AIG share price rises as analysts reassured on BI exposure to virus

AIG is another leading US insurance group whose share price benefited from a confident and detailed presentation to analysts about the group’s limited exposure to claims from Covid-19, even after reporting first-quarter results that were wrecked by the impact of the virus.

The group’s share price jumped as much as 9.3% on Tuesday morning, its biggest gain in intra-day trading since early April, helping to reduce this year’s decline to 50%.

This came after AIG CEO Brian Duperreault had reported $272m of pre-tax losses in the first quarter caused by the virus, in lines including travel, commercial property, trade credit and workers compensation. The insurer reported an $87m underwriting loss in its property and casualty (P&C) operation. In total, the P&C operation was hit by $419m in pre-tax catastrophe costs in the quarter, including losses from the virus.

The rise in the share price following the presentation of such numbers can only be attributed to a rising feeling that legislators may well not proceed with efforts to retroactively open up BI policies to virus claims for small businesses, and the increasingly confident and transparent presentations on virus exposures by top insurer executives such as AIG’s Mr Duperreault and Peter Zaffino, its president and global chief operating officer.

“I want to emphasise that the overwhelming majority [of AIG BI policies] contain exclusions for losses related to viruses and, otherwise, require a showing that the virus caused direct physical loss or damage that was the cause of the business interruption. We are confident these exclusions and related terms and conditions will be upheld should they be challenged,” said Mr Zaffino according to reporting service Seeking Alpha.

“In the small fraction of commercial property policies where we have provided affirmative coverage for infectious disease, we’ve done so under strict underwriting guidelines, offering small supplements with terms and conditions limiting coverage, in many instances only to certain specified diseases, and regardless, only where it can be shown that the disease was physically present and led to a governmental suspension of the business operations. Additionally, our reinsurance programme will help protect our portfolio from Covid-19 losses. And depending on the line of business, geography and size of loss, our net exposure will be significantly limited,” he added.

“Lastly, I want to note that there’s been a fair amount of attention to various US legislative efforts to retroactively impose coverage for COVID-19-related business interruption losses, notwithstanding the clear terms and conditions in commercial property insurance policies. We are confident that these efforts will not be broadly successful or survive constitutional scrutiny,” continued Mr Zaffino.

After an exhaustive analysis of the group’s potential exposure – the best Mr Duperrault said he had seen in 40 years within the industry – AIG has worked out that potential policies exposed to virus claims are no more than 1% of the total group limits.

“There are limited instances where we do write affirmative coverage for communicable diseases. But even in those cases, it’s only on a supplemented basis and in pursuant, we have very strict underwriting guidelines that often result in coverage for only specified diseases. And in an event like that, there’s a requirement that there would also be a government closure caused by physical presence of the disease itself,” explained Mr Duppereault.

“So again, it’s fairly clear. And just to give you some context in terms of what I’m talking about, is that 100% of our sub-limits aggregate to well less than 1% of our total limits in our commercial property policy. So, it’s a very small portion of the overall property exposure. And I would just note that… we have really comprehensive reinsurance, whether it’s on a property per risk basis, we have low attachment points on a per occurrence basis that’s regional, and we also have global aggregates that attach to reduced volatility on a frequency severity basis,” he added, again suggesting that the reinsurance market may have a bigger exposure than originally envisaged.

AIG’s first-quarter results were also hit by a $1bn fall in investments. But it also explained that it had de-risked the portfolio and was feeling comfortable with its position.

The insurer said it had carried out material reductions in hedge funds, life settlement, CDOs and FVO securities, totalling approximately $32bn, which is a 60% drop in these asset classes since year-end 2015.

“Additionally, AIG’s portfolio has only a very small direct equity exposure, representing just 0.2% of the portfolio. The volatility in the equity markets has a minimal impact on our investment income and even that is below the line,” explained the group.