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AIG targets restructured Japan cat reinsurance program

2nd November 2018 - Author: Luke Gallin

Insurance giant American International Group (AIG) experienced high catastrophe losses in the third-quarter from its operations in Japan, and has revealed that it’s working to reorganise its Japanese reinsurance program into a single structure for 2019, in order to reduce both frequency and severity exposure.

AIG LogoYesterday, the firm announced a $1.3 billion net loss, noting that its results were impacted by $1.6 billion of net pre-tax ($1.3 billion net after-tax) catastrophe losses, of which more than half came from Japan, with the country experiencing a significant volume of catastrophic events in the 2018 season.

For AIG, Q3 2018 Japan losses are net of $264 million of reinsurance recoveries under AIG’s Japanese catastrophe reinsurance arrangement, a program the firm has been working on changing throughout the year in order to lower net exposures in the region.

Speaking during the firm’s Q3 earnings call, Peter Zaffino, Executive Vice President (EVP) and Chief Executive Officer (CEO) of AIG’s General Insurance unit, said: “AIG’s Japan CAT reinsurance program was structured in two separate towers for our commercial and personal insurance business. In late 2017, we began working to improve the program and successfully reduced the attachment points for both towers during the January 1st 2018 renewal.

“For the upcoming 2019 renewal, we plan to consolidate the program into a single tower to improve effectiveness and further reduce our net exposure on a frequency and severity basis.”

AIG’s President and CEO, Brian Duperreault, also commented that AIG has “been working diligently throughout this year to get a single structure in place for 2019, to reduce our net exposure on both a frequency and severity basis.”

Exactly what the insurer’s newly restructured Japan cat reinsurance program will look like for 2019 remains to be seen, but it’s possible it lowers its retention and makes greater use of reinsurance in order to reduce its net exposure.

As noted by analysts, the firm already lowered its North American catastrophe reinsurance program’s attachment point from $1.5 billion per occurrence to $750 million aggregate, as well as its gross and net property limits to $750 million/$143 million from $2.5 billion/$611 million, and its gross casualty limits to $100 million from $250 million.

Regarding its North American program, the firm said yesterday that it estimates that it’s exhausted approximately $700 million of its $750 million retention, which includes the high-end estimate from the impacts of hurricane Michael in the fourth-quarter.

The above changes to its reinsurance utilisation over-time, as well as the planned restructuring of its Japan cat program, is expected to lower its exposure to greater volatility that is inherent in low frequency and high severity large losses.

“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,” said analysts at Keefe, Bruyette & Woods (KBW).

Overall, the firm’s combined ratio, while still in unprofitable territory at 124.4% in Q3 2018, strengthened against the 157.1% recorded in the same period in 2017, and lowering its net exposure to highly competitive and volatile lines could further assist with the strengthening of its combined ratio in 2019.

Pressures remain in the global insurance and reinsurance industry, and especially in the P&C segment where alternative capital is converging with traditional sources, which, while providing diversification and efficiency, is also dampening rate increases and ensuring competition is intense.

The trend at 1/1 2019 is expected to be much of the same, and the Zaffino commented on the oulook for rates at the upcoming renewals.

“Looking at the reinsurance market at the upcoming January 2019 renewals, and we expect property CAT and retrocessional rates to be relatively flat, on average, for non-loss affected accounts. Rates on loss-affected accounts will be determined on a case-by-case basis, including in Japan, where the majority of renewals take place on April 1st. In casualty, we expect to continue to see terms and conditions tighten with rate change in line with loss cost trends.

“In closing, we continue to expect that the implementation of our underwriting and reinsurance strategies will manage growth in net lines. Actions to reduce expense and strategic contributions from Validus and Glatfelter, will enable us to improve our underwriting performance as we enter 2019.”

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