Reinsurance lowers AIG’s hurricane Ida loss. Subrogation reduces prior year recovery

Interesting reinsurance related dynamics in the quarterly results announcement of AIG, as the giant insurer continues to reap the benefits of having expanded and made its reinsurance protection more robust in recent years.

Firstly, on catastrophe activity during the third-quarter, AIG said that it experienced $628 million of catastrophe losses, which will be net of any reinsurance recoveries.

These cat losses were predominantly from hurricane Ida and flooding in the UK and Europe.

The Q3 catastrophe loss bill compared to $790 million in the prior year quarter, but that included $185 million of estimated COVID-19 losses, so the Q3 2021 nat cat bill appears a little higher year-on-year.

“Despite the elevated level of global catastrophic activity in the third quarter of 2021, AIG’s losses were mitigated by improved underwriting and enhanced reinsurance protections,” the company said.

AIG has been repeatedly talking up its enhanced reinsurance protection in recent months and in a quarter with an event like hurricane Ida, when you’d expect the insurer to perhaps have a cat loss bill approaching the billion dollar level (given its scale), it is clear the company has ceded a reasonable share of its exposure to the hurricane to its reinsurance partners.

AIG President and CEO Peter Zaffino commented on the results that, “General Insurance delivered very strong results demonstrating the underwriting discipline now embedded in our culture and the benefits of our volatility reduction efforts through a well-articulated risk appetite and reinsurance program that performed well.”

On the flip-side of AIG’s reinsurance arrangements, the insurer benefited from fresh wildfire subrogation flows during the third-quarter, which actually lowered its reinsurance recoveries made from 2018 California wildfire events.

Interestingly, the subrogation has made a significant difference it seems, perhaps saving AIG’s reinsurance panel as much as roughly $206 million.

AIG explained, “Subrogation recoveries related to 2018 California wildfires losses in our Personal Insurance business were largely offset by the reversal of recorded reinsurance recoveries for 2018 in our Commercial Lines business of approximately $206 million, as we no longer reached the attachment point under our North American aggregate CAT cover as a result of the receipt of the subrogation amounts.”

So, while AIG’s reinsurers may be readying to pay reasonably large recoveries for recent catastrophe loss events, those long-term partners that were also on the programs in 2018 stand to see their liabilities to the insurer greatly reduced.

Some of the reduction in ultimate AIG has experienced on the 2018 wildfire losses may ultimately flow to the benefit of some ILS funds, enabling them to reduce side-pockets or release some trapped collateral that could have been held for the recoveries due.

Also of note, today during the AIG Q3 2021 earnings call, CEO Peter Zaffino also gave some insights into how reinsurance may come into play over the coming weeks for the insurer, should any further events occur.

He explained that the firm’s North American aggregate catastrophe treaty is now just $175 million away from its attachment point, while its worldwide aggregate excluding Japan is also not far off coming into play.

The CEO said that thanks to AIG’s robust reinsurance arrangements, there is a strong chance AIG’s catastrophe experience in the fourth quarter will be greatly moderated.