AM Best punishes AIG on reserves concerns despite Berkshire Hathaway deal

AM Best has placed the financial strength ratings (FSR) of American International Group (AIG) and its insurance subsidiaries under review with negative implications because of concerns over its reserves.

The rating agency said the 'under review' status follows AIG’s recent announcement that its fourth quarter 2016 financial statement will include a material adverse reserve adjustment, as well as a capital supporting reinsurance transaction for its US commercial business.

This refers to the $9.8 billion reinsurance deal between AIG and National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway, which sees the latter cover US commercial long-tail exposures for accident years 2015 and prior.

AIG’s adverse development of loss reserves in the fourth quarter of 2016 follows a $3.6 billion net adverse reserve adjustment for the fourth quarter of 2015 in the same longer-tailed lines of business, AM Best pointed out.

It noted that while it anticipated the potential of further reserve development, “the timing of this latest charge highlights the challenges that AIG management continues to face in reserving, pricing, and handling this longer tail commercial lines business, and the effectiveness of the group’s enterprise risk management function”.

AM Best acknowledged that the reinsurance transaction is anticipated to absorb a portion of the expected reserve development, as any reserve development on the covered lines in excess of the current carried reserves of about $35.7 billion is covered on a quota share basis, up to the limit of the reinsurer’s liability, which is 80 percent of $14.3 billion. But it also noted that certain lines of business are excluded from the contract.

“The under review with negative implications status on the ratings of AIG and its operating subsidiaries considers the potential impact on future earnings, the available dividend capacity, and the feasibility of succeeding at the necessary strategies outlined by management and the board to improve profitability and efficiency and maximize shareholder value within stated timeframes,” AM Best said.

“The ratings will remain under review while AM Best analyzes the planned actions following the release of the loss reserve review, receives and reviews year-end financial information and engages in further discussions with management to assess the potential impact of these items on the current ratings.”

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