AIG’s Japan occurrence reinsurance & Validus’ retro exposed to typhoons

Analysts at Keefe, Bruyette & Woods (KBW) have agreed that insurance giant American International Group’s (AIG) per-occurrence reinsurance tower is at-risk of losses following typhoon’s Faxai and Hagibis, while today the insurer’s executives said that Validus’ retrocession could also be exposed.

KBW said a few days ago that it believes it may have underestimated the potential impact of typhoon Faxai initially, but now a better picture of the loss expectation from the market means the analysts feel a greater impact is likely for AIG.

As one of the most exposed international insurers underwriting in the Japanese market, AIG was always expected to take significant loss impacts from typhoon Faxai and also the more recent typhoon Hagibis.

But opinions differed on whether its reinsurance tower would come into play, or at least how much it would.

But recently, as we explained in this article, equity analysts from Credit Suisse claimed that AIG might have already used up its per-occurrence reinsurance protection even before going into losses from typhoon Hagibis.

AIG’s per-occurrence reinsurance tower for Japan is structured to provide a $500 million layer of per-occurrence catastrophe reinsurance protection that attaches excess of $200 million of losses for the insurer.

On this basis and using an estimate that AIG may have faced a gross loss of around $750 million from typhoon Faxai, based on it having a roughly 10% market share in the affected area, the Credit Suisse analysts believed that losses from typhoon Faxai probably triggered this layer of protection and perhaps are set to blow all the way through it.

KBW’s analysts meanwhile had not been so bullish on AIG’s potential losses from typhoon Faxai, but now their view has changed and it’s partly to do with typhoon Hagibis following on so close behind the storm.

Having initially underestimated the industry-wide impact and company specific losses for AIG from Faxai, KBW’s analysts are also factoring in demand surge, saying that the influence that typhoon Hagibis will have on claims from Faxai, “further increases the odds of Typhoon Faxai losses hitting AIG’s $200 million Japanese per-occurrence attachment point.”

Today, AIG reported its results and disclosed a $254 million net and pre-tax loss from typhoon Faxai, which with the $500m occurrence tower attaching at $200 million, seems to suggest that Faxai has blown through the top of it by $54 million.

This would closely align with the estimate Credit Suisse analysts gave, suggesting that Faxai could cost AIG $750 million.

This all has ramifications for AIG’s ability to claim on reinsurance for Hagibis and at this stage we’re not sure whether the above occurrence layer can be reinstated to cover Hagibis as well.

AIG’s executives have given some insight into the potential for both reinsurance and retro claims from Hagibis, saying that recoveries from both are now possible.

During AIG’s earnings call, which has just recently finished today, the insurers’ exec team discussed how they expect Hagibis’ losses to be dealt with, although declined to give any idea of how exposed it is to the storm on a gross basis.

They said that AIG’s reinsurance program structure means that it has just $75 million of exposure to Hagibis, while in addition Validus’ retrocessional reinsurance could also kick in at $155 million and above, although to what level wasn’t stated.

This suggests recoveries under both traditional reinsurance and retro for AIG after Hagibis, with perhaps as little as $230 million of losses retained, as its much more robust reinsurance provisions continue to play a key role in buffering its results against catastrophe losses.

Demand surge, or the demand for repairs and services and resulting claims cost inflation, could be severe again in Japan this year after the two typhoons.

As a result, both typhoon losses are expected to see high levels of claims inflation due to demand surge, as the widespread impacts of the paid put significant demand on assessors, repairers, contractors and other services.

This could push AIG’s ultimate loss even higher than anticipated, analysts have said, resulting in a greater threat to of further losses being passed onto the reinsurance and retro market.

Also read:

– RMS puts typhoon Hagibis loss estimate at max $11bn.

– Faxai loss to near $10bn, Hagibis $15bn, climate change a factor: RenRe CEO.

– RenRe & Markel expect typhoon Hagibis losses to eclipse Faxai.

– At up to $16bn, Hagibis industry loss to drive rates, with creep possible: KBW.

– Typhoon Hagibis industry loss estimated from $8bn to $16bn: AIR.

– Hagibis + Faxai industry loss may be close to Jebi + Trami: Credit Suisse.

– Hagibis loss complex to assess, ILS deductible erosion possible: Twelve.

– Hagibis loss could match Faxai, may accelerate reinsurance rates: KBW.

– No cat bond loss from Hagibis, price impacts to be short-lived: Plenum.

– Typhoon Hagibis causes severe flooding, damage across swathe of Japan.