AIG expects double-digit P&C rate increases, $500m California wildfire hit

American International Group (AIG) expects double-digit rate increases across the property market while the costs of the California wildfires are estimated at around $500 million before taxes.

One area of discussion on the third quarter results conference call was expectations around rate increases on AIG's property book that is not currently earning an underwriting margin on a normal cat basis, Credit Suisse analysts wrote in a note. AIG indicated that it is communicating with clients about the need for rate increases on all risks (cat exposed and non-cat exposed) and noted "positive signs that property rates will improve" with double-digit rate increases targeted on a risk-adjusted basis, according to the note.

AIG reported a net loss of $1.7 billion for the third quarter of 2017, compared to a net income of $462 million in the prior-year quarter. Third quarter results included aggregate pre-tax catastrophe losses of $3.0 billion primarily from Hurricanes Harvey, Irma and Maria.

Furthermore, AIG estimated that its exposure to the California Wildfire would be a $500 million pre-tax loss, largely in personal lines. This would represent a 6 percent share of the high end modelled industry loss estimate of $8 billion, the Credit Suisse analysts noted.

Multiple wildfires exacerbated by hot, dry, and windy conditions spread across eight counties of California starting in early October. Twenty-two active wildfires were reported by CAL FIRE on October 12, consuming more than 170,000 acres and destroying more than 3,500 structures.

During the call, CEO Brian Duperreault offered no assurance that the reserve charges were now under control, analysts suggested.

AIG has taken an $836m 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 as the company reacted by striking a reinsurance deal and significantly increasing claims loss reserves.

“On the one hand, Mr. Duperreault indicated that this [third] quarter marks the base from which he intends to grow AIG profitably,” the Credit Suisse analysts noted. “On the other hand, there was little tangible explanation on the call for why the reserve process today is less likely to lead to further adverse [developments] than it has in the past. The analysts noted that they are “incrementally more confident that 4Q reserve activity will be muted following the call,” but that this probably won't be the last quarter where reserves are a key topic.

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