AIG’s Doubling of Q4 Loss Pinned on Wildfires, Tax Act

February 9, 2018

American International Group reported a net loss of $6.7 billion for the fourth quarter of 2017, compared to a net loss of $3.0 billion in the prior-year quarter. The fourth quarter of 2017 net loss included a charge of $6.7 billion related to the enactment of the Tax Cuts and Jobs Act.

Adjusted after-tax income was $526 million for the fourth quarter of 2017, compared to an adjusted after-tax loss of $2.8 billion in the prior-year quarter.

Fourth quarter results for General Insurance, which includes North American and international commercial and personal lines business, saw adjusted pre-tax income of only $13 million after $762 million of catastrophe losses, of which $572 million related to the wildfires in California. General Insurance net written premiums were $5.9 billion, a 10 percent drop from the same period in 2016. The underwriting loss was $846 million, down considerably from the $5.8 billion loss in the fourth quarter 2016. The General Insurance combined ratio improved substantially to 113.3 from 182.5 in the same period in 2016.

General Insurance net premiums written for North America alone decreased by 14 percent to $2.6 billion, primarily due to continued “portfolio actions” in commercial lines casualty and property business. Adjusted pre-tax income of $412 million included $682 million of catastrophe-related losses, which were primarily related to the California wildfires and largely impacted Personal Insurance. The fourth quarter commercial lines combined ratio for North America was 992; the ratio for North America personal lines was 145.5.

North American commercial lines net premiums fell to $1.8 billion while personal lines remained about even at $772 million. The North American General Insurance segment saw an underwriting loss of $316 million, compared to a $5.3 billion loss in the fourth quarter 2016. The reduction in the North America loss ratio to 83, down from 237.6 in the same period for 2016, was driven by the fourth quarter 2016 reserve additions.

In its Life and Retirement segment reported fourth quarter adjusted pre-tax income of $782 million. The fourth quarter of 2017 reflected higher fee income for individual and group retirement business due to historically high assets under administration driven by equity market.

On January 21, 2018 AIG agreed to acquire Validus Holdings Ltd., a provider of reinsurance, primary insurance and asset management services, for $5.6 billion in cash. AIG said this transaction will strengthen AIG’s global General Insurance business by expanding its current product portfolio through additional distribution channels and advancing the tools available for underwriting. The transaction is expected to close in mid-2018.

AIG also reported on its recent creation of a Bermuda-domiciled legal entity named DSA Reinsurance Co. (DSA Re) to act as AIG’s main run-off reinsurer. DSA Re’s primary purpose is to reinsure AIG’s legacy Life and Retirement and legacy General Insurance run-off lines. The amount expected to be reinsured upon receipt of all regulatory approvals represents approximately $37 billion or over 80 percent of legacy total insurance reserves and will be backed with approximately $40 billion of invested assets managed by AIG Investments.

Brian Duperreault, who became president and CEO last May, called the fourth quarter “another important step forward in positioning AIG for the future.” He cited steps the company has taken to improve AIG’s talent base, reassess its underwriting actions, and establish a new operating structure. He said “2017 represents a starting point” from which AIG expects to build and “2018 will be a year of execution” and that the Validus acquisition reflects the company’s desire to diversity and pursue profitable growth.

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