AIG seeks double-digit property rate increase and lower limits on back of $1.7bn Q3 loss
AIG is seeking double-digit price increases for property insurance, while looking to reduce limits and buy more reinsurance as it attempts to reduce earnings volatility.
“Third-quarter [catastrophe] events will be a catalyst for property and we are taking actions,” said Peter Zaffino, head of general insurance at AIG. “We have been communicating the need for rate in both cat and non-cat with clients and distribution partners,” he told analysts on a conference call.
“Our goal is to achieve double-digit rate increases on a risk-adjusted basis, which will deliver further improvements in the accident year loss ratio on an adjusted basis,” he said.
According to Mr Zaffino, problems in property insurance go well beyond catastrophe losses. “We are not where we want to be in terms of underwriting performance. The cats have been a catalyst for pushing rates but the accident years for property have underperformed,” he said.
The soft market for property insurance and lack of significant catastrophe losses in the past four years have allowed attritional loss ratios to “creep up”, according to Mr Zaffino. “In the third quarter we began to push rate, and that was cat and non-cat exposed business, and the rates are holding,” he said.
According to AIG’s chief executive officer, Brian Duperreault, the insurer is not alone in seeking rate increases.
“The severity of recent catastrophic events forced AIG and all market participants to reassess the appropriate pricing of the risks assumed. We have successfully begun to raise rates in the wake of the catastrophes and will continue to do so. We have recently seen other participants follow across the market,” Mr Duperreault said
Asked if a hardening of the market is sustainable, Mr Duperreault said: “In the property market it is recognised that property levels are unsustainable, that is number one. Second, the property market has been living off of the [catastrophe] profits, and they don’t exist. And number three, there is a question whether the [catastrophe] models are hitting the mark.
“With global warming and the things we are seeing, like wildfires in California, I think there is a question around the whole level of exposure we have,” added Mr Duperreault.
“All those are great for making a hard market. But how long it lasts? I guess it lasts as long as it lasts. But I do think it has all the ingredients for a significant improvement in property, because property has problems at a frequency level and a severity level, and problems in cat. And all should be fixed,” he said.
Mr Duperreault and Mr Zaffino were recruited earlier this year after AIG reported disastrous results in 2016, which led to the departure of CEO Peter Hancock. AIG reported a $3bn loss in the fourth quarter of 2016, after experiencing a $5.6bn prior-year adverse reserve development in its US liability portfolio.
Last week, the insurer was forced to add to its casualty reserves yet again.
“The 2016 accident year is still very green, but we saw greater than expected claim emergence this quarter and decided to be more cautious on the 2016 and 2017 accident years,” said Mr Duperreault.
In particular, AIG experienced adverse reserve development in the third quarter of 2017 for European and US casualty. This included higher severity losses for US motor, poorly performing US programme business and increased private company bankruptcy claims in financial lines.
“In our European casualty business we saw an increase in large losses, driven by increases in underwriting limits in continental Europe. We are taking actions to remediate this book,” said Siddhartha Sankaran, chief financial officer at AIG.
Mr Duperreault is confident that AIG’s reserve process remains “reasonable and sound”, despite an unfavourable development of US reserves for liability business written in 2016. He noted that there was no development on reserves for 2015 and prior years, which are covered by a $10bn adverse loss development agreement with Berkshire Hathaway’s National Indemnity Company.
AIG is in the midst of implementing a new structure under Mr Duperreault and Mr Zaffino, which will see its consumer and commercial P&C businesses combined in one general insurance unit under Mr Zaffino, who joined AIG from Marsh three months ago.
“The challenges seen in our commercial business are ones that I have seen in the past and will be addressed by clear actions,” said Mr Duperreault.
He said AIG will now create more “distinct business segments” with a return to “specialisation”. Mr Duperreault has already established AIG Risk Management and last week announced he would reconstitute AIG’s excess and surplus lines underwriter Lexington as a standalone business.
Mr Duperreault and Mr Zaffino also set out changes to AIG’s strategy, which will see the insurer make greater use of reinsurance and reduce limit sizes in property and casualty insurance.
In the third quarter, AIG absorbed catastrophe losses of $3bn and expects a further $500m loss in the fourth quarter from the recent California wildfires. However, despite the large catastrophe losses, AIG’s reinsurance programme was not triggered by the multiple events because they did not exceed retentions.
“Going forward, we will take a long-term and strategic approach to reinsurance, working in close partnership with our major reinsurers,” said Mr Zaffino.
“During 2018, at a minimum, we will look to take a lower net retention on our property cat book, take less per-risk retention on property, reduce net limits in certain casualty lines and look for opportunities to further reduce volatility in our results as we position the company for long-term profitable growth,” he said.
Mr Duperreault is not a fan of AIG’s move under Mr Hancock to write larger net lines.
“You will find a change in our philosophy of underwriting risk. It is not my style to take large limits and retentions of risk. One of our challenges has been the size of limits and where we write in the tower in various classes of business,” said Mr Duperreault.
“We will also partner closely with our reinsurers as they provide another valuable set of eyes on our book. Reinsurance is a capital management tool that allows us to better balance our capital and risk across our global businesses, as well as manage our gross limits. I expect this will take time but you should expect actions and improvements each quarter, with a goal of getting to sustainable underwriting profitability,” said Mr Duperreault.
