AIG claims no material warning signs on reserves

American International Group (AIG) has reviewed reserves throughout “the course of the year” with no material warning signs coming to light, Morgan Stanley analysts were told at the annual Association of Insurance and Financial Analysts (AIFA) conference.

AIG took an $836 million pre-tax reserve charge in commercial lines in the third quarter of 2017 that also resulted in the company increasing the full-year loss estimates, surprising analysts who thought the casualty issues at the company had been addressed.

AIG’s US casualty business had performed significantly worse than expected by the firm in recent years, resulting in a $3 billion loss in the fourth quarter of 2016 as the company reacted by striking a reinsurance deal and significantly increasing claims loss reserves.

In 2017, Berkshire Hathaway subsidiary National Indemnity Company (NICO) entered a $9.8 billion adverse development reinsurance agreement with various subsidiaries of AIG.

NICO agreed to indemnify AIG for 80 percent of up to $25 billion of losses and allocated loss adjustment expenses in excess of $25 billion retained by AIG, with respect to certain commercial insurance loss events occurring prior to 2016.

Berkshire has increased the estimated claim liabilities under the reinsurance contract with AIG by approximately $1.8 billion in February 2018.

With respect to the Berkshire reserves, AIG management noted that Berkshire’s estimates are above the high end of AIG’s actuarial range and above two independent analyses.

On commercial P&C improvement as rates recover, AIG is setting up a new underwriting structure and hiring talent. AIG is changing the underwriting culture to make business leaders more accountable, according to Morgan Stanley.

Even after the Validus acquisition, AIG remains open to other deals, but they must be complementary and help AIG grow, analysts were told.