Insurance giant AIG’s profits take a massive hit as devastating wildfires in Los Angeles County result in catastrophic losses totaling $460 million, highlighting growing challenges for insurers across California’s increasingly risky landscape.
At a Glance
- AIG reported a 41.5% decline in first-quarter profits primarily due to $460 million in losses from Los Angeles County wildfires
- The insurance industry faces estimated losses of $40 billion from these wildfires, with total property damages potentially reaching $131 billion
- California homeowners in high-risk areas are experiencing rising premiums or policy cancellations as insurers reassess risk exposure
- Despite catastrophe losses, AIG’s stock rose 3.5% to $83.66, up nearly 15% year to date
- AIG stopped writing new admitted homeowners policies in California in 2022 but continues with surplus line coverage
Catastrophic Wildfire Losses Slash AIG’s Profits
American International Group (AIG) reported a substantial 41.5% decrease in first-quarter profits, with net income attributable to shareholders falling to $698 million. The primary driver behind this decline was the devastating January wildfires in Los Angeles County, which contributed a staggering $460 million to the company’s total catastrophe-related charges of $525 million.
These destructive fires resulted in at least 30 deaths and destroyed over 16,000 buildings across the region, creating one of the costliest natural disasters in recent California history. The financial impact was particularly severe on AIG’s personal lines business, which reported an underwriting loss of $126 million, compared to a $30 million gain during the same period last year.
The combined ratio for AIG’s global personal lines jumped to 107.9 from 98.3 in Q1 2023, reflecting the significant wildfire losses. In insurance terms, any combined ratio above 100 indicates that the company is paying out more in claims than it collects in premiums.
Despite these catastrophic losses, AIG’s general insurance net premiums written remained relatively stable at $4.5 billion, showing an 8% increase when adjusted for comparability factors. The company’s underwriting income in the General Insurance segment decreased dramatically by 59% to $243 million compared to the previous year, highlighting the severe impact of these wildfire events.
“While the broader macroeconomic and geopolitical environment remains uncertain, AIG is navigating these challenges from a position of strength given our global diversified portfolio, disciplined underwriting, and resilient balance sheet”, Peter Zaffino said.
California’s Insurance Crisis Deepens
The Los Angeles County wildfires represent just one aspect of a broader crisis affecting California’s insurance market. With global insured losses from natural disasters projected to reach $145 billion by 2025, insurance companies are fundamentally reevaluating their exposure in high-risk regions.
This reassessment has led to significant market shifts, with several major insurers either increasing premiums substantially or withdrawing coverage entirely from vulnerable areas. AIG itself stopped writing new admitted homeowners policies in California back in 2022, citing unprofitability and regulatory constraints, though it continues to offer surplus line policies, which typically cost more but provide coverage for higher-risk properties.
AIG holds just a 1% share of the California insurance market, while State Farm, which commands nearly 9% of the market, has also sought significant premium increases in the state. The intensifying frequency and severity of wildfires have forced insurers to recalibrate their risk models and pricing strategies. For homeowners in fire-prone regions, this translates to dramatically higher insurance costs or, in some cases, the inability to secure coverage at all. California’s Insurance Commissioner has implemented a one-year moratorium on policy cancellations in affected areas, providing temporary relief but highlighting the unsustainable nature of the current market dynamics.
“While the broader macroeconomic and geopolitical environment remains uncertain, AIG is navigating these challenges from a position of strength”, said CEO Peter Zaffino.
AIG’s Strategy Amid Natural Disaster Challenges
Despite the significant wildfire-related losses, AIG CEO Peter Zaffino maintained an optimistic outlook, characterizing the first quarter as an “excellent start” to the year. The company reported a General Insurance combined ratio of 95.8 and an accident-year combined ratio of 87.8, which Zaffino described as the best Q1 result since the financial crisis. This performance indicates that outside of catastrophe losses, AIG’s core underwriting operations remain profitable. The company’s stock has shown resilience as well, rising 3.5% to $83.66 following the earnings announcement, and posting nearly 15% growth year to date.
AIG’s North American commercial business grew by 14% in net premiums written, primarily driven by its Lexington Insurance division, while International commercial premiums grew by 8% on a comparable basis. This growth in commercial lines has helped offset some of the losses in personal insurance. The company’s strategic pivot away from high-risk homeowners’ coverage in California appears to be part of a broader industry trend, as insurers increasingly factor climate change into their long-term business models. AIG’s experience highlights the growing tension between providing affordable insurance coverage and maintaining financial stability in an era of escalating natural disasters.
