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A big increase in loss reserves helped push American International Group Inc. into a $3.04 billion loss for the fourth quarter of 2016, compared with a $1.84 billion loss in the 2015 quarter, but the actions set the insurer up for a stronger future, according to AIG’s leadership.
AIG, which announced several actions last year to transform its business, has seen a “radical reshaping” of its business mix in 2016, shrinking its U.S. casualty book by more than 30%, said AIG CEO Peter Hancock in a conference call with analysts on Wednesday.
In addition, the insurer will benefit from the purchase of $20 billion in adverse development reinsurance cover from National Indemnity Co., a unit of Berkshire Hathaway Inc., he said.
“An agreement of this scope and scale is redefining,” Mr. Hancock said. “The economics and the reduction in risk associated with this agreement will provide benefits for many years to come and pivot us towards the future AIG with lower risk to impairments to book value, higher-quality earnings and ultimately a lower cost of capital.”
The $5.6 billion addition to prior-year loss reserves in the quarter was a reaction to “emerging severity trends across lines and accident years,” he said. “The trends we witnessed and reacted to this quarter were broad and we believe are materially impacting the overall U.S. casualty market.”
AIG has been pushing through rate increases in the U.S. casualty business it retains and has cut significant amounts of unprofitable business, he said. In particular, AIG cut significant amounts of commercial auto, medical malpractice and excess casualty business.
While the reduction in U.S. casualty business volume accelerated sharply in 2016, in the three years prior the insurer had reduced its casualty book by about 11% a year, Mr. Hancock said, as the sustained low-interest-rate environment combined with increased losses as the economy improved to make the business more problematic.
U.S. casualty now makes up 21% of AIG’s commercial book, compared with 40% in 2011, said Robert S. Schimek, CEO of commercial, on the call.
“In the U.S., casualty rates are inadequate, and we continue to stand firm in a competitive environment,” he said. In addition to increasing rates, the insurer has shifted its mix of business to pursue more profitable financial lines and international casualty business, Mr. Schimek said.
But the soft market extends to other areas, and AIG faces profitability challenges in property and specialty risk, too, Mr. Schimek said. As a result, AIG became “more rigorous” in its risk selection last year, and it will continue to shift to highly engineered, large-limit middle-market risks “while we aggressively reduce exposure to commoditized excess and surplus lines where we simply don’t agree with market behavior,” he said.
AIG reported total premiums for the fourth quarter of $8.26 billion, down 3.8% compared with the same period last year.
In its core commercial lines business, AIG reported $3.7 billion in net written premiums, down 20.2% compared with the same period in 2015. The combined ratio for the commercial lines business was 241.6%, reflecting the reserve actions taken on the business.
For the full year, AIG reported a loss of $849 million in 2016, compared with a 2015 profit of $2.2 billion, and total premiums fell 6.2% to $34.39 billion.
Following the release of the results, New York-based rating agency Standard & Poor's Financial Services L.L.C. said AIG’s “weak results due to $5.6 billion of reserve strengthening for its quarter … do not have an immediate impact on our ratings or stable outlook.”
However, the insurer’s A rating from A.M. Best Co. Inc. remains under review with negative implications. The Oldwick, New Jersey-based rating agency announced the review last month when AIG indicated that it would be making an addition to loss reserves when it announced its quarterly results.
American International Group Inc. will pay Berkshire Hathaway Inc. $9.8 billion to reinsure much of its pre-2015 long-tail commercial liability exposures, the insurer announced Friday.