U.S. and global insurance giant American International Group (NYSE:AIG) is likely to trigger its aggregate reinsurance tower due to catastrophe losses suffered in the fourth quarter, as CEO Duperreault said the firm expects cats to cost it up to $800 million.
Speaking on Wednesday at the Goldman Sachs U.S. Financial Services Conference in New York and as reported by Reuters, Duperreault said that the insurer anticipates an estimated fourth-quarter catastrophe burden of $750-800 million.
Duperreault said at the event that he still expects AIG's general insurance division will move into 2019 with a slight underwriting profit. Helping the insurer to that underwriting profit is likely to be the firm's reinsurance program.
Previously, AIG had said it had exhausted approximately $700 million of its $750 million retention, which includes the high-end estimate from the impacts of hurricane Michael in the fourth quarter, as our sister publication reported last month.
With an expected burden of up to $800 million from Q4 catastrophes including the wildfires, it's likely that AIG will have eaten through the rest of this aggregate retention, and this reinsurance layer will begin to pay out for the insurer.
The estimate for Q4 is only from October and November, so likely largely from hurricane Michael and the California wildfires. AIG had previously estimated that hurricane Michael would cause it a $300-500 million loss.
So even at the top end, the rest of the losses suffered so far in Q4 seem likely to erode a portion of the aggregate reinsurance, and any further losses this quarter may erode that layer of protection further.
We understand that there is some ILS fund or collateralised participation in this aggregate AIG reinsurance layer, hence some further impacts for certain capital market-backed funds.
Reuters wrote that Duperreault said the recent California wildfires will add around $150-175 million to the Q4 loss burden, net of reinsurance. While Validus is cited as taking up to $60 million of the loss.
So, there's a very good chance AIG will claim on its aggregate reinsurance tower, although this is impossible to confirm without the finalised loss figures from the insurer, which likely won't come until it reports its fourth-quarter results.