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

A week after American International Group Inc. announced it expects to report next month a “material prior year adverse development charge” for Q4 2016, A.M. Best Company Inc. has placed the long-term issuer credit rating of the New York City-based insurer under review “with negative implications.”

In a press release Jan. 20, AIG said it “currently expects a material prior year adverse development charge in the fourth quarter.” The firm is scheduled to release its 2016 financials on Feb. 14.

Rating firm A.M. Best said Jan. 26 it has “placed under review with negative implications” the long term issuer credit rating of AIG, as well as the financial strength ratings and long-term ISRs of AIG’s insurance subsidiaries.

On Nov. 3 2016, AIG reported its combined ratio in commercial P&C, for the three months ending Sept. 30, was 105.3%, though its combined ratio was 96.3% for the accident year.

For 2015, AIG reported prior year development of US$4.168 billion in 2015.

A.M. Best said Thursday it “anticipated the potential of further reserve development,” but added the timing of its AIG’s Jan. 20 announcement “highlights the challenges that AIG management continues to face in reserving, pricing, and handling this longer tail commercial lines business, and the effectiveness of the group’s enterprise risk management function.”

In its annual report for 2015, AIG said 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.”

On Jan. 20, 2017, AIG announced an adverse development reinsurance agreement with National Indemnity Company (NICO), a subsidiary of Omaha, Neb.-based Berkshire Hathaway Inc.

The agreement, effective Jan. 1, 2016, “covers 80% of substantially all of AIG’s U.S. commercial long-tail exposures for accident years 2015 and prior, which includes the largest part of AIG’s U.S. casualty exposures during that period,” AIG said at the time. AIG is agreeing to pay NICO $9.8 billion payable by June 30, 2017, with interest at 4% per annum from January 1, 2016. All figures are in United States dollars.

“NICO is assuming 80% of the net losses and net allocated loss adjustment expenses on the subject reserves in excess of the first $25 billion and NICO’s overall limit of liability under the agreement is $20 billion,” AIG said Jan. 20 “This provides material protection to policyholders against adverse developments beyond current reserve levels.”

The agreement with NICO is “anticipated to absorb a portion of the expected reserve development, as any reserve development on the covered lines in excess of the current carried reserves of about $35.7 billion is covered on a quota share basis, up to the limit of the reinsurer’s liability, which is 80% of $14.3 billion,” A.M. Best said in release Jan. 26. “It should be noted that certain lines of business are excluded from the contract.”