8-KEarnings & ResultsExhibits & Filings

AMERICAN INTERNATIONAL GROUP, INC. 8-K Report, Financial Results (Apr 19, 2017)

Filed April 19, 2017For Securities:AIG

Summary

This 8-K filing from American International Group (AIG) on April 19, 2017, primarily informs investors about two significant financial developments. First, AIG is estimating the financial impact of a UK Ministry of Justice decision to reduce the Ogden rate, which affects lump-sum bodily injury payouts. This change is expected to have financial implications for AIG's U.K. operations. Second, AIG announced a change in its accounting treatment for the deferred gain related to the adverse development cover it entered into with Berkshire Hathaway. Beginning in the first quarter of 2017, this gain will be amortized over the expected reinsurance recovery period. Investors should pay close attention to the magnitude of the Ogden rate impact and the implications of the revised amortization schedule for the Berkshire Hathaway reinsurance gain.

Key Highlights

  • 1AIG is assessing the financial impact of the UK Ministry of Justice's decision to reduce the Ogden rate for bodily injury payouts.
  • 2The reduction in the Ogden rate is expected to affect AIG's U.K. operations.
  • 3AIG will begin amortizing the deferred gain from its adverse development cover with Berkshire Hathaway starting in Q1 2017.
  • 4The amortization of the Berkshire Hathaway deferred gain will occur over the expected reinsurance recovery period.
  • 5The press release detailing these matters is furnished as Exhibit 99.1 to the 8-K.
  • 6The information provided in Item 2.02 is not considered 'filed' for purposes of Section 18 of the Exchange Act or incorporated by reference into other filings.

Frequently Asked Questions

The Ogden rate is a discount rate used in the UK to calculate lump-sum payouts for serious bodily injury claims. A reduction in this rate means that future payouts will be calculated using a lower discount, potentially increasing the present value of claims and thus the total cost for insurers like AIG operating in the UK.

This refers to a reinsurance agreement where AIG purchased protection from Berkshire Hathaway against unexpected increases in prior-period loss reserves (adverse development). AIG had recognized a deferred gain from this transaction, which it will now begin to amortize.

Amortizing the deferred gain over the reinsurance recovery period means that the gain will be recognized in AIG's income statement gradually over that period, rather than all at once. This will likely result in a smoother, but potentially longer-term, positive impact on earnings compared to a lump-sum recognition.

More details are expected to be found in the press release dated April 19, 2017, which is furnished as Exhibit 99.1 to this 8-K filing. Investors should refer to that document for specific financial estimates and further explanation.