AIG sees net loss of about US$3 billion in 2016 Q4

American International Group, Inc. (AIG) has posted net losses for both the full year and the fourth quarter of 2016, but company president and CEO Peter Hancock reports that actions taken last year will help “dramatically reduce uncertainty and deliver higher quality, more sustainable earnings in the future.”

AIG saw a net loss of US$3,041 million in 2016 Q4 compared to a US$1,841 million net loss in 2015 Q4, the company reported Tuesday in a statement detailing results for the quarter and fiscal year ended Dec. 31, 2016.

AIG’s after-tax operating loss for 2016 Q4 was US$2,787 million compared to US$1,318 million in 2015 Q4, the statement notes.

For full-year 2016, the net loss was US$849 million compared to net income of US$2,196 million for 2015.

With regard to after-tax operating income, the company adds, this stood at US$406 million for 2016 compared to US$2,872 million in 2015.

Looking at Commercial Insurance, steps were taken with underwriting to improve the overall mix of business and use more rigorous pricing tools in U.S. casualty lines, which AIG identifies as the “primary driver of recent adverse development.”

Related: Adverse development charge highlights AIG’s challenges with longer tail commercial lines: A.M. Best

Pointing out the company’s “experience in U.S. Casualty reflects aggregate exposures that have accumulated over AIG’s decades of underwriting long-tail business,” the statement notes that associated net premiums written are down about 39% since the end of 2015.

AIG reports the adverse development reinsurance agreement – which it entered with National Indemnity Company (NICO), a Berkshire Hathaway subsidiary in early 2017 – covers the majority of the U.S. Casualty reserves.

AIG is agreeing to pay NICO US$9.8 billion payable by June 30, 2017, with interest at 4% per annum from Jan. 1, 2016, the company reported in January.

Specifically, the agreement retroactively covers the majority of U.S. long tail lines reserves for accident years 2015 and prior.

In addition, the statement notes, it “covers roughly half of total Commercial Insurance loss reserves at the company and should generate a deferred pre-tax gain before discounting of approximately US$2.6 billion in the first quarter of 2017.”

In its annual report for 2015, AIG cited a “significant portion” of its non-life reserves “are for the U.S. commercial casualty class, including excess casualty, asbestos and environmental, which tends to involve longer periods of time for the reporting and settlement of claims than other types of insurance.”

For full-year 2016, the company’s strategic remediation of certain underperforming casualty lines and greater use of reinsurance saw Commercial Insurance net premiums written (NPW) decline 17.9% compared to 2015.

NPW was also down for the fourth quarter of 2016, this time by 20.2% compared to the same quarter of 2015, as a result of strategic portfolio actions and premiums ceded, the statement adds.

“The loss ratio was 211.5 in the quarter and included 125.2 points attributable to prior-year adverse reserve development and 8.1 points attributable to catastrophe losses,” AIG reports. For full-year 2016, the “loss ratio was 104.0, which included 30.8 points of adverse reserve development.”

Looking at Consumer Insurance, AIG reports that 2016 saw a narrowing of focus and enhancement of operating performance. “The Personal Insurance business continued to see strong growth in the high-net worth space as well as improved profitability across all business lines,” the statement notes.

“Personal Insurance had a strong quarter reflecting improved current accident year loss and expense ratio performance, together with favourable prior-year loss reserve development, partially offset by higher catastrophe losses,” AIG adds.

For Personal Insurance, NPW for the three months ended Dec. 31, 2016 amounted to US$2,810 million compared to US$2,729 million in the same quarter of 2015.

Other announced results include the following:

• for full-year 2016, AIG returned US$13.1 billion of capital to shareholders;
• the Board of Directors has authorized an additional increase to its previous repurchase authorization of AIG Common Stock of US$3.5 billion;
• AIG continues to maintain strong capital and liquidity ratios at year-end to meet expectations of key stakeholders, including clients and rating agencies; and
• the company was ahead of target on expense reduction targets. “For the full-year, general operating and other expenses (GOE) declined US$1.7 billion, or 13.4%, to US$11.0 billion from the prior year.”

AIG reports that 2016 Q4 included a US$5.6 billion impact from prior-year adverse reserve development. “Total full-year 2016 adverse development on subject lines of US$5.3 billion is included under, and will be 80%, or US$4.2 billion, covered by the adverse development reinsurance agreement,” the company explains.

“This agreement covers roughly half of total Commercial Insurance loss reserves at the company and should generate a deferred pre-tax gain before discounting of approximately US$2.6 billion in the first quarter of 2017,” the statement adds.

Related: AIG reports net income of US$462 million for Q3 2016 compared to net loss of US$231 million in Q3 2015

“We remain committed to continuing to execute our clearly defined transformation plan, as well as achieving our financial goals,” Hancock says in the company statement.

This includes “the return of the remainder of the US$25 billion to shareholders we announced in January of last year subject to regulatory and rating agency considerations and future profitability improvements,” he points out.