AIG needs to regain investor confidence after cat losses: Morgan Stanley

Following multiple quarters of missed earnings, American International Group’s (AIG’s) large third quarter cat losses will further weigh on investor sentiment, Morgan Stanley said in a note.

AIG expects to report third quarter 2018 pre-tax catastrophe losses, net of reinsurance, of approximately $1.5 to $1.7 billion.

These losses are largely associated with multiple events in Japan, including Typhoons Jebi and Trami, as well as Hurricane Florence and revisions to our loss estimates on the California mudslides.

The outsized third quarter losses call into question AIG's catastrophe risk management capability, Morgan Stanley said. AIG has revamped its reinsurance programme this year and strengthened its reinsurance protection. For example, it has a North America aggregate loss cover. It has exhausted around $700 million of the $750 million retention which could limit further cat losses in North America through the rest of 2018. However, the large losses in Japan and Asia showed that more could be done in its overseas business.

AIG expects pre-tax catastrophe losses, net of reinsurance, resulting from multiple events in Japan and Asia to be approximately $900 million to $1 billion. Pre-tax catastrophe losses, net of reinsurance, resulting from events in North America are set to reach approximately $600 to $700 million.

In addition, initial pre-tax loss estimates for Hurricane Michael, net of reinsurance, are approximately $300 to $500 million, which will be included in fourth quarter 2018 operating results.

Catastrophe loss estimates include expected losses for Validus Holdings and its affiliates.

However, Morgan Stanley analysts noted that given the preannouncements of Bermuda peers, they think Validus probably contributed only around $100 million to the total losses.

Morgan Stanley estimates AIG has about 8 percent of P&C market share in Japan which accounted for the majority of AIG's third quarter cat losses.

It could take multiple quarters of steady improvement in underwriting to rebuild investor confidence, Morgan Stanley analysts said.

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