AIG Estimates $100 Million First-Quarter Hit on Ogden Rate, $40 Million Deferred Gain From Berkshire Deal
April 21, 2017 by David Pilla
NEW YORK – American International Group Inc. announced two items it said will impact first-quarter results — a $100 million estimated negative impact related to the U.K. Ogden rate change for bodily injury and a $40 million pretax amortization gain related to AIG’s $9.8 billion adverse development cover agreement with a Berkshire Hathaway Inc. reinsurer.
AIG said it expects to record an increase to prior-year loss reserves of about $100 million pretax related to the U.K. Ministry of Justice decision to reduce the discount rate applied to lump-sum bodily injury payouts, known as the Ogden rate. The rate, used to calculate lump sum awards in U.K. bodily injury cases, changed from 2.5% to -0.75%, effective March 20 (Best’s News Service, March 1, 2017).
“Our carried reserves as at Dec. 31, 2016, were estimated using an assumption that the Ogden rate would decline to 1.0%. This discount rate change primarily impacts the liability and financial lines business within commercial insurance in the United Kingdom,” AIG said in a statement.
AIG said it will also recognize an estimated nominal pretax deferred gain of $2.6 billion in connection with the adverse development cover agreement it entered with Berkshire Hathaway’s National Indemnity Co.
“Beginning in the first quarter of 2017, AIG will begin amortizing the deferred gain over the expected reinsurance recovery period,” the group said. “The amortization of such amount will be included in pretax operating income for the liability and financial lines business each quarter.”
AIG said first-quarter 2017 results will reflect a partial quarter of amortization of about $40 million pretax based on the contract’s closing date of Feb. 3, 2017.
AIG announced the $9.8 billion reinsurance agreement with National Indemnity in January (Best’s News Service, Jan. 20, 2017). AIG ceded 80% of reserve risk on nearly all of its U.S. commercial long-tail exposures for accident years 2015 and prior, representing carried reserves of about $34 billion, net of discount as of Jan. 1, 2016.
National Indemnity Co. has a current Best’s Financial Strength Rating of A++ (Superior). Underwriting entities of American International Group Inc. have current Best’s Financial Strength Ratings of A (Excellent).
Shares of American International Group Inc. (NYSE: AIG) were trading at $59.10 on the morning of April 20, up 0.20% from the previous close.
(By David Pilla, news editor, BestWeek: David.Pilla@ambest.com)
