Risk managers should not expect easy renewal from AIG based on half-year results

European or international risk managers should not look forward to an easy renewal from AIG this year, as CEO Brian Duperreault made it crystal clear to analysts during the company’s recent half-year results call that 2018 remains the “year of the underwriter” at the New York-based insurance group. Peter Zaffino, executive vice-president and chief executive officer of AIG's general insurance organisation and a member of the firm’s executive leadership team, confirmed that limits on offer from AIG have been slashed this year. He told analysts that property underwriting limits have been cut from $2.5bn globally to $1bn in the US and $750m internationally, with the exception of fronted policies. This, he said, coincides with other changes being made that will result in lower exposures across the portfolio. “We are also in the process of revising our use of deductibles, reducing exposure to certain industries and putting new team of seasoned underwriters in place,” said Mr Zaffino. Mr Duperreault reported a decent net profit of $937m, or $1.02 per diluted share, for the second quarter of 2018, compared with net profit of $1.1bn for the same quarter last year. AIG’s result-wrecking reserve addition nightmares that ultimately led to the departure of Mr Duperreault’s predecessor, under intense pressure from activist investor Carl Icahn and his colleagues, appear to be a thing of the past. “Reserves were stable again this quarter with no prior year development of note and overall, actual versus expected claims trends continued to come in better than expected. The $63m of reported net favourable reserve development this quarter largely results from a quarterly amortisation of the deferred gain on the ADC,” AIG’s group CFO Siddhartha Sankaran said, according to online results service Seeking Alpha. The recently installed CEOs of other leading international insurers, such as Generali and AXA, are busy selling their restructuring plans and visions of a digitally enabled future to investors and other stakeholders in the hope that they will back them in the long run. Based on AIG’s presentation to analysts, Mr Duperreault and his experienced management team are much more focused as they continue the group’s turnaround on traditional values of the insurance business: tight cost control and disciplined underwriting. As shown by the dramatic reduction in limits on offer, the pens wielded by AIG underwriters are currently under close scrutiny. The other side of the equation – cost control – is just as important, said Mr Duperreault. “Our expense levels, even with that 2% improvement [reported in the half-year results] is nowhere near where it needs to be. So, you'll see us address not just the pricing side and the loss ratio, but you'll see us address, continue to address, the expenses. Expense management is a way of life. It's got to be a way of life in this company. And I think those are the two things that will get us down to – get us to that – top-quartile position,” he said in response to one analyst’s question. A comment from Mr Zaffino on the hardcore tightening of limits and deductibles will certainly prick the ears of most corporate risk and insurance managers. Mr Zaffino said: “The severe losses were largely attributable to policies incepted in 2017 and earlier. We believe the underwriting changes we are making will address the root causes of these losses as they earn into our financial results over time. During past earnings calls, I've shared our intent to balance gross and net limits, while bringing quality and consistency to our underwriting guidelines to stabilise performance.” Adding: “To that end, one of the initiatives we've undertaken is to reduce property, underwriting limits from $2.5bn globally to $1bn in the US and $750m internationally with the exception of fronted policies, which coincides with changes being made to authorities that will result in lower exposures across the portfolio. We are also in the process of revising our use of deductibles, reducing exposure to certain industries and putting a new team of seasoned underwriters in place.” A key member of Mr Duperreault’s team brought into to re-underwrite the business and bring it back to more traditional, profit-making values is Tom Bolt. He has apparently been hard at work to ensure that 2018 is indeed the year of underwriter, as proclaimed by Mr Duperreault late last year. “Tom Bolt, our chief underwriting officer, is partnering with our business leaders to implement a new underwriting framework to better position us in the market. We started to reduce gross and net limits in both property and casualty during the first half of the year. And we are taking actions to improve financial performance in challenged areas of our business,” explained Mr Zaffino. “As I've discussed previously, our revised underwriting and reinsurance strategies will result in a better net mix of business and an improved risk profile. Since last quarter, we expanded our European casualty excess of loss programme to cover the entire international business and entered into a new US terrorism facility that reduced net exposures for our in-force commercial property policies,” he added. It was also not surprising to hear, given the overall tenor of this presentation, that growth is not a key priority currently for AIG. Clearly, Mr Duperreault does not want to invite investors to continue to support a shrinking business. “Second-quarter net premiums written increased 2%, excluding FX [foreign exchange] compared to the prior year quarter, primarily driven by growth in personal insurance. We continue to expect that 2018 net premiums written will be relatively flat to 2017, while our mix of business shifts as a result of our underwriting and reinsurance strategies,” said Mr Duperreault.

Risk managers should not expect easy renewal from AIG based on half-year results

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