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Duperreault the latest AIG CEO to face questions about reserve adequacy

Much has changed at American International Group Inc. during the past several months, but at least one thing has remained the same: concerns in the investment community about the adequacy of the company's loss reserves for prior accident years.

Even with the $25 billion adverse development cover, which addresses 80% of the reserve risk on substantially all of AIG's U.S. commercial long-tail exposures for accident years 2015 and prior, in place with Berkshire Hathaway Inc.'s National Indemnity Co., new President and CEO Brian Duperreault still had to deal with several reserve-related questions during the company's Aug. 3 earnings conference call as analysts sought his insight on an area that resulted in kitchen-sink charges in each of the past two calendar years.

AIG reported unfavorable reserve development net of the impact of the National Indemnity pact of $56 million during the second quarter and $66 million for the first half of 2017. But the company posted incurred losses and loss adjustment expenses, or LAE, attributable to prior accident years of $391 million for the second quarter and $453 million for the first half of the year prior to the pact's effects.

Of the second quarter's sum, $341 million represented covered losses under the National Indemnity adverse development cover, and $50 million pertained to development on noncovered reserves. AIG said the amount of unfavorable development on covered reserves amounted to $6 million net of the impact of the adverse development cover and the effect of the company's recognition of the amortization of the deferred gain on the agreement.

AIG recorded incurred losses and LAE attributable to prior accident years of $6 million in the second quarter of 2016 in what hardly served as a precursor of the multibillion-dollar reserve charge the company would later reveal for the fourth quarter of 2016.

Duperreault said that disciplined underwriting in AIG's commercial lines business should serve to reduce future reserve-related concerns, and he expressed confidence in the soundness of the company's reserving and loss-pick process. He explained that most of the recent accident years have been developing as expected in the approximately $16 billion of reserves the company reviewed during the second quarter in an accelerated process that included some of its "most challenged lines," including primary and excess general liability, medical malpractice and environmental exposures.

JPMorgan analyst Jimmy Bhullar was one of the analysts who pressed Duperreault on the topic because, as he pointed out, "for the past several years, management has been assuring investors that the company is becoming more conservative at risk selection [and] more conservative in setting loss picks, but we've seen continued adverse development even on recently sold business."

Reserves for accident years 2011 through 2015 developed favorably by $83 million in the aggregate on a net basis during the second quarter, but that amount was offset by unfavorable development of $58 million for accident year 2016, $42 million for accident years 2006 through 2010 and $39 million for accident year 2005 and prior.

By broad category of business, AIG attributed $41 million of the second quarter's unfavorable development to the property and special risk grouping and $21 million to liability and financial lines, with a partial offset in the form of small amounts of favorable development for the consumer personal insurance and legacy portfolios. The small amount of adverse development in the year-earlier period largely came from the liability and financial lines grouping, which reflected the impact of AIG's response to unfavorable judicial rulings affecting its Florida workers' compensation business.

The company said in its 10-Q that it observed unfavorable claim experience within primary general liability segments of its U.S. other casualty business, particularly resulting from construction defects and multiyear construction projects that cover all contractors on a site, along with other large individual claims. The company blamed similar types of risks for unfavorable development in its U.S. excess casualty business. In the property and special risks segment, AIG said "several large international claims" primarily from accident-year 2016 suffered from "unexpected development."

But if there are lingering concerns about the potential for outsized reserving actions, they were not immediately reflected in the performance of the AIG stock. The company's shares closed Aug. 3 at $66.06 apiece, up 0.2% on the day, after selling for as much as $67.30 shortly after the market open. That marked the highest intraday value for the stock since Jan. 20, the day on which AIG revealed plans to enter the adverse development cover with National Indemnity and take a material fourth-quarter 2016 reserve charge.