AIG warns of mounting casualty loss trends as it reshapes book

AIG is dramatically reshaping its business mix after warning about market-wide issues with US casualty loss development and pricing. After posting an $849m loss for 2016 last week, AIG has given details of the trends behind its fourth quarter $5.6bn reserve addition, as well as some dramatic changes to its appetite for US casualty business. “Our $5.5bn reserve addition in the fourth quarter was a reaction to emerging severity trends across lines and accident years, as well as more prudent reserve assumptions,” Peter Hancock, AIG’s chief executive, told analysts during a conference call. The reserve increases in the fourth quarter were the result of a review of AIG’s reserves carried out by the company at the end of 2016. The review also led AIG to increase its expected losses by $700m in 2016 and by $500m for 2017. The vast majority of the fourth quarter reserve additions were for US casualty, in particular workers’ compensation and excess casualty, explained Sid Sankaran, AIG’s chief financial officer. AIG has seen an increase in both the frequency and severity of US casualty claims. This trend “became more material in the third quarter and accelerated in the fourth quarter” of 2016, according to Mr Sankaran. The insurer also saw an increase in paid and incurred claims for excess casualty. In the areas where AIG had already acted to reduce its underwriting – namely US auto and healthcare – loss costs continued to worsen, said Mr Sankaran. AIG suggested that the trends driving its reserve additions are not likely to be isolated to the New York-based insurer. “The trends that we witnessed and reacted to in the fourth quarter were broad and we believe are materially impacting the overall property/casualty market, which is generally rate inadequate,” Mr Hancock told analysts. The emerging trend in casualty loss ratios during the past year or so has resulted in AIG taking some fairly drastic steps, including a $10bn reinsurance transaction with Berkshire Hathaway and some big changes to its business mix. Prior to its 2016 results, AIG purchased a huge adverse development reinsurance cover from Berkshire Hathaway. The cover protects AIG from further adverse development on its US casualty book, covering exposures that go back some 40 years, explained Mr Hancock. “Following a 2015 reserve addition, we felt that it was strategically imperative to improve earnings sustainability. While adverse development covers are not new to the industry, an agreement of this scope and scale is redefining,” said Mr Hancock at the analyst presentation. The transaction sees Berkshire Hathaway reinsure a large part of AIG’s US casualty reserves – which stood at $35.7bn at the end of 2015 – against an adverse development. The cover kicks in at a $25m attachment point, with a $50bn limit. AIG will hold 20% of the liability above the $25bn attachment point and the remaining 80% sits with Berkshire Hathaway. The deal covers US casualty and financial lines, but excludes international commercial, short-tail commercial and personal lines. AIG said it will maintain control of claims handling. “We retain full claims authority to honour commitments with consistency of decision making and service that clients expect of AIG,” explained Robert Schimek, chief executive of AIG’s commercial business. According to Mr Hancock, the deal with Berkshire Hathaway will lower the risk of future impairments, increase the quality of earnings and lower the cost of capital. Mr Sankaran told analysts that the deal should “dramatically reduce earnings volatility”. The other big change at AIG has been a reduction in its appetite for certain lines of business, in particular US casualty. The insurer has reduced its casualty premium by 60% since 2011, which now accounts for just 21% of its commercial portfolio, compared with 40% in 2011. US casualty net premiums were down 39% in 2016, against the previous year. With greatly reduced appetite for US casualty, AIG is now shifting its focus to financial lines, international casualty and its global programme capabilities. “In US casualty, rates are inadequate and we stand firm in a competitive environment. In the fourth quarter, rates increased 5.5 points, representing the fifth consecutive quarter of rate increases in excess of three points,” said Mr Schimek. Even property and specialty business is proving challenging for AIG. The insurer reported a return on equity for property business of -0.2% in 2016. Mr Schimek said there had been “price erosion” and “poor performance” of property programmes, prompting a more “vigorous risk selection” at January renewals and a shift towards “highly engineered and mid-market risks”. Despite raising rates and cutting back on US casualty business, AIG is conscious of the need to manage client relationships. “We need to balance the need for increased rate with our valued client relationships,” said Mr Schimek. In fact, AIG will now “prioritise” and reshape its business around its most valuable and profitable clients. AIG’s retention rate among major clients remained consistent at 94%, said Mr Schimek. The other talking point during AIG’s analyst presentation was the possible reaction of ratings agencies to its reserve additions and losses. In the days after the results were posted, Fitch Ratings and Standard & Poor’s both affirmed AIG’s financial strength ratings. S&P said AIG’s results would not have an immediate impact on its ratings or stable outlook. Fitch affirmed all of AIG’s ratings, but assigned a negative outlook. Fitch noted that AIG’s reserve experience is a sharp outlier to peers, as most large underwriters have reported net favourable development during the same period.

AIG warns of mounting casualty loss trends as it reshapes book

Want to read this article?

Read Next

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

European Parliament approves regulation to tackle forced labour

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

European Parliament approves regulation to tackle forced labour

Want to read this article?

Read Next

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

European Parliament approves regulation to tackle forced labour

Related Articles