The reinsurance market was more orderly during the key mid-year renewal season and sellers’ appetite for more discrete purchases rose somewhat, which helped buyers fill shortfalls experienced at 1/1, according to Peter Zaffino, Chairman and Chief Executive Officer (CEO) of global insurer AIG.
Speaking recently during the large primary insurer’s Q2 2023 earnings call, CEO Zaffino commented on reinsurance market conditions and the elevated catastrophe loss experience in the first half of the year.
“Overall, the market exhibited more orderly behaviour during mid-year renewals amidst more stable trading conditions compared to January 1. Reinsurer appetite for more discrete purchases increased somewhat, enabling a number of buyers to make up for shortfalls in coverage experienced at January 1,” said Zaffino.
At the mid-year renewals, AIG saw property cat price rises of 25 to 35% year-over-year in the U.S., driven by Florida, with Zaffino noting that this is now the second year in a row of substantial rate increases.
International renewals, driven by Australia and New Zealand, witnessed price rises of 20 to 50%, with the higher increases resulting from loss activity in the region.
AIG purchases its major reinsurance treaties at 1/1, with around 20% of its overall core reinsurance buying taking place in Q2, during which it has a number of core mid-year renewals, mostly in specialty classes.
Zaffino explained that these “were all successfully placed” at the mid-year renewals, while AIG also decided to purchase additional retrocession for Validus Re, and a low excess of loss reinsurance placement for its Private Client Group ahead of the 2023 wind season.
During the call, the CEO highlighted the more than $50 billion of insured losses experienced by the industry in the first half of 2023, of which most relates to secondary perils and notably severe convective storms in the U.S.
“A majority of insured losses continue to occur in the United States, highlighting the difficulty of managing volatility in the largest insurance market in the world,” he said.
“Against this challenging backdrop, and a strengthened reinsurance rating environment, we maintained our conservative risk appetite and continue to have one of the lowest peak peril net positions in the market, while managing our overall reinsurance spend.
“Additionally, through each of our renewals, we maintained all of our principal relationships with our key reinsurance partners,” continued Zaffino.
Expanding on the company’s reinsurance use during the Q&A, Zaffino said that those purchased by the firm are “world class”, adding that even though the environment was extremely challenging at the January renewals, AIG “did not compromise by taking a lot more net because of the reinsurance pricing.”
“It reflected our book. We’ve got great partners, and as a result, we didn’t really have more net in terms of overall low return period PMLs,” he explained.
In terms of catastrophe volatility going forwards, Zaffino underlined the fact that owing to the sale of Validus Re to RenaissanceRe, it’s no longer going to have the tail exposure, but that it’s also going to have less cat at all return periods.
“We’ve managed aggregates across the world. And Validus Re is a very good business, but as I said, when we want to continue to reduce volatility, we do that through reinsurance, but when you have a treaty reinsurance business that has got a portfolio that has a lot of cat, that’s harder to do.
“So, I think the volatility, the cat loads will go down, by the very nature we’re going to lose a big part of our cat exposure. But we’ve been conservative on that and increased them this year and are very comfortable with our estimates and our actual results,” said Zaffino.
He also stressed that while AIG is exiting the assumed reinsurance business through the sale of Validus Re, its ownership of RenRe common stock, which is part of the purchase price consideration, combined with its ability to invest up to $500 million in RenRe’s capital partner vehicles, ultimately enables the firm “to continue to participate and benefit from partnering with a world class reinsurer with less risk and capital requirements.”
AIG released an impressive set of second-quarter 2023 results, including a rise in adjusted pre-tax income within its general insurance business of 5% to $1.32 billion.
