AIG takes $272m hit from industry's 'largest cat loss ever'; withdraws guidance

American International Group (AIG) has withdrawn its previously issued profit guidance with its CEO pointing to "significant uncertainty" and ramifications of COVID-19, which he says will be the "single largest cat loss the industry has ever seen".

In the first quarter of 2020, the company's general insurance business reported a pre-tax underwriting loss of $87 million, including $272 million of estimated COVID-19 losses related to travel, contingency, commercial property, trade credit, workers’ compensation and Validus Re.

The segment recorded $419 million of pre-tax catastrophe losses, net of reinsurance. The combined ratio was 101.5 percent, compared with 97.4 in the prior year quarter. The unit's gross premiums written were flat year on year at $10.086 billion in Q1 2020, compared with $10.195 billion a year earlier.

The overall group net income attributable to AIG shareholders was $1.7 billion for the first quarter of 2020, compared to $654 million in the prior year quarter.

AIG said the improvement was primarily due to $3.5 billion of pre-tax net realized capital gains largely related to mark-to-market gains from variable annuity and interest rate hedges and the impact of our non-economic non-performance risk adjustment, per GAAP, on the fair value of our liabilities, compared to $446 million of pre-tax net realized capital losses in the prior year quarter.

Adjusted after-tax income was $99 million, compared with $1.4 billion in the prior year quarter. The decrease was primarily due to lower net investment income driven by declines in equity markets and losses on FVO bonds from widening spreads in credit markets, and the impact of COVID-19.

AIG's life and retirement reported adjusted pre-tax income of $574 million, primarily due to declines in equity markets and widening spreads in credit markets triggered by the ongoing COVID-19 crisis.

The results showed total consolidated net investment income of $2.5 billion for the first quarter, compared to $3.9 billion in Q1 2019, "reflecting lower alternative investment returns and losses on fair value option (FVO) securities".

Brian Duperreault, AIG’s chief executive officer, said: “In the face of COVID-19, an unprecedented global catastrophe, our colleagues have shown great resilience and remain focused on what we do best, which is helping our clients manage risk, especially in difficult times.

“AIG was in a strong financial position before this crisis began and remains in a strong financial position today. While we believe COVID-19 will be the single largest CAT loss the industry has ever seen, the significant body of work our team has undertaken since late 2017 has served us well as we navigate through this evolving situation. AIG is well-positioned to emerge as a global insurer of choice with significant financial flexibility."

He explained: “In the first quarter of 2020, our core businesses delivered strong results building on the momentum we had coming into the year. In General Insurance, the adjusted accident year combined ratio continued to improve, and Life and Retirement delivered solid results despite unfavorable capital markets and continued low interest rates.

“The COVID-19 crisis has created significant uncertainty, and it will take time to understand its broader ramifications. In light of this, AIG is withdrawing previously issued guidance, including that relating to Adjusted Return on Common Equity. However, we do expect to see continued improvement in General Insurance, particularly in the adjusted combined ratio, and, in Life and Retirement, we do not believe that the impact of COVID-19 will result in a material reduction of our long-term return profile.

Duperreault concluded: “While the new normal COVID-19 will create for each of us is still unknown, I am confident that AIG will continue to move forward on its journey to become a top performing company and leading insurance franchise.”