Global insurer American International Group (AIG) expects its revised underwriting and reinsurance strategies to drive an improved mix of business at the firm alongside better risk selection, with the insurer actively engaging with its reinsurance partners on opportunities for the remainder of the year.
During its Q2 2018 earnings call, AIG President and Chief Executive Officer (CEO), Brian Duperreault, and Executive Vice President (EVP) and Chief Operating Officer (COO), Peter Zaffino, both discussed the insurer’s focus on achieving underwriting profitability as it exits 2018, noting that reinsurance will play an important role as it continues to restructure its operations.
Duperreault explained that the firm is confident that its General Insurance unit will deliver an underwriting profit in 2018, with the company’s focus on cost reductions in the unit and at AIG headquarters, to contribute roughly two points of decline in the combined ratio.
Furthermore, the acquisition of Validus is expected to contribute approximately one point of decline in the combined ratio, with the remaining improvement expected to come from “our underwriting actions and reinsurance strategies,” said Duperreault.
During the call, Zaffino expanded on the expected, important role reinsurance is to play in the second-half of the year, ultimately assisting the insurer achieve profitability for the year.
“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,” said Zaffino.
“In addition, we’re actively engaging with our reinsurance partners on opportunities for the second-half of 2018. From an organisational perspective, we continue to make significant progress,” he added.
Part of the insurer’s changing reinsurance strategy includes a shift away from its utilisation of reinsurance capital being heavily focused on reducing volatility, to a more holistic approach in the second-half of the year.
“As we look at the back half of the year, we’re going to look at our entire portfolio, in particular, casualty, and be very strategic on how we look at the reinsurance with partners in the reinsurance market, and we would expect to see a benefit from that in 2019,” said Zaffino.
At the same time, the company revealed that it expects to pass on a greater share of its major loss experience to its reinsurance partners through the remainder of the year, with severe losses being up significantly year-on-year, to $293 million.
The majority, or $276 million of the severe loss bill was driven by the insurer’s commercial lines book, with the rest coming from its personal lines book. Zaffino explained that much of the toll is attributable to policies incepted in 2017 and earlier, adding that AIG believes “the underwriting changes we are making will address the root cause of these losses as they earn into our financial results over time.”
One such initiative includes pulling back from the more competitive lines of business, which continue to experience a supply / demand imbalance driven by both alternative and traditional capital.
Zaffino explained that the firm has decided to reduce its property underwriting limits from $2.5 billion, globally, to $1 billion in the U.S. and $750 million internationally, with the exception of fronted policies.
So, it’s clear that moving forward, AIG believes a changing approach to how it leverages reinsurance protection will support improved profitability in what’s expected to be a challenging market environment.
It will be interesting to see the changes develop throughout the remainder of the year and into 2019, when AIG expects to see benefits from its revised underwriting and reinsurance strategies.
