In a bid to protect itself from natural disasters,
American International Group Inc.
) recently inked a reinsurance deal with Compass Re Ltd.
The deal entails AIG to obtain reinsurance coverage worth up to
The transaction was financed by a $400 million catastrophe
bond issued by Compass Re Ltd. in a single tranche. Using an
index-based risk transfer with state-specific payment factors,
the deal will provide fully collateralized coverage for AIG
against catastrophe losses like Hurricanes and earthquakes
occurring through December 2014.
The Bermuda-based Compass Re Limited, a special purpose
insurer, issues catastrophe bond transactions. It provides
coverage against uncertain events like hurricane and earthquake
risks on per-occurrence basis for the Class 1 notes and annual
aggregate basis for the Class 2 and 3 notes. Through the
reinsurance agreement, Compass Re will cover AIG against these
losses on a per-occurrence basis.
AIG has a clientele of more than 88 million customers in over
130 countries and jurisdictions around the world. It has
established itself as a market leader in the catastrophe bond
marketplace for some time now. With this agreement, the company
sponsored $1.85 billion in catastrophe bonds in the last three
In the fourth quarter of 2012, the entire insurance industry
was hit by a loss of more than $25 billion due to Super Storm
Sandy. AIG estimated its loss from Sandy to be $1.3
billion. The company, which posted better numbers in the first
three quarters of 2012, owing to lower catastrophe activities, is
expected to incur huge losses in the fourth quarter of 2012 from
The Zacks Consensus Estimate for the fourth quarter of 2012 is a
loss of 11 cents representing a year-over-year decline of 113.3%.
However, for full year 2012, it is currently pegged at $3.75,
reflecting year-over-year growth of 267.9%.
We expect this risk-management effort by AIG to reinsure itself
will help it sustain the sudden shocks of unpredictable weather
changes in the upcoming period.
AIG currently carries a Zacks Rank #3 (Hold).
The AXA Group
), a peer of AIG, carries Zacks Rank #2 (Buy).
AMER INTL GRP (AIG): Free Stock Analysis
AXA SA -SP ADR (AXAHY): Free Stock Analysis
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