Insurance giant American International Group, Inc. (AIG) has announced a slightly higher than anticipated estimate of losses from recent hurricanes Harvey, Irma and Maria, and the Mexico earthquakes of between $2.9 billion to $3.1 billion, before tax but net of reinsurance.
Comments are already being made by investment analysts regarding AIG’s use of reinsurance in recent years, with some suggesting that the previous leadership had downsized AIG’s reinsurance buy which has left it with a loss a little larger than anyone had anticipated.
AIG was one of the major insurers that went through a reinsurance buying transformation, as it centralised and rationalised its reinsurance programs and purchases. It’s just possible this could have fallen short, as this loss after reinsurance now shows.
AIG said that it estimates pre-tax losses of between $1.1 billion to $1.2 billion from hurricane Harvey, $1.0 billion to $1.1 billion from hurricane Irma, $600 million to $700 million from hurricane Maria, and around $150 million from other catastrophe events during the third-quarter of 2017 including the two Mexico earthquakes.
Brian Duperreault, AIG’s relatively recently installed President and Chief Executive Officer, commented; “During this period of unprecedented catastrophes, our thoughts are with all who are affected by these storms. We are actively ensuring the safety and support of AIG employees, who acted selflessly to serve their colleagues, clients, and communities. Through AIG’s financial strength and long experience with natural catastrophes, our teams across the company have reacted quickly to provide our clients with the claim funds, resources, and expertise they need to recover and rebuild with greater resilience. We are proud of our response as a member of the industry and as a corporate citizen during this time of need.”
With the new management now installed AIG could increase its use of reinsurance and potentially of third-party capital as well, putting it to use to help it manage major loss years while leveraging it as efficient capital to back its underwriting expansion.
It’s market knowledge though, that AIG has already had to buy back-up reinsurance coverage in the wake of recent events, as the firm knew it was set to eat well into (through) its reinsurance arrangements.
Sources told Artemis that a number of ILS and collateralized reinsurance players have participated in AIG’s back-up cover at what was seen as very favourable terms.
At one time AIG liked to lock in reinsurance for as long as it possibly could, which we saw with its efforts in the catastrophe bond market where its Tradewynd transactions stretched what had been possible at the time, both in terms of coverage and duration.
However, despite the fact AIG’s losses are higher than analysts had been forecasting, KBW noted that they do only represent around 4.1% of the insurers shareholders’ equity, which is lower than the 6.1% average pre-tax loss from other re/insurers that have announced losses already.
Analysts from Morgan Stanley said the hit to book-value would be manageable for AIG, adding that the insurer is well-capitalised.
AIG has catastrophe bonds in-force under its Tradewynd shelf program, but these are all per-occurrence bonds which would need losses to surpass $3 billion from a single event, rather than this aggregation of losses we see announced here.