logo
  Join        Login             Stock Quote

American International Group: Implications Of Sandy Loss Disclosure

 December 11, 2012 09:59 AM
 


(By Mani) American International Group, Inc.'s (NYSE: AIG) net exposure to Hurricane Sandy came in twice than the market expectations, suggesting that its gross losses could be outsized.

AIG says its net exposure to Hurricane Sandy totals $2.0 billion pre-tax or $1.3 billion after-tax, exceeding the market estimate of $1 billion. The number seems high on a relative basis to gross/net pre-tax exposure announcements of $1.275 billion/$1.075 billion for Allstate Corp. (NYSE: ALL) and $1.135 billion/$1.0 billion for Travelers Companies, Inc. (NYSE: TRV).

[Related -American International Group Inc (AIG): Current Weakness Offers A Buying Opportunity]

AIG's commercial multi-peril exposure is much lower than Travelers's in the New York/New Jersey area, and AIG's personal lines exposure is so small relative to Allstate's as not to be at all comparable.

However, AIG's exposure to unique large properties will be higher than perhaps any of its competitors, given its traditional willingness to use its balance sheet to underwrite risks larger than the tolerance level of many of those same competitors. Moreover, Hurricane Sandy loss is equivalent to about $1.00 per share, or a quarter's worth of earnings.

"At this point, Hurricane Sandy remains a complicated loss to analyze. The damages associated with business interruption have not finished being accrued, and we expect meaningful litigation to arise regarding claimability for many losses," Deutsche Bank analyst Joshua Shanker wrote in a note to clients.

[Related -American International Group Inc (AIG): Buy This 'Hated' Company While It's Still An Incredible Bargain]

If Hurricane Sandy proves to be a smaller industry event than modelers are forecasting, AIG's exposure might be construed as outsized. AIG incurred $370 million in losses related to Hurricane Irene in the third quarter of 2011. Hurricane Irene is estimated to have been around a $4.5 billion industry loss event, which put AIG at an 8.2 percent market share for that event.

There is a wide range for insured loss estimates for Hurricane Sandy among catastrophe modelers: AIR at $16 billion to $22 billion, Eqecat at $10 billion to $20 billion and RMS at $20 billion to $25 billion plus.

"Our view is that Hurricane Sandy is unlikely to exceed $20 billion in insured losses based on early indications from Allstate, Progressive and Travelers as well as claims count data from State Farm. However, AIG's estimate of a net loss of $2 billion seems to point to a Hurricane Sandy impact toward the higher end of modelers' estimations," Shanker noted.

Meanwhile, there is no detail about the size of its gross loss before the impact of reinsurance. AIG is not helping investors understand its risk management by keeping its reinsurance arrangements shrouded in secrecy. The company believes that the way it buys reinsurance is a trade secret that could reveal some of its underwriting strategies to competitors.

"As we understand from sources other than AIG's SEC filings, the company has purchased protection against a singular North American catastrophe event, whereby it retains the first $2.0 billion of its exposure to the loss and is covered for the next $2.5 billion. This means that AIG's gross exposure to Hurricane Sandy spreads over a very wide range," Shanker said.

The gross loss could be as low as sub-$2 billion with AIG injecting a very generous IBNR (incurred-but-not-reported) allocation into that estimate to shield from the currently high degree of uncertainty. Alternatively, the company could have a very large gross loss of up to $4.5 billion on its hands, of which reinsurance is covering more than half the loss.

"We think a $4.5 billion gross loss is a highly unlikely scenario (we mention it only for the sake of argument), but knowing AIG's gross loss will help us understand the degree to which its exposure might be outsized and whether there is risk management concern.

If the gross loss is little above $2.0 billion, we could conclusively say we are not concerned about catastrophe risk management and, in fact, that the company may merely be behaving conservatively, which may result in favorable Sandy-related reserve development in future quarters.

Ultimately, AIG would come forth with enough information by which investors can piece a rough sketch together of the size of the gross loss and the extent to which Hurricane Sandy losses represent case losses as compared with IBNR.

In a separate development, the U.S. Treasury is expected to sell its last remaining stake in AIG, fetching a total profit to taxpayers of $22.7 billion on the bailout. The Treasury said it had realized a profit of $5 billion on the $182 billion bailout while the Federal Reserve had made $17.7 billion.

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article image3 US Updates Show Ongoing Growth

Three economic updates today provide more evidence that moderate growth endures for the US. The numbers du read on...

article imageBuy These Solar Stocks Before They Snapback

Sometimes the market hands you a gift. And it would be foolish not to take it. Thanks to general market read on...

article imageInvestors Are Even More Euphoric And Confident.

As noted on the blog last Thursday, even though the market had been down for three straight weeks, last read on...

article imageThe Butterfly Machine

There’s a phenomenon called the Butterfly Effect. One common quotation is “It has been said that something read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.