AIG not expected to post large reserve charges in Q1

American International Group (AIG) is not expected to report large reserve charges when it posts 2018 first quarter results on May 2 despite a differing liability assessment with Berkshire Hathaway, according to Morgan Stanley analysts.

Modest reserve charges in the fourth quarter of 2017 were a relief for investors but Berkshire Hathaway's reserve addition to its reinsurance agreement with AIG brought back lingering concerns, according to an analyst note.

Berkshire has  increased the estimated claim liabilities under a major reinsurance contract with AIG by approximately $1.8 billion. In 2017, Berkshire subsidiary National Indemnity Company (NICO)  entered a $9.8 billion adverse development reinsurance agreement with various subsidiaries of AIG. The agreement covers 80 percent of substantially all of AIG’s US commercial long-tail exposures for accident years 2015 and prior, which includes the largest part of AIG’s US casualty exposures during that period.

While there is a gap of around $6 billion between Berkshire and AIG's estimates, Morgan Stanley analysts are less concerned given Berkshire's estimates could be conservative. In addition, if AIG was to increase liabilities to Berkshire levels, the additional net charge of  approximately $1.3 billion would be manageable for AIG, the analysts noted.

Instead, positive pricing should provide tailwinds to a commercial property/casualty (P&C) turnaround, according to the analysts. Improving commercial core loss ratio is a key driver to a return on equity (ROE) improvement for AIG, Morgan Stanley noted. The new management under CEO Brian Duperreault is making fundamental changes to commercial underwriting, including hiring talent, realigning operating structure, and reducing risk exposures. “We could see these efforts bearing some fruits in the first quarter,” analysts said.

However, catastrophe losses could be a large variable from Northeastern winter storms and California mudslides, Morgan Stanley noted. Both Chubb and Travelers have reported large losses, the former estimated the losses at $380 million and the latter at $354 million, the analysts noted. Morgan Stanley is including $225 million losses for AIG in its estimates while noting that its market share in the Northeast and Mid-Atlantic (1.6 percent in homeowners and commercial multiple peril lines vs. 7.1 percent for Chubb and 7.3 percent  for Travelers) suggests even lower losses.