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In a bid to protect itself from natural disasters, American International Group Inc. (AIG - Analyst Report) recently inked a reinsurance deal with Compass Re Ltd.
The deal entails AIG to obtain reinsurance coverage worth up to $400 million.

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 years.

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 hurricane Sandy.

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 (AXAHY), a peer of AIG, carries Zacks Rank #2 (Buy).

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