AIG (NYSE:AIG) reported weak fourth quarter earnings on Tuesday, with its net loss crossing $3 billion on a larger than expected pretax charge of $5.6 billion to boost reserves for future claims. The company’s revenues fell 6% to $13 billion on declines in the Property and Casualty business and Corporate and Other run-off insurance lines. AIG’s stock price fell by about 5% following the release.
AIG reported a pre-tax operating loss of about $3.1 billion, driven by a 107% rise in operating losses in the P&C business partially offset by a 56% rise in the Life and Retirement segment operating income. The company reported a net loss of over $3 billion, or $2.72 per share, in Q4 2016 versus a loss of $1.8 billion in the prior year quarter.
The loss was primarily because of the reserve charge for risks associated with U.S. commercial insurance policies. Most of the cost of AIG’s $5.6 billion reserve charge will be covered under the agreement it signed with a unit of Warren Buffett’s Berkshire Hathaway last month. Under the agreement, AIG will pay over $10 billion to Berkshire to take on the bulk of the risk associated with those U.S. commercial insurance policies.
Property And Casualty Insurance
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- AIG 2016 Review: Earnings & Investment Income In Focus
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AIG ranks among the top ten Property & Casualty (P&C) insurers in the U.S., with a market share of 3.23% in terms of premiums earned. In Q4 2016, the P&C division’s net premiums declined 15% y-o-y to $4.2 billion but net investment income increased 32% to $918 million. However, an underwriting loss of $5.9 billion led to a 107% rise in the segment operating loss to over $5 billion.
The accident year combined ratio – the ratio of claims and expenses paid to premiums earned – worsened by 12.5 percentage points to 108.3% in Q4 2016 owing to a higher loss ratio.
Life and Retirement Insurance
The Life and Retirement division’s revenue increased 1% to over $6 billion, but pre-tax operating income increased by 56% owing to lower advisory fee expenses.
The Personal Insurance accident year combined ratio improved from 103.1% in Q4 2015 to 96.9% in Q4 2016, owing to a lower expense ratio which declined from 47.7% in Q4 2015 to 44.2% in Q4 2016.
Please refer to our complete analysis for AIG