AIG has taken a $622m charge after it found that accident victims were living longer than expected, a setback to the insurer as chief executive Peter Hancock seeks to show it has a bright future without resorting to a break-up.
Weaker-than-expected third-quarter earnings pushed shares in the biggest US insurance company by market value down 3.4 per cent in after-market trading on Wednesday.
The shortfall was caused by rising costs associated with historic “structured settlements”, a way of compensating victims of workplace and other accidents introduced by Congress in 1982.
Instead of receiving compensation for injuries as a lump sum, victims in the US can opt to receive streams of payments designed to meet medical expenses and living costs.
AIG warned on Wednesday that “mortality experience studies” showed the disabled recipients of the payments were living longer than had been expected, putting the insurance company on the hook for more payouts.
The resulting $622m hit applied to insurance policies written before 2010 that are now housed in AIG’s “legacy” portfolio, which the insurer plans to dispose of or wind down.
Although AIG has got out of the troublesome lines of business that almost brought the insurer to its knees in the financial crisis, types of traditional insurance cover are still a problem for the group.
Mispriced polices dating back to the 1990s are particularly problematic. Earlier this year Mr Hancock ringfenced such assets from the rest of AIG, but the earnings on Wednesday highlighted how policies written years ago can still hurt the company’s bottom line.
Similar types of liabilities in the UK, where courts have been awarding rising numbers of so-called periodic payment orders to car crash victims, have become a rising concern of the insurance industry there.
Some reinsurers even withdrew from the UK market — partly because they feared such types of indefinite compensation turns regular policies into complex, life insurance-like liabilities.
AIG, which has reserved $21bn for structured settlements, was expected to provide further details about its longevity charge on a call with Wall Street on Thursday.
After-tax operating earnings per share of $1.00 fell short of the $1.21 that analysts had pencilled in, but were 92 per cent higher than last time’s 52 cents. Despite the hit, the insurer still produced after-tax operating income of $1.1bn, up 59 per cent from a year ago, which Mr Hancock said demonstrated that the company’s “underlying financial performance is positive and on track”.
“We are just nine months into our two-year strategy,” he wrote in a memo to employees. “Although the numbers also remind us that our earnings performance won’t be a straight line, we should all feel confident in the strategy and direction of our company.”
AIG is slimming down and trying to boost returns after the activist investors Carl Icahn and John Paulson earlier this year called on the board to separate its life and non-life businesses. In recent months the group has sold both its mortgage insurance arm and a Lloyd’s of London franchise.
Mr Hancock said the group remained committed to its 2017 financial targets, was ahead of its plan to cut costs, and was still targeting improvements in underwriting results at its commercial insurance business.
The longevity charge was partially offset by a $238m pre-tax benefit associated with a separate review of actuarial assumptions for the company’s consumer life and retirement businesses.