AIG Again Battered by Catastrophes But Reinsurance Lowers 3Q Net Loss

October 31, 2018

Catastrophe losses in Japan and North America pushed American International Group to a net loss of $1.3 billion for the third quarter of 2018, compared to a net loss of $1.7 billion in the prior-year quarter. Adjusted after-tax loss was $301 million the third quarter to $1.1 billion in the prior-year quarter.

The global insurer dealt with major catastrophe losses of $1.6 billion. Catastrophe losses in Japan represented over half of the overall catastrophe losses in the quarter. This has been one of the worst catastrophe seasons in Japan in 25 years and AIG is the largest foreign-based insurer in Japan. The Japan losses are net of $264 million of reinsurance recoveries.

Catastrophe losses in North America accounted for just under half of the overall catastrophe losses in the quarter and were largely due to Hurricane Florence as well as revisions to the loss estimates on the California mudslides. For the quarter the insurer added $170 million to reserves to cover higher than expected costs from last year’s California wildfires.

AIG estimates that it has exhausted approximately $700 million of the $750 million retention under its North America aggregate catastrophe reinsurance program following the California mudslides, Hurricane Florence and assuming the high end of the previously disclosed loss estimate range for Hurricane Michael.

Net catastrophe losses at reinsurer and specialty writer Validus, which AIG acquired in July, totaled approximately $200 million, mostly Japan-related.

The quarter also saw AIG agree to acquire Glatfelter Insurance Group, a prominent specialty insurance broker and program manager headquartered in York, Pennsylvania. AIG is counting on Glatfelter as a major part of the plan to reposition General Insurance and improve underwriting. AIG said it is non-renewing as much as 50 percent of its current program business book.

In prepared remarks, Brian Duperreault, president and chief executive officer, said that despite the current difficulties he thinks the insurer is still on track to produce an underwriting profit.

“In the third quarter we continued to execute against our strategic priorities for delivering long- term, profitable growth,” said Duperreault. “While managing a significant number of global catastrophic events, General Insurance continued to make progress against key initiatives, including improving underwriting capabilities, repositioning reinsurance structures, adding world class talent and driving efficiencies. We remain on track to produce an underwriting profit. Life and Retirement achieved increased sales and solid double digit returns, reflecting the strength of our product expertise and distribution networks.”

He said the company continues to “work with a sense of urgency” and is “taking decisive actions across the company to position AIG for the future.”

Duperreault is scheduled to speak with analysts Thursday morning.

Last month when AIG estimated its third quarter catastrophe losses would be between $1.5 and $1.7 billion, analysts at Morgan Stanley said that was much higher than they had anticipated. The large 3Q losses “call into question AIG’s catastrophe risk management capability,” Morgan Stanley said, warning that AIG “needs to show steady improvement to regain investor confidence, over time.”

At that same time, KBW analysts lowered their earnings estimates for AIG on the “bigger-than-expected’ catastrophe losses and book value erosion but KBW said it also still expects AIG’s underwriting results to improve over time

General Insurance

Third quarter General Insurance posted an adjusted pre-tax loss of $825 million and an underwriting loss of $1.7 billion. Net written premium grew four percent to $6.8 billion. The General Insurance combined ratio was 124.4, compared to 157.1 for the same quarter a year ago while the loss ratio of 88.6 included 22.0 points from the catastrophe losses.

In General Insurance North America:

  • Adjusted pre-tax loss of $160 million included $791 million of catastrophe-related losses, net of reinsurance, and $88 million of severe losses.
  • Net premiums written increased by 7.5%, largely due to additional premiums from the acquisition of Validus of $275 million, lower ceded premiums due to changes in the 2018 reinsurance programs and growth in Personal Insurance businesses.
  • An improvement in the North America loss ratio was driven by significantly lower catastrophe losses and lower unfavorable prior year loss reserve development.
  • An increase in the expense ratio reflected a higher acquisition expense ratio driven by changes in Personal Insurance’s portfolio mix and an increase in general operating expenses related to strategic initiatives.

In General Insurance International:

  • Adjusted pre-tax loss of $665 million included $776 million of catastrophe-related losses, net of reinsurance, severe losses of $65 million and unfavorable prior year loss reserve development of $38 million.
  • An increase in net premiums written was due to the inclusion of additional premiums of $165 million from the acquisition of Validus, growth in European Financial Lines business and Accident and Health and Personal Lines businesses in Asia Pacific.
  • The third quarter loss ratio was 79.7. The accident year loss ratio, as adjusted, increased 0.9 points to 58.2, driven by higher attritional losses in Commercial Lines, partially offset by lower severe losses (1.8 pts) compared to the prior-year quarter.

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