AIG Swings to Q3 Loss on Sharp Rise in Hurricane Costs

AIG Swings to Q3 Loss on Sharp Rise in Hurricane Costs
November 21, 2017

The hurricanes, Harvey, Irma, and Maria dropped a huge bill of about $120 billion on the US insurers. Still, the large players posted a third-quarter profit that beat analysts’ estimates. However, it was not the case with American International Group (NYSE: AIG). The global insurer reported a swing to a net loss in the September quarter, compared with a net profit in the similar period last year. The net loss was much worse than analysts’ estimates. On the basis of an adjustment made to the reserves and the weak performance of the personal insurance division, we forecast the stock of AIG, which closed at $60.06 on Monday, to decline further in the days ahead.

AIG reported a net loss of $1.74 billion, or $1.91 per share, in the July-September quarter 2017, mainly driven by a pre-tax catastrophe loss of $3 billion related to hurricanes. The Thomson Reuters survey of analysts called for a net loss of $0.79 per share. In the year-ago period, the company reported a profit of $462 million, or $0.42 per share.

Operating loss for the third-quarter was $1.22 per share. That compares with an operating profit of $1.01 per share in the prior-year period. But for a 15.3% decline in the operating expenses to $2.15 billion, the quarterly loss could have been much higher.

Net premiums written in the Commercial Insurance segment dropped 13% to $3.77 billion. Nearly 4% of the decline was due to divestitures, while the remaining decrease was mainly due to continued execution of strategic portfolio actions throughout the third-quarter.

During the quarter, loss ratio increased 91.1 points to 168.4. The losses related to hurricanes Harvey and Irma were approximately 65.6 points. However, the expense ratio declined by 1.5 points to 27. The combined ratio was 195.4 at the end of third-quarter, an increase of 89.6 from the prior-year period.

Liability and Financial Lines division posted a pre-tax operating loss of $257 million, compared with a pre-tax operating income of $948 million in the year-ago period. Property and Special Risks unit reported a widened pre-tax operating loss of $2.605 billion, from $263 million last year.

The Consumer Insurance division recorded a pre-tax operating income of $1.01 billion in Q3 2017, a decrease of 18% from $1.228 billion in 3Q16. Under this division, Individual Retirement and Group Retirement units reported a pre-tax operating income of $718 million and $249 million respectively. However, the Personal Insurance unit recorded a pre-tax operating loss of $71 million, compared with a pre-tax operating profit of $148 million in the year-ago period.

Due to the poor performance of the Commercial Insurance division, AIG had to set aside $836 million for policies written in previous years. Thus, on the basis of a swing to loss, an increase in the provision for losses, and poor performance of the Commercial Insurance division, we forecast the stock of AIG to remain bearish in the short-term.

The price chart indicates heavy resistance for the stock at 61.50. Further, the accumulation/distribution indicator is declining, while the stock has broken the support base of the descending triangle. Thus, it would be prudent to have a short position in the stock.

AIG - Technical Analysis - 21st November 2017

We may invest in a put option to profit from the probable downtrend in the stock. A strike price closer to $60 and an option expiry date around November 29 will be ideal for the trade.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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