AIG continues turnaround strategy; tax law hits fourth-quarter profitReprints
American International Group Inc. cut back on unprofitable lines of business and bought more reinsurance protection during the fourth quarter last year as the new management team continued its efforts to turn the insurer around.
Discussing AIG’s fourth-quarter results in a conference call with analysts on Friday, including a $6.66 billion loss compared with a $3 billion loss in the same period in 2016, largely due to a one-off charge related to the recent tax reform law, Brian Duperreault, president and CEO of AIG, was upbeat about the insurer’s prospects.
“I feel confident that we have a good handle on where the issues are line by line, country by country … we’ve got the structure, we’ve got the understanding. Now we’ve just got to execute,” he said.
Since his return last May to AIG, where he spent the first two decades of his career, Mr. Duperreault has undertaken a review of the insurer’s business and recruited a significant number of senior executives to manage it.
Excluding the charge for the tax law’s effect, adjusted after-tax income was $526 million for the 2017 fourth quarter, compared with an adjusted after-tax loss of $2.8 billion in the 2016 fourth quarter. For the full year, AIG reported a loss of $6.08 billion, compared with a loss of $849 million in 2016. On an adjusted basis, it reported a loss of $232 million, compared with a $2.4 billion loss in 2016.
Many insurers have booked significant one-off charges relating accounting provisions to comply with the new tax law. Overall, the lowering of the corporate tax rate in the law “will be a net positive for AIG over the long term,” Mr. Duperreault said.
AIG reported $762 million in catastrophe losses for the quarter, including $572 million related to the California wildfires.
Its general insurance unit, which includes its commercial and personal lines property/casualty business, reported an adjusted profit of $13 million in the quarter, compared with an adjusted loss of $4.8 billion in the prior year quarter.
The insurer reported net adverse prior-year reserve development of $76 million, largely attributed to its international business. Its international general insurance segment reported an underwriting loss of $530 million, compared with an underwriting loss of $564 million in the 2016 quarter.
AIG reported a fourth-quarter 2017 combined ratio of 113.3%, compared with 182.5% in the 2016 quarter. For the full year, its combined ratio improved slightly to 117.3% from 118.9%.
The insurer reported North America commercial lines net premiums written of $1.81 billion in the fourth quarter, a 19.1% decrease from the prior year period.
Reviewing the property/casualty unit’s operations over the quarter on the conference call, Peter Zaffino, CEO of general insurance, said: “Cat losses significantly impacted our 2017 performance; however, going forward you can expect us to more thoughtfully manage frequency and severity of cat exposure through our reinsurance strategy and the management of our gross exposures,” he said.
At the Jan. 1, 2018, reinsurance renewals, “we began executing on our strategy by reducing severity and frequency exposures on our North American cat and net retention on our property per risk and also obtained a new catastrophe cover for international cat,” Mr. Zaffino said.
The additional reinsurance, taking into account the announced acquisition of reinsurer Validus Holdings Ltd., will reduce AIG’s probable maximum loss exposure by 20%, he said.
The changes to the reinsurance program included changing the limits it bought from occurrence, which responds to individual events, with no reinstatement to a mix of occurrence coverage and annual aggregate coverage, which responds to multiple losses over a year, with one reinstatement.
AIG’s North American 2018 catastrophe reinsurance limit is $4.75 billion, compared with $3 billion in 2017, according to its investor presentation. Its aggregate attachment point is $750 million, and its occurrence attachment point is $2 billion, compared with a single occurrence attachment point of $1.5 billion in 2017.
If the same catastrophes losses in 2017 reoccurred in 2018, AIG’s net catastrophe losses would be 40% to 60% lower, Mr. Zaffino said.
AIG continued to reduce its property/casualty premiums in the fourth quarter, he said. Total net premiums written declined 9% for the quarter and 10% for the year, excluding the effect of currency fluctuations. Divestitures accounted for 6 points of the decline, while the rest “primarily reflects remediation of underperforming lines,” Mr. Zaffino said.
In light of its reinsurance strategy and actions to manage the overall portfolio, AIG expects premium volume to be flat in 2018.
“While the general insurance underlying accident year loss ratio improved year over year, we still have work that needs to be done across the commercial lines,” Mr. Zaffino said.
The insurer saw rate increases across multiple lines of business in the fourth quarter, with U.S. property insurance seeing the largest increases, he said.
“We saw rate strengthening each month during the quarter, which averaged in the high single digits and appears to be sustaining in the first quarter,” Mr. Zaffino said.
U.S. casualty increases averaged in the mid-single digits, he said.
AIG also announced, that it recently established DSA Reinsurance Co. Ltd. in Bermuda to act as its main runoff reinsurer, combining its life and nonlife runoff business.
“By combining these runoff lines into a single, well-capitalized legal entity, we were able to achieve operating synergies and strong diversification benefits,” said Sid Sankaran, AIG’s chief financial officer.