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AIG Expects to Incur Nearly $3M Weather-Related Loss in Q3


Multi-line insurer American International Group Inc. AIG expects to incur catastrophe (cat) loss of $2.9 billion to $3.1 billion ($1.9 billion to $2.0 billion after-tax), net of reinsurance, in the third quarter.

The loss is related to hurricanes Harvey ($1.1 billion to $1.2 billion), Irma ($1 billion to $1.1 billion) and Maria ($600 million to $700 million). The Mexico earthquake is estimated to cause $150 million of loss.

The loss will be incurred in the company’s Commercial segment, which benefited in the previous quarter from low catastrophe loss.

We expect the segment’s profitability to suffer in the third quarter from high loss claims at a time when the segment’s top line is already weighed down by challenging market conditions.

Year to date, the stock has lost 5.4%, underperforming the industry which recorded growth of 7.2%.

Third-quarter 2017 was one of the costliest in history with respect to cat loss. Mass devastation was seen in parts of the United States which continued to be ravaged by a number of hurricanes one after another.

While Harvey rocked Houston and Texas Gulf Coast, Irma ran amok in regions across Caribbean to Florida. Both storms are considered the costliest in a decade. No sooner the country had heaved a sigh of relief, with Hurricane Jose not turning not as destructive, another hurricane, Maria, hit Puerto Rico and the Virgin Islands. Maria is already deemed as a Category 5 storm.

Economic losses from Irma are estimated at about $58-$83 billion while the same from Harvey could be as high as $108 billion by Moody’s Analytics. Catastrophe modeling firm AIR Worldwide estimates industry insured losses for Hurricane Maria in the Caribbean between $ 40 billion and $85 billion.

Other insurers too have come up with their loss estimates. Assurant Inc. AIZ has estimated between $134 million and $140 million pre-tax of reportable catastrophe losses from Harvey and expects gross losses from Irma to exceed its retention of $125 million pretax.

The Travelers Companies, Inc. TRV estimates pre-tax catastrophe loss from Hurricane Harvey between $375 million and $750 million or $245 million and $490 million after tax. HCI Group, Inc. HCI projects loss between $100 million and $300 million from Hurricane Irma.

On the face of it, catastrophe losses cause a spike in loss ratio and hurt insurers’ underwriting margins. However, these losses act as catalysts in turning the industry's pricing cycle. The industry which has amassed a huge capital buffer and led to soft pricing (thanks to a benign cat loss environment in recent years) will likely see price hardening in certain lines of business that have been affected the most.

AIG carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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