AIG carries reserve cushion first time since 2010
American International Group (AIG) is carrying a “modest” $17m excess reserve cushion, the first redundancy since 2010, according to Morgan Stanley research.
Although it is a thin cushion in the context of AIG's $33 billion US statutory reserves, Morgan Stanley analysts think it is an important milestone after years of reserve charges.
AIG took an $836 million pre-tax reserve charge in commercial lines in the third quarter of 2017 that also resulted in the company increasing the full-year loss estimates, surprising analysts who thought the casualty issues at the company had been addressed.
AIG’s US casualty business had performed significantly worse than expected by the firm in recent years, resulting in a $3 billion loss in the fourth quarter of 2016, which included a $5.6 billion prior year adverse reserve development, driven by the US casualty operations.
AIG’s improved reserve position reflects significant reserve strengthening, a reinsurance agreement with Berkshire, and more conservative reserving, the analysts said. There could still be adverse development, but Morgan Stanley is more confident that large reserve issues are finally behind the company.
In the first quarter of 2017, Berkshire Hathaway subsidiary National Indemnity Company (NICO) entered a $9.8 billion adverse development reinsurance agreement with various subsidiaries of AIG, retroactively covering the majority of US long tail lines reserves for accident years 2015 and prior.
However, in February 2018 Berkshire increased the estimated claim liabilities under the contract with AIG by approximately $1.8 billion.
While there is a gap of about $6 billion between Berkshire and AIG's gross reserve estimates, Morgan Stanley analysts are “less concerned given” that Berkshire's estimate could be conservative. In addition, if AIG were to increase to Berkshire's levels, an additional net charge of about $1.3 billion would be manageable for AIG's $63 billion balance sheet, the analysts stated.
On a positive note, the analysts said that AIG is attracting talent and improving property/casualty (P&C) underwriting. Since CEO Brian Duperreault took the helm a year ago, AIG has attracted a top management team, including chief operating officer Peter Zaffino (from Marsh & McLennan Companies), chief underwriting officer Tom Bolt (from Berkshire), and most recently chief actuary Mark Lyons (from Arch Capital Group), the analysts noted.
Morgan Stanley believes that Lyons will further strengthen AIG's reserve philosophy and practice. AIG is targeting P&C underwriting profitability by 2018-end. While noting that this is not an easy task, the analysts believe that the actions taken in the last 12 months will start to bear fruit in the coming quarters.
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