American International Group Inc. (AIG) provided an initial catastrophe (CAT) loss projection of as much as $1.0 billion ($0.9 billion post-tax) in its property-casualty (P&C) unit, Chartis; more than 70% of which account for multiple disasters in Japan. These losses will be considered in the first quarter of 2011.
The recent earthquake, tsunami and the nuclear plant explosions are expected to take a toll on most of the insurers’ claims. In addition, AIG’s CAT loss estimate also includes other natural disasters that occurred to date in 2011. These include the New Zealand earthquake, the U.S. winter storms, the northeast Australian floods, Cyclone Yasi and the Brazil floods.
However, the loss guidance excludes AIG’s general insurance operations in Japan that works for the Japanese Earthquake Reinsurance Company (JERC), which is a non-profit earthquake coverage provider for residential losses in Japan.
AIG had previously created a fund of about $500 million to cover its claims against CAT losses, while a major portion of the total estimate has been deposited with JERC. Still, the maximum AIG can incur, as of now, is $575 million since the US GAAP restricts any company from establishing prior reserves for any impending CAT losses.
While the industry losses remain beyond calculation, AIG’s Chartis unit has already been in a deep rut on the back of a weak performance due to the fragile P&C cycle.
During the fourth quarter of 2010, Chartis significantly incurred an operating loss of $4.0 billion compared with $1.8 billion in the year-ago quarter, attributable to higher claim and claim adjustment expenses and higher underwriting expenses. Consequently, the combined ratio deteriorated to 160.5%, compared with 132.5% in the prior-year period.
Recently, poor performance also led rating agencies like Fitch and S&P to demote Chartis. Going forward, growth prospects for Chartis are expected to remain weak based on intense competition, the augmented CAT losses and a dull economy.
However, despite the financial upheaval faced by AIG, it enjoys the leading insurer position, according to Fortune 500, given its diversified and unique franchise in both domestic and international markets, leaving behind prime peers such as MetLife Inc. (MET) and Prudential Financial Inc. (PRU).
This is based on the increased optimism of gaining capital flexibility post the successful completion of its recapitalization program and repayment of a chunk of its government bailout loan, along with AIG’s increased focus on core operations post the divestment of redundant operations.
As a result, we maintain an Outperform recommendation on the stock with a Zack #1 Rank, which absorbs the risk of restructuring and CAT losses in the upcoming quarters.
AMER INTL GRP (AIG): Free Stock Analysis Report
METLIFE INC (MET): Free Stock Analysis Report
PRUDENTIAL FINL (PRU): Free Stock Analysis Report
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