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Duperreault promises more change at AIG; Lexington to be repositioned

Posted On: Nov. 3, 2017 10:22 AM CST

American International Group Inc. President and CEO Brian Duperreault promised more action to improve the insurer’s performance as AIG reported another big quarterly loss and added significant funds to reserves for 2016 business.

In a conference call with analysts discussing AIG’s third-quarter 2017 results, Mr. Duperreault said more changes will take place at AIG, including focusing on specialization, writing smaller net limits, buying more reinsurance and repositioning Lexington Insurance Co. as a pure surplus lines insurer.

In addition, Mr. Duperreault said AIG has already increased property insurance rates since the recent string of catastrophe losses and is looking for further increases.

On the call, Mr. Duperreault said he has already taken significant actions since returning to AIG in May. 

Mr. Duperreault had a long career at AIG in the 1970s and 1980s before leaving to run Ace Ltd. and later Marsh & McLennan Cos. Inc. Over the past several months, he has recruited several executives to AIG, including Peter Zaffino, with whom he worked at Marsh & McLennan, who joined as CEO of general insurance in August.

“The challenges in our commercial business are ones that I’ve seen in the past and will be addressed by clear actions that I describe as blocking and tackling. This quarter marks a base from which I intend to grow profitably,” Mr. Duperreault said. “We will return to a discipline of specialization in how we run our businesses, and we will have more distinct business segments.”

As part of those plans, AIG’s surplus lines unit Lexington will be reconstituted as a stand-alone operation, he said.

“Lexington is a surplus lines company; it requires a separate unit with people who are specialists in surplus lines work. We had taken that business and kind of spread it into our branches, and so people were doing both. That’s not a good way to structure it,” Mr. Duperreault said.

Mr. Zaffino indicated that AIG will look to add to the leadership of Lexington. “We will invest in specialized leadership, expertise and a distribution strategy that enables Lexington to act more opportunistically in the market,” he said.

In addition, AIG will review its reinsurance purchasing.

AIG received more than 11,000 claims from hurricanes Harvey, Irma and Maria, but none of the events triggered its catastrophe reinsurance coverage. In the third quarter, AIG reported $2.7 billion in catastrophe losses. For the California wildfires, the insurer’s early loss estimate is approximately $500 million.

“During 2018 at a minimum, we will look to take a lower net retention on our property cat book, take less per-risk net retention in property, reduce net limits in certain casualty lines and look for opportunities to further reduce volatility in our results as we position the company for long-term profitable growth,” Mr. Zaffino said.

Mr. Duperreault added that he sees reinsurance as a capital management tool and that reinsurers provide another “set of eyes” to review the AIG book of business. “It’s not my style to take large limits and retentions of risk,” he said.

“We’re in a volatile business; we take a lot of volatility. Our gross lines, I believe, were too high. I believe our net lines were too high, so when you have issues they’re extreme, if you make a mistake it’s exacerbated. So we want to cut those extremes down, and we want a better balance. You’ve got to pick your spots where you can make money, and where you can’t you should reduce,” Mr. Duperreault said.

Since the third-quarter catastrophes struck, AIG has increased property insurance rates and will be looking for further increases, the executives said.

“Our goal is to achieve double-digit rate increases on a risk-adjusted basis,” Mr. Zaffino said.

AIG reported a loss of $1.74 billion for the third quarter of 2017, compared with a profit of $462 million in the same period last year. The insurer reported total revenue, which includes its commercial and personal lines businesses, of $11.75 billion for the third quarter of 2017, an 8.6% decrease from the 2016 period.

In its commercial insurance segment, it reported a pretax operating loss of $2.86 billion, compared with a profit of $685 million in the same period in 2016, and a combined ratio of 195.4%, compared with 105.8% a year earlier. In addition to $2.7 billion in catastrophe losses, net of reinsurance, the operating results included $837 million in unfavorable prior-year loss reserve development, which was related to the 2016 accident year.

Earlier this year, AIG bought about $20 billion in reinsurance coverage from Berkshire Hathaway Inc. to cover prior-year losses.

On the call, Chief Financial Officer Sid Sankaran said AIG has completed its assessment on more than 80% of its reserves and has accelerated about $6 billion of reserves into the third quarter from the fourth quarter “based on lines that displayed adverse claims trends.”

“At this point, the remaining 20% of lines scheduled for the fourth quarter do not display any adverse claims trends,” he said.

Detailing the problem areas, Mr. Sankaran said AIG’s European casualty business saw an increase in large losses driven by an increase in underwriting limits in Continental Europe; U.S. commercial auto, including some program business, “continued to experience higher severity beyond our prior expectations,” but the problem programs have been terminated; and reserves were added to U.S. casualty and financial lines portfolios “largely to respond to increased private company bankruptcy trends and increased claims in not-for-profit.”

AIG’s commercial insurance net premiums written fell 13.4% to $3.77 billion in the quarter. “About 4% of the decrease was related to divestitures. The remaining decrease was related to continued execution on our strategic portfolio actions throughout the third quarter of 2017,” an AIG statement said.

Breaking down the commercial business further, liability and financial lines net premium written fell 9% to $2.18 billion, and property and special risks fell 18.8% to $1.6 billion.

For the first nine months of 2017, AIG reported a profit of $576 million, compared with a profit of $2.19 billion in the prior-year period, and total revenue of $36.89 billion, down 6.3% from the year-earlier period

In a research note on the results, analysts Credit Suisse Securities (USA) L.L.C. said the increase in loss reserves indicated that the previous management at AIG had not taken sufficient measures.

“At face value, we read this quarter's reserve actions as a partial rebuttal to our thesis that previous management left AIG (property/casualty) in somewhat better condition than perceived by the market, though the rebuttal is not complete,” the note said.