AIG says rate increases strongest in last 20 years but posts Q2 $7.9bn loss

AIG execs have told analysts that market hardening is the strongest for decades, on the back of Covid-19, and are confident they will not suffer big Covid-19 business interruption (BI) losses, despite racking up hefty pandemic claims in the second quarter that contributed to a tough period. AIG posted a net loss attributable to shareholders of $7.9bn in the second quarter of this year, compared with a net profit of $1.1bn for the same period of 2019. This included estimated Covid-19 losses of $458m within total cat losses of $674m. AIG posted an underwriting loss of $343m in the quarter. Brian Duperreault, AIG’s CEO, said however that Covid-19 remains an earnings event rather than a capital event for the insurer. He stressed that the bulk of AIG’s quarterly loss was driven by a $6.7bn after-tax loss from the sale and deconsolidation of its runoff reinsurance company Fortitude Re to an investor group led by The Carlyle Group and T&D Holdings. The firm's adjusted after-tax net income was, however, down 55.1% in Q2 to $571m. On a results call with analysts, Mr Duperreault said the current rating environment is as “strong as I've seen in more than 20 years and the increases [during] the last several quarters are accelerating due to Covid-19”. “These rate increases are global, broad-based across multiple lines of business and the changes we are starting to drive in terms and conditions, particularly in commercial property are remarkable,” he said, according to results service Seeking Alpha. AIG’s CEO of general insurance, Peter Zaffino, said rates across the firm’s global commercial portfolio were up an average 16% in the second quarter, reflecting an increase of 21% in North America and 10% in international. Mr Zaffino, who is also AIG’s president and chief operating officer, said retail property and excess casualty rates were up more than 35%. Public company D&O pricing was up more than 50% and employment practices liability more than 30%, he added. Mr Zaffino said AIG’s UK business and Talbots both saw rate increases of about 20%. This was driven primarily by specialty lines, with energy up more than 40% and aviation up more than 20%. Mr Zaffino added that rates have been increasing now for ten consecutive quarters. He also explained that AIG’s $458m estimated second-quarter Covid-19 loss brings the total to $730m. “As we expected, Covid-related claims activity increased in the second quarter, our first full quarter of Covid, and impacted a larger number of lines of business than in the first quarter, including travel, contingency, property, trade credit, marine, casualty, workers compensation, accident and health, financial lines and Validus Re,” said Mr Zaffino, according to Seeking Alpha. But he added that AIG does not expect many Covid-19 BI losses. Mr Zaffino said the “overwhelming majority” of AIG’s property BI policies contain exclusions for losses related to viruses, or require physical damage. “We continue to believe that these exclusions and related terms and conditions will be upheld where challenged,” said Mr Zaffino. He added that the “small fraction” of commercial property policies in which AIG provides affirmative coverage for infectious disease have been placed under strict underwriting guidelines. Mr Zaffino said these policies offer “only small sublimit, with terms and conditions limiting coverage, in many instances only to certain specified disease, and regardless only where it can be shown that the disease was physically present and led to a governmental suspension of the business operations”. Mr Duperreault was brought back to AIG after it ran into trouble and has since addressed many of the problems. This included changes in general insurance and global commercial, with the help of Mr Zaffino. Mr Zaffino told the call that AIG’s global commercial portfolio has been largely addressed and is now ready for growth. “With respect to our global commercial portfolio, it has been significantly remediated and while there will always be opportunities for improvement, this portfolio is now positioned for further strengthening, more diversification and profitable growth,” said Mr Zaffino. He added that Covid-19 has resulted in a “flight to quality” among insurance buyers that is benefiting AIG. Mr Duperreault reported that AIG continues to see improved underlying underwriting profitability based on its ongoing portfolio remediation, expense discipline and improving market conditions. This was particularly evident in the results of its international commercial operations, which reported net premiums written up by 7% on a constant dollar basis in the second quarter, driven by “strong rate improvement” and higher retention across most commercial lines. Risk and insurance managers can continue to expect a disciplined approach from AIG during coming renewals, as Mr Duperreault presses ahead with his strategy to turn around the group’s underwriting performance and improve profitability. “We are effectively navigating the current complex environment due to the strong foundation we built over the last three years. While unprecedented and ongoing, Covid-19 remains an earnings event, not a capital event, for AIG. We also increased our financial flexibility, ending the second quarter with over $10bn in liquidity,” he said. “Our core businesses performed well in the second quarter. In general insurance, the underlying underwriting profitability improvement was driven by our focus on portfolio remediation and expense discipline. Life and retirement benefited from its diversification and agility, and continues to meet client needs despite an uncertain economic environment,” continued Mr Duperreault. The group’s general insurance combined ratio was 106%. This included 11.9 points of catastrophe claims for Covid-19, civil unrest and weather-related events, as well as reinstatement premiums, of which 8.2 points was related to pandemic losses. “Commercial lines in both North America and international continued to show strong improvement due to underwriting and reinsurance actions taken to improve business mix, loss performance, and rate adequacy,” stated AIG.

AIG says rate increases strongest in last 20 years but posts Q2 $7.9bn loss

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