International insurance giant American International Group (AIG) has continued to pass on a share of its catastrophe losses to its reinsurance panel and looks set to continue doing so through the rest of this year, as its third-quarter loss bill is up to $1.7 billion and Q4 starts with up to $500 million from hurricane Michael.
AIG’s reinsurance program insulates it against major loss events and also frequency losses above a certain size, while its severe loss stop-loss also caps its exposure further.
Yesterday evening the insurer pre-warned of its third-quarter catastrophe losses, which are largely due to Japanese losses and catastrophes striking the United States during the quarter.
AIG said its third-quarter catastrophe losses would be in a range from $1.5 billion to $1.7 billion, pre-tax but after reinsurance is taken into account.
This breaks down with Japan and Asia driving the majority, as multiple events including typhoons Jebi and Trami are expected to result in $900 million to $1 billion of pre-tax catastrophe losses, net of reinsurance.
In the United States, the expectation is that hurricane Florence, other events and revisions to AIG’s loss estimates for the California mudslides, will drive $600 to $700 million of losses pre-tax and net of reinsurance.
These loss estimates include the impacts to Validus’ reinsurance portfolio as well, which of course could have seen some leakage of losses into the AlphaCat Managers insurance-linked securities (ILS) strategies, although it’s likely this would only be an attritional amount rather than anything major.
On top of this and a Q4 impact rather than Q3, hurricane Michael is estimated to have resulted in a net of reinsurance impact of around $300 to $500 million for AIG as well.
As a result of the catastrophe impacts, AIG said that it has exhausted roughly $700 million of its $750 million retention under the North America aggregate catastrophe reinsurance program, taking into account the California mudslides, hurricane Florence and assuming the higher end of the loss estimate range for hurricane Michael.
That suggests the firm could start to claim on its aggregate reinsurance layer before the end of this year.
AIG had already purchased other new reinsurance covers to protect it in regions including Japan, covering its severe losses on an international basis, as it had realised smaller and multiple loss events can be as impactful to its earnings as the major catastrophe losses for which it has a separate reinsurance tower, where the aggregate sits.
AIG also has a stop-loss protection in place for its severe losses, which kicks in when they reach $415 million and losses under this contract had reached $293 million at the end of the first-half we understand, meaning that its reinsurance protection here may have kicked in as well thanks to the Q3 catastrophe and severe weather costs.
Brian Duperreault, President and Chief Executive Officer, commented on the announcement, “Our thoughts are with those who have been affected by the recent extreme events. Across AIG we are committed to supporting our customers, wherever they are around the world, by acting quickly to help them recover and rebuild. We are pleased that our efforts to restructure our North American reinsurance portfolio are yielding the desired result to mitigate our exposure to catastrophe losses. We continue to look for ways to further evolve our global protection measures while remaining diligently focused on executing against our plan to position AIG for long-term sustainable, profitable growth.”
AIG has collateralized participation in its reinsurance program from some of the leading ILS funds, who may have taken a small share of its Q3 losses and now will stand ready to take more if the fourth-quarter sees further catastrophe activity this year.