“We do see it coming. We expect that in 2019 we’re going to be in an underwriting profit position, not a great one, but a profit. And we’ll move from there to a great one.”
So said Brian Duperreault, president and chief executive officer, American International Group (AIG), speaking with analysts on a conference call explaining that despite another quarterly loss due to major catastrophe losses, his company, in particular its General Insurance unit, is on the right track.
While managing a significant number of global catastrophic events, General Insurance, Duperreault said, continued to make progress on “improving underwriting capabilities, repositioning reinsurance structures, adding world class talent and driving efficiencies.
“We remain on track to produce an underwriting profit.”
Peter Zaffino, executive vice president and CEO of General Insurance, outlined the “fundamental changes” in underwriting strategy and in reinsurance that AIG is counting on to get it to that 2019 profit position. For example, the insurer reduced its property gross limits from $2.5 billion to $750 million and its net limits from $611 million to $143 million. Casualty’s gross limits have been reduced from $250 million to $100 million.
Zaffino also said General Insurance is utilizing reinsurance to support growth. As an example, AIG has expanded its existing international casualty excess of loss treaty into a global program that now includes exposures across U.S. primary and excess casually lines.
AIG has added some new talent to keep the focus on strengthening its underwriting capabilities. David McElroy recently joined from Arch to be CEO of AIG’s surplus lines unit Lexington Insurance and Peter Bilsby of Talbot is the new head of Global Specialty Business.
Zaffino said that under Tom Bolt, who joined AIG from Berkshire Hathaway to be chief underwriting officer about a year ago, the company has built a structure to support its underwriters across the globe.
Zaffino said the changes have “produced very positive feedback” from brokers, clients and reinsurers that now see “AIG as a better and more agile partner.”
The underwriting improvement strategy is counting on the pending acquisition of program manager Glatfelter Insurance Group, which Zaffino praised for being a highly selective program manager, with a track record of profitability and a talented leadership team. Zaffino said Glatfelter will help AIG reposition its existing U.S. program business which, he said, the insurer is currently in the process of non-renewing more than 50 percent of its current programs.
The global insurer’s third quarter results reflected major catastrophe losses of $1.6 billion. Catastrophe losses in Japan represented over half of the overall catastrophe losses in the quarter. This has been one of the worst catastrophe seasons in Japan in 25 years and AIG is the largest foreign-based insurer in Japan.
AIG has been restructuring its catastrophe reinsurance program for Japan. For the upcoming 2019 renewal, it plans to consolidate the program into a single tower to improve its effectiveness and further reduce its net exposure on a frequency and severity basis, Zaffino said.
North America Personal Insurance’s results included $148 million in additional losses for the California mudslides that took place in the first quarter of 2018. Asked why the losses were not caught earlier, AIG officials noted many are in high-value areas that were hard to reach to inspect, higher costs tied to the increased demand for construction services, and higher additional living expenses expected by a high net worth clientele. Duperreault, however, termed the late losses an “anomaly” unlikely to occur again.
Zaffino said AIG is already seeing improvement. The adjusted accident year combined ratio was 99.4 while the adjusted accident year loss ratio of 63.6 reflecting “underlying portfolio management improvements of 240 basis points and a more moderate level of severe losses compared to the prior year quarter and the second quarter of 2018.”
He said expense reductions should begin to be evident in the fourth quarter and into 2019.
Mark Lyons, chief actuary who joined in May from Arch, said he has been busy reviewing reserves. Overall 75 percent of loss reserves have been reviewed. The one area where he said material reserve strengthening was necessary was in the excess casualty portfolio, mainly around construction defect exposures. He said AIG has been working since 2009 to reduce its exposure in this area of construction defect.
In the fourth quarter, his actuarial team will review the remaining 25 percent that includes U.S. financial lines, workers’ compensation, international casualty reserves other than the UK and Europe, and personal lines. He reassured analysts that at this point he sees no “red flags” for these fourth quarter lines that give him undue concern.
Lyons stressed that recent reserve charges result from past underwriting practices and have nothing to do with AIG’s revised underwriting strategy
Lyons, a self-described skeptic of the benefits of underwriting overhauls, praised the system now in place and then put an exclamation point on his view that this time it’s different. “My 40 years of property and casualty experience, however, tell me that these changes are substantive and will lead to improved loss ratios in any market,” he said.
Lyons is not the only skeptic when it comes to underwriting turnarounds.
S&P Global Ratings weighed in after AIG reported its third quarter $1.3 billion net loss, saying it does not have an immediate effect on its AIG ratings or change its negative outlook that it has held since June 2017. However, it questioned the likelihood of AIG attaining an underwriting profit by 2019.
“Our primary rating focus remains monitoring AIG’s improvement of underwriting fundamentals,” S&P said.
Although the General Insurance adjusted accident-year loss ratio incrementally improved to 63.6 during third-quarter 2018 (compared to 66 during the same quarter last year), on a nine-month basis underlying results worsened to 64 in 2018 from 62.3 in 2017, according to S&P.
S&P said that tackling underwriting performance through external talent appointments could actually delay remediation efforts. “It may take multiple years to fix the operating core, underscoring management’s opaque intermediate-term financial targets, with the exception of its stated goal to deliver an underwriting profit by first-quarter 2019,” S&P said. “We expect AIG to improve underwriting results slowly, but achieving break-even combined ratios by first-quarter 2019 may be a challenge.”
KBW analysts have a more favorable view of the changes.
For one, KBW analysts see AIG’s lowering of limits as a pathway to profit. “The obvious benefit of AIG lowering its net line sizes … is less exposure to the greater volatility inherent in low-frequency/high-severity large losses,” they said in a note on Friday. “We also think that lower coverage layers currently face better overall market conditions, which means that this shift in net assumed business should further improve AIG’s core P&C combined ratio.”
KBW analysts said they expect AIG to “outperform as internal underwriting improvement efforts and external rate increases combine to improve its Commercial P&C results.”
KBW analysts also think the influx of new talent will help: “Turning AIG around is an inherently slow process (and it took us far too long to fully understand how bad the starting point was), but we remain convinced that its massive talent inflow means that 3Q18’s initial signs of improved underwriting (which was a little better than it looked – about 60 bps of the 3Q18 core loss ratio reflected a true-up of prior quarters’ accident-year 2018 loss picks) should persist throughout 2019 and 2020.”
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