AIG losses widen to $3bn in Q4 as claims jump

American International Group (AIG) reported a net loss of $3.04 billion for the fourth quarter, up from a negative $1.84 billion in the same period of 2015, impacted by a $5.6 billion prior year adverse reserve development.

As a result, AIG recorded a full-year net loss of $849 million compared to a net income of 2.20 billion in 2015.

"We took decisive actions in 2016 to dramatically reduce uncertainty and deliver higher quality, more sustainable earnings in the future," said Peter Hancock, AIG president and CEO.

During the first quarter of 2017, AIG entered into an adverse development reinsurance agreement with National Indemnity Company, a Berkshire Hathaway subsidiary. The agreement retroactively covers the majority of US long tail lines reserves for accident years 2015 and prior.

Total full-year 2016 adverse development on subject lines of $5.3 billion is included under, and will be 80 percent, or $4.2 billion, covered by the adverse development reinsurance agreement with National Indemnity Company, AIG said. The agreement covers roughly half of total commercial insurance loss reserves at the company and should generate a deferred pre-tax gain before discounting of approximately $2.6 billion in the first quarter of 2017, the company said.

"The comprehensive adverse reserve development cover significantly reduces the risk of further reserve additions in some of the most volatile lines, and we responded definitively to emerging severity trends that we believe are materially impacting the overall U.S. Casualty market,” Hancock said.

“Going forward, we expect to see the results from our improved underwriting platform, reduced expense base, and the strong improvement in our business mix. We remain committed to continuing to execute our clearly defined transformation plan, as well as achieving our financial goals, including the return of the remainder of the $25 billion to shareholders we announced in January of last year subject to regulatory and rating agency considerations and future profitability improvements."

In the press release, AIG stressed other actions taken to improve the company’s performance such as cutting costs and improving liquidity.

For the full-year 2016, general operating and other expenses declined $1.7 billion, or 13.4 percent to $11.0 billion from the prior year. AIG also completed or announced over 10 transactions which in the aggregate will generate approximately $10 billion of liquidity, most of which was received in 2016. Included in that amount was the sale of United Guaranty Corporation to Arch Capital Group that closed on Dec. 31, 2016.

AIG is also addressing the issues in its US casualty line which have been the primary driver of recent adverse development by changing the overall mix of business and utilizing more rigorous pricing tools in US casualty lines.

The net premiums written associated with those lines have declined approximately 39 percent since the end of 2015, and the adverse development reinsurance agreement covers the majority of the US casualty reserves.

In the fourth quarter of 2016, total commercial insurance combined ratio was 241.6 percent, up from 163.3 percent in the same period a year ago. The underwriting loss was driven by liability and financial lines with a combined ratio of 338.7 percent, leading to a pre-tax operating loss of $ 4.98 billion in the fourth quarter.

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