More remedial work ahead as Duperreault says AIG’s problems bigger than expected

CEO Brian Duperreault has said the problems at AIG were bigger than he expected, as top management explained that aggressive reductions in limits and remedial work carried out on general insurance in 2018 will continue this year. Mr Duperreault and Peter Zaffino, AIG’s CEO of general insurance, were speaking at the insurer’s full-year and fourth-quarter 2018 results presentation. AIG reported an after-tax loss of $559m in Q4, booking a reserve charge of $365m to close full-year 2018 with a loss of $6m. The insurer’s fourth-quarter results were also hit by general market decline that impacted investment income, and large cat losses of $798m. General insurance closed 2018 with a loss of $469m, almost halving its 2017 losses of $813m. Its fourth-quarter losses stood at $722m after North American business recorded a loss of $575m, against £147m in international business. The results show things are moving in the right direction at AIG but there remains much room for improvement. Mr Duperreault said AIG’s problems were “deeper and more pervasive” than anticipated. As industry veterans stepped into key positions at AIG to focus on fixing “fundamentals”, they discovered issues and “unintended consequences” of prior strategies, explained Mr Duperreault. Much of this was the result of AIG’s ‘Go Large’ strategy, he continued. This approach to the market created “outsized risk and volatility” for AIG, explained its CEO. “By expanding its risk appetite to encompass very large limits on a gross and net basis, AIG added significant risk to its earnings pattern and balance sheet. Additionally, certain of these issues were exacerbated by risks being written on a multi-year basis and record cat losses, [as well as] $30bn in stock buybacks, which reduced AIG’s capital, making the outsized limits more risky,” said Mr Duperreault, according to results service Seeking Alpha. “While I had some understanding of the Go Large strategy before I arrived at AIG, I had not appreciated the extent of the issues it created or that it had been deployed throughout the company,” he added. Mr Duperreault said that with very few exceptions, almost every AIG business suffered from underperformance. He explained that the main priority for 2018, however, was returning general insurance to profitability as soon as possible. Since Tom Bolt’s arrival from Berkshire Hathaway in January as chief underwriting officer of general insurance, the business moved quickly to “overhaul” its risk appetite and redesign its underwriting philosophy, continued Mr Duperreault. He said the strategy is now set and underwriters understand what they are being ask to do. This strategy will be applied across AIG’s book in 2019, he continued. “Implementation is weaving its way through the book this year,” said Mr Duperreault, who is also president of AIG. “The implementation is being done and risk by risk, as they come up for renewal, you make adjustments and things bleed off,” he added. The general insurance business has focused on outlining a new underwriting risk appetite, improving underwriting capabilities and creating business units that can positively distinguish themselves in the market, said Mr Zaffino. Key components of this work included a rigorous review of the entire portfolio, an aggressive effort to limit reduction and embedding an enhanced governance and control framework, he explained. “Detailed portfolio reviews uncovered significant complexity and exposures, resulting from the prior large limit deployment strategy that made AIG an outlier in the industry,” said Mr Zaffino. Throughout 2018, AIG general insurance prioritised reducing gross and net limits to reduce risk and volatility in its portfolio. Mr Zaffino gave some examples of how and where. In property, gross limits “deployed in the field” were reduced from $2.5bn to $750m. Net limits were reduced from $611m at the end of 2017 to between $5m and $50m at the beginning of this year. In casualty, gross limits were reduced from $250m to $100m and net limits were reduced “significantly”, said Mr Zaffino. He went on to explain that primary D&O gross limits were reduced by more than $8bn in aggregate throughout 2018. The insurer reduced gross limits by more than 50% and net exposure by more than 75% in its Caribbean general insurance business. This was achieved through aggressive limit management and changes to reinsurance. AIG also found that its general insurance reinsurance programmes had “substantial shortcomings” and “notable gaps”. It therefore revised a “more sophisticated” approach to underwriting when designing its global reinsurance programme for 2019. Mr Zaffino said 2018 was a “year of heavy lifting” for AIG’s general insurance business. But while a “tremendous amount of foundational work was done, we still have more work to do”, he added. “We continue to be laser-focused on repositioning our portfolio, instilling underwriting discipline across general insurance, improving profitability and continuing to evolve our reinsurance programe,” he added. In addition, AIG continues to look for efficiencies and cost-saving opportunities remain a priority, he explained. Mr Zaffino also noted that general insurance rates increased by an average of 4% across AIG’s book of business in the fourth quarter. In Europe and the UK, rates were up about 3% on average. This was led by motor business with increases in the upper-single digits and D&O that rose in mid-single digits. Rates were also up 3% in Asia-Pacific. This was led by property and financial lines increases in the mid-single digits. Rates were higher in other lines of business, explained Mr Zaffino. North American public primary D&O saw low-double-digit rate increases. Commercial auto also experienced rate increases in the low-double digits. US excess casualty saw double-digit rate increases in most units and commercial property saw mid-single-digit increases. Mr Zaffino said that while rate is an important area of focus for AIG, it is not the key strategic driver. “The work we're doing to improve risk selection in our core underwriting capabilities, as well as the overall repositioning of our portfolio, will be the primary drivers of our future performance and profitability,” he said. Mr Duperreault pointed to fourth-quarter improvements in general insurance as a sign that AIG is on the right track. The accident year combined ratio, excluding cats, was 98.8% in Q4. This is a 140-basis point improvement over the same period of 2017, largely driven by an improved loss ratio of 63.9%. The expense ratio is also moving in the right direction. Mr Duperreault said AIG has made “significant progress” in transforming general insurance. “The foundational work we did over the course of 2018, particularly in general insurance, has positioned us well for the future,” said Mr Duperreault. General insurance is targeting a combined ratio below 100% this year, from 111.4% in 2018. Mr Duperreault said a combined ratio below 100% is an “inflection point”, but stressed it is not where AIG expects to be in the longer term. “The crossing over into profitability for the first time in over a decade is an important milestone we will achieve in repositioning AIG for the future," he said. Mr Duperreault also stressed that he is more confident today than a year ago, that AIG is on the right path.

More remedial work ahead as Duperreault says AIG’s problems bigger than expected

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