Analysts expressed surprise at the size of the adverse reserve development taken by American International Group following its recent settlement of fraud charges.
Overall, Bank of America property-casualty analyst Brian Meredith called the carrier's $1.1 billion after-tax negative reserve development, along with its $1.64 billion settlement with state and federal authorities, “positives for the stock, since they remove significant shareholder concerns and together they are less than one quarter's earnings.”
At a conference call with analysts, AIG Chief Executive Officer Martin Sullivan refused to elaborate on the tenor of the discussions that led to the settlement with state and federal regulatory authorities, other than to say “it was a very open and constructive dialogue.”
This came after UBS analyst Andrew Kligerman wondered how shareholders were harmed, since the share price had returned to its level of early 2005.
Mr. Sullivan said that while the company will no longer pay broker contingency commissions for the most part as part of the settlement, they will still be continued in the personal auto line.
As for the $800 million set aside for a Securities and Exchange Commission-supervised fund for shareholder litigation, Mr. Sullivan said that none of the money would be returned to the company if shareholder suits did not exhaust it.
Mr. Sullivan also said that Milliman Inc. will continue to monitor reserve developments after its “ground-up” study resulted in a net reserve charge of $820 million not related to asbestos and environmental claims.
“At first we were surprised at the size of the development given that AIG appears to be one of the most conservatively reserved companies in the industry,” Mr. Meredith wrote in his analysis of recent developments at the carrier. He also expressed surprise that AIG would take down so many reserves on “relatively immature accident years.”
Mr. Sullivan said the figures came from a reserving method that relied much more closely on actual claims statistics rather than projections.
AIG Chief Financial Officer Steven Bensinger said a report on the process of internal control procedures will be available when the company announces fourth-quarter earnings in mid-March. He also said a consultant will then be hired to monitor the implementation of the procedures called for in the settlement agreement.
Meanwhile, Fitch Ratings said AIG and its subsidiaries will remain on “rating watch negative” following its settlement announcement and reserve changes. The rating agency expressed concern about the operating leverage ratio of AIG's domestic property-casualty subsidiaries most impacted by the announcement as well as last year's results restatement.
“Fitch views the domestic property-casualty subsidiaries' capital ratios as generally being lower than those required to support existing ratings,” Fitch said. The agency added it will also closely examine the $3.2 billion favorable reserve development action for recent accident-year reserves.
“Given the difficulty in accurately setting longer-tail reserves, Fitch will review carefully the company's current accident-year loss ratios and methodology for setting current accident-year reserves,” the statement said.
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