How AIG Woes Hurt U.S. Commercial Lines Results: Fitch

While U.S. commercial lines insurance had been a relatively bright spot among property/casualty insurers, the sector is facing some clear deterioration due to weakening premiums and poor loss experience. What’s more, Amercian International Group (AIG) alone is to blame for some of the decline, according Fitch Ratings’ latest commercial lines market update report.

Commercial lines produced an underwriting profit in 2016 for the fourth consecutive year, but the combined ratio worsened to 99, four points higher than it was the previous year, Fitch noted.

“Results are more likely to slide further in the near term due to competitive market conditions, reductions in overall reserve strength and the potential for volatility from catastrophe losses in any given underwriting period,” Fitch said in its report.

AIG’s Fault?

While the sector in general has seen some deterioration, Fitch blames AIG – typically the largest U.S. commercial lines carrier – for affecting the overall market due to its own struggles over the last two years. The insurer, Fitch pointed out, struggled after dealing with “large charges for adverse development centered in longer-tail casualty segments and the impact of other strategic business mix and reinsurance changes.”

Fitch noted that without AIG, the industry commercial lines combined ratio would have been 3.4 points and 2.3 points lower in 2016 and 2015, respectively. Focusing on just the other liability line within the commercial segment, AIG’s results added 13.9 points to the industry combined ratio for policies written on an occurrence basis. For other liability written on a claims-made basis, AIG’s results pushed the industry combined ratio up 10 points.

AIG booked nearly $1.2 billion in net income during the 2017 first quarter, but that follows a $183 million loss in the 2016 first quarter and a massive flow of red ink during most of the year.

As far as AIG goes, Fitch pointed out the insurer is shifting a bit away from U.S. commercial casualty and focusing on revamping its organization and expenses. If successful, AIG could help improve commercial lines performance in the U.S. moving forward, the report noted.

“Though [AIG’s commercial casualty] underwriting platform is shrinking, significant improvement in AIG’s results would have a noticeable effect on year-to-year industry results in 2017 and going forward,” Fitch said. One thing that could help, according to Fitch: It’s $20 billion retroactive reinsurance treaty signed in recent months with Berkshire Hathaway’s National Indemnity Company.

Other findings in the Fitch report:

Commercial auto continues to perform the worst among commercial lines underwriting segments. Fitch noted that its combined ratio surpassed 110 in 2016 due to continued unfavorable loss severity trends and growing adverse loss reserve development.
On the other hand, commercial property lines are doing quite well, and 2016 was the fourth consecutive year with combined ratios below 90. Its success has made it a “key driver” of commercial lines underwriting profits, the report said.
Workers compensation results – the largest U.S. Commercial lines segment by premium – achieved combined ratios of 95 in 206 and 2015, according to the report. Helping the results: growing employment and a better economy, as well as claims trends and the Affordable Care Act.

While commercial lines market pricing has weakened quite a bit over the last three years, Fitch noted that each major segment has displayed a “strong market underwriting capacity.” This means that a reversal likely won’t happen anytime soon, save for commercial auto, which is the only segment that is showing “positive current rate movement” due to large underwriting losses, Fitch said.

Source: Fitch Ratings