Market Overview

Did AIG's Reserve Charge Reveal An Underlying Weakness?


A $5.6 billion reserve charge led American International Group Inc (NYSE: AIG) to report a bigger loss of $3.04 billion for its fourth quarter, and Deutsche Bank believes the multi-billion dollar charge reflects weakness in the insurer’s underlying underwriting margins.

The reserve charge was related to the U.S. commercial insurance policies it has already written and indicates that AIG's underlying P&C business is in worse shape than formerly thought.

AIG Commercial segment closed 2016 with an accident-year loss ratio of 67.5 percent, a substantial improvement from an newly adjusted 72 percent for 2015, but significantly higher than anyone expecting somewhere near 60 percent for 2016.

“The 60% number now seems a fantasy, and underlying loss ratio forecasts are likely to rise.  Every 100bps of deterioration in Commercial underwriting margins is equivalent to $0.11 of annual EPS,” analyst Joshua Shanker wrote in a note.

Related Link: How AIG Stands To Prosper Under A Trump Presidency

Shanker noted that AIG’s results cast doubt on its loss picking ability going forward as “management's credibility is challenged regarding its optimism about the extent of achievable improvement in 2016-2017.”

The analyst pointed out that all but $342 million of the $5.6 billion reserve charge appears to have come from U.S. Commercial Lines. This suggests that AIG mispicked the U.S. Commercial risk in 2015 by almost 1,000bps when it closed the books last year.

“Assuming that the reserve strengthening for 9M16 relates to U.S. Commercial lines (likely), management mispicked the loss margins on these risks (not protected by the NICO cover) by about 520bps,” Shanker elaborated.

Shares of AIG fell 8.79 percent to $61.01. Shanker has a Hold rating on the stock, with a target price of $64.

Latest Ratings for AIG

Jul 2019UpgradesMarket PerformOutperform
Jul 2019MaintainsOutperform
Jun 2019DowngradesBuyHold

View More Analyst Ratings for AIG
View the Latest Analyst Ratings

Posted-In: Deutsche Bank Joshua ShankerAnalyst Color Reiteration Analyst Ratings


Related Articles (AIG)

View Comments and Join the Discussion!

Latest Ratings

LOWRBC CapitalMaintains129.0
MARRBC CapitalMaintains148.0
CRLSunTrust Robinson HumphreyMaintains162.0
CFRSunTrust Robinson HumphreyMaintains105.0
View the Latest Analytics Ratings
Don't Miss Any Updates!
News Directly in Your Inbox
Subscribe to:
Benzinga Trading Daily
Get pre-market outlook, mid-day update and after-market roundup emails in your inbox.
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Thank You

Thank you for subscribing! If you have any questions feel free to call us at 1-877-440-ZING or email us at

USDA Daily Hog Slaughter; Lean Hog Futures Erase Gains

Conagra Could See 15% Upside In The Next 12 Months