AIG reports recovery in US commercial business but needs $399m reserve addition in Europe

AIG’s recovery under president and CEO Brian Duperreault continues, as the group reported a pre-tax profit of $1.45bn for full-year 2017 compared with a loss of $74m in 2016. But there was need for a reserve addition on European business and a huge $6.6bn loss in the fourth quarter due to US tax changes. Mr Duperreault replaced Peter Hancock last year, after he was forced to report a string of big reserving additions for US casualty business. The good news for Mr Duperrault and his team is that a recent reserving review found that the worst appears to be over. The full-year general insurance combined ratio included only 4% for prior-year reserve development in 2017, compared with 18.5% the year before. The bulk of this reserve development actually came from AIG’s international operations, notably Europe. It appears that while the US commercial book may have been cleaned up, there is still serious work to do elsewhere. AIG’s international general insurance business generated net written premiums of $3.3bn for the fourth-quarter 2017, compared with $3.5bn the year before – a reduction of 6%. The international commercial lines premium fell from $1.5bn in the fourth quarter of 2016 to $1.4bn in the fourth quarter of last year. The reported combined ratio for international general insurance business was a horrible 135.7% in the final quarter of last year, compared with 131.5% the year before. The adjusted accident year combined ratio for this segment was still 121.6% for Q4 2017, against 108.4% for the fourth quarter of 2016. US commercial lines business fared much better last year, with a reported combined ratio of 99.2% against an immense 318.7% in the fourth quarter of 2016. The adjusted accident year ratio was 92.1% at the end of last year, compared with 108.2% at the end of 2016. AIG explained that net premiums written by its US commercial and personal lines businesses combined decreased by 14%. “The reduction in the North America loss ratio was driven by the fourth-quarter 2016 reserve additions. The 15.4-point improvement in the accident year loss ratio, as adjusted, primarily reflects the impact of adjustments to the loss estimates that were made in the fourth quarter of 2016, as well as pricing and underwriting actions, and recoveries from reinsurance on severe losses,” added the group. “Adjusted pre-tax income of $412m included $682m of catastrophe-related losses, which were primarily related to the California wildfires and largely impacted personal insurance. Favourable loss reserve development of $97m was primarily due to improvement in North America commercial lines,” continued AIG. All this was against a backdrop of record catastrophe losses of $4.2bn in 2017, driven by Californian wildfires and Hurricanes Harvey, Irma and Wilma. AIG’s report on international business was not so positive. “Net premiums written decreased 6% on a reported basis, primarily driven by divestitures and risk selection strategy in Europe in international commercial lines and strategic country exits for personal insurance,” stated the group. “The loss ratio increased 2.8 points to 74.7 in the fourth quarter of 2017. The accident year loss ratio, as adjusted, increased 8.2 points to 67.7, primarily due to continued remediation efforts of international commercial lines in Europe,” added AIG. So while AIG’s reserving problem seems to be under control in the US, it has reared its ugly head in Europe instead. AIG reported that its international business posted an adjusted pre-tax loss of $399m for the fourth quarter, “largely due to the strengthening of reserves and loss estimates in international commercial lines”. AIG group’s headline quarterly post-tax result was hammered by a massive tax bill incurred for the Tax Cuts and Jobs Act (the Tax Act) enacted at the end of last year by the Trump administration to try and reduce tax bills for US individuals and businesses. AIG offered no real explanation as to why it had to incur a huge tax charge of $6.7bn in the final quarter in its initial statement, other than that it was related to the new Act. If the tax bill is taken into account, then the company actually reported a net loss of $6.7bn for the fourth quarter of 2017 against a net loss of $3bn for the same period in 2016. News agency Reuters reported that this tax reform has caused many financial service companies to book big one-time losses for earnings held overseas, and in response to an “accounting oddity” related to losses booked during the 2007 to 2009 financial crisis. The plan is that lower corporate tax rates will help US companies such as AIG compete with competitors based elsewhere in the long run. Overall, the US insurance industry is pleased with the new Tax Act because it will reduce the average bill for a US insurer down from about 35% to 21%. Though, faced with a $6.7bn tax bill, it may not feel such a positive development for AIG currently. It also arrives with the new Base Erosion and Anti-Abuse Tax, which hikes tax paid on inter-company reinsurance transactions used to transfer premiums out of the US into Bermuda and elsewhere. Credit rating agency Fitch recently pointed out that these two measures combined will “significantly reduce the longstanding Bermuda tax advantage over the US”, and has naturally been welcomed by US insurers. International insurers point out, however, that this protectionist strategy will backfire on US policyholders and those international corporations with US operations covered under their global programmes, as competition will be restricted and ultimately prices will increase.

AIG reports recovery in US commercial business but needs $399m reserve addition in Europe

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