AIG Climbs After Firm Details Business-Interruption Exclusions

(Bloomberg) -- American International Group Inc. shares climbed after executives said the company has limited exposure to business-interruption losses, a topic that's spurred questions as companies across the U.S. shut down to help stem the spread of the coronavirus.

Among AIG's policies, “the overwhelming majority contain exclusions for losses related to viruses, and otherwise require a showing that the virus caused direct physical loss or damage that was the cause of the business interruption,” President Peter Zaffino said Tuesday on an earnings conference call. “We are confident these exclusions and related terms and conditions will be upheld” if they are challenged.

Insurers across the industry have been assessing their exposure to Covid-19 losses as the industry braces for what AIG Chief Executive Officer Brian Duperreault said would probably be its “single largest” catastrophe loss ever. Business-interruption coverage has come under scrutiny as companies shut operations, with some of the industry's customers suing insurers.

AIG shares jumped as much as 9.3% Tuesday morning, their biggest gain in intraday trading since early April. The increase helped reduce this year's decline to 50%.

“This pandemic has affected every corner of the world,” Duperreault said Tuesday on AIG's earnings call. Still, “we feel very, very comfortable with how we manage this risk in general and how we're well-positioned for Covid.”

Pretax Losses

AIG reported $272 million of pretax losses in the first quarter stemming from the virus in business lines including travel, commercial property, trade credit and workers' compensation policies. That drove an $87 million underwriting loss in the sprawling property-casualty operation, New York-based AIG said Monday in a statement.

The insurer also withdrew previously issued guidance, including a forecast for 10% adjusted return on common equity by the end of 2021. In total, the property-casualty operation was hit by $419 million in pretax catastrophe costs in the quarter, including losses from the virus.

“While we believe Covid-19 will be the single largest CAT loss the industry has ever seen, the significant body of work our team has undertaken since late 2017 has served us well as we navigate through this evolving situation,” Duperreault said in Monday's statement. “AIG was in a strong financial position before this crisis began and remains in a strong financial position today.”

The firm said it sees “continued improvement” in the property and casualty business and expects no material reduction in long-term returns in the life and retirement operations because of the virus.

The P&C operation posted a better adjusted combined ratio, a key measure of profitability that excludes catastrophe costs. That's been important for AIG's executives seeking to turn around that operation, which had previously been routinely hit by higher-than-expected costs on old policies.

‘Particularly Challenging'

“This was a particularly challenging quarter with AIG hit from several angles,” Mark Dwelle, an analyst at RBC Capital Markets, said in a note to clients Monday before the earnings call. Still, the P&C operation “managed to produce further improvements in the core combined ratio (despite a higher expense ratio in the quarter), which is a bit of positive news in a tough environment.”

AIG shut a technology-driven unit, Blackboard, at the end of March, “in light of current market conditions,” Chief Financial Officer Mark Lyons said Tuesday. The company booked a $210 million pretax loss from placing that business into runoff, according to the statement Monday.

The life and retirement business reported a 38% decrease in pretax income as stocks plummeted and spreads in credit markets widened. AIG's earnings of 11 cents a share fell short of the 74-cent estimate from analysts in a Bloomberg survey.