AIG’s reserve hit in two charts.
First, $4.6 billion in loss development, before discounting, breaks down this way:
Next, $446 of offsetting items (discount and additional premium from loss-sensitive items) looks this way:
The company had reserves of $63.7 billion at Q3, so this is not a big hit on its reserve base. But the loss does take the steam out of earnings.
Through three quarters AIG had earned about $3.2 billion pre-tax on general (p/c) insurance operations on $24 billion premium. So Wednesday’s action more than wipes out p/c profit for the year and, assuming flat Q4 premiums adds about 12 points to the combined ratio for the year.
The $1.18 billion asbestos hit (after discount) is most interesting to me, since the company had booked $180 million in additional asbestos reserves in Q3 as part of $168 million in company-wide adverse development. Wednesday’s hit about doubles AIG’s A&E reserve, which stood at $1.27 billion at Q3.
But from last quarter’s 10-Q I notice the company had a 3-year paid survival ratio of 4.4. That number will drift up to about 8.0 at year-end, right at the industry average (7.98 at year-end 2009).
For the record, here are AIG’s comments on the whole deal:
- Asbestos: $1.3 billion before discount
- Rationale: During the 2010 year end loss reserve review, the third-party actuary’s standard account-specific asbestos model was updated for 2010 information and was calibrated to actual AIG experience, including that in the second and third quarters of 2010. AIG also modified certain of its loss-reserve-related assumptions to better reflect both industry-wide and AIG-specific expectations and experience for IBNR claims, taking into consideration recent, higher industry-wide trends regarding expanding coverage theories for liability.
- Note: Asbestos coverage has been excluded from AIG policies commencing in 1985.
- Excess Casualty: $1.0 billion
- Rationale: During the fourth quarter of 2010, loss emergence for the excess casualty class significantly exceeded expectations, particularly in more recent accident years. In response to this higher level of loss emergence, AIG modified its loss development assumptions for recent and older accident years to provide greater weight to emerging adverse experience in the more recent years. AIG also considered the continued exposure to latent claim emergence and the industry-wide rise in large product-liability verdicts for this long tail class of business as well as the continued uncertainty surrounding the expected loss ratios during the soft market conditions that have prevailed in recent accident years.
- Excess Workers’ Compensation: $825 million before discount
- Rationale: The claims projections utilized in the 2010 year end loss reserve review indicated that these claims continue to develop more adversely than expected. As a result, AIG concluded that there was sufficient experience to support a revision in its loss assumptions to reflect its adverse experience. Significant contributing factors have been continuing medical inflation, new and often additional treatment specialties such as “pain management,” longer claim payment periods due to improved medical care, as well as the underestimation of claim costs by third party administrators.
- Primary (Specialty) Workers’ Compensation: $420 million before discount
- Rationale: Loss emergence for the more recent accident years for this class has significantly exceeded that which was anticipated by the expected loss ratios originally established for these accident years taking into consideration AIG’s revised claims handling practices, and AIG has now concluded that worsening experience is driving the emergence. Similar to excess workers’ compensation, continuing medical inflation, additional treatment specialties, and longer claim payment periods are all contributing factors, further compounded by reduced return to work opportunities in today’s high unemployment environment. Therefore, AIG modified its estimates to give greater weight to the emergence pattern for the more recent accident years and, to a lesser extent, earlier accident years, during the 2010 year end loss reserve review.
- Note: Since 2007, AIG has reduced its net written premiums for guaranteed cost primary (specialty) workers’ compensation business by almost 70 percent.
In addition to the above classes, AIG also strengthened reserves in its construction/commercial risk and national accounts classes of business by approximately $820 million before discount. The construction and commercial risks, while separate classes of business, consist primarily of certain primary workers’ compensation and general liability coverages, and thus the experience in the workers’ compensation lines identified in the distinct classes above also affected these lines. For the 2010 year end loss reserve review of the construction and commercial risks classes, AIG determined it was appropriate to modify its loss development assumptions to provide greater weight to emerging adverse experience in the more recent accident years and increased its loss reserves by approximately $420 million in the fourth quarter of 2010. For the national accounts business, the 2010 year end review of Chartis loss data led to the conclusion that reserves for older accident years required strengthening. As a result, reserves for this class of business were strengthened by approximately $400 million. Various other classes comprised the remaining $240 million of reserve strengthening.
Partially offsetting the reserve strengthening was $446 million of loss reserve discount and loss sensitive business premium adjustments, including approximately $120 million of reserve discount for the asbestos class; approximately $300 million of reserve discount for the various workers’ compensation classes discussed above; and an additional premium accrual of $26 million on certain loss sensitive policies.
Wednesday press release here.
Third quarter 10-Q is here (pdf).