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American International Group Inc. reported a 30.3% drop in profit for the first quarter of 2019 related to the accounting treatment of an investment by a subsidiary, but it posted an underwriting profit for its property/casualty business after making significant changes to its operations over the past year.
The 97.4% combined ratio for its general insurance unit followed CEO Brian Duperreault’s pledge last year that the insurer would soon return to underwriting profitability. AIG last reported an underwriting profit in the second quarter of 2017, but in later results it made significant prior-year reserve adjustments.
The insurer will likely post an underwriting profit for the full year in 2019 as it continues to benefit from underwriting and reinsurance changes it imposed last year and tighter expense control, Mr. Duperreault said in conference call with analysts Tuesday to discuss AIG’s first-quarter results. In addition, the insurer is benefiting from increased insurance rates, AIG executives said.
“This quarter’s underwriting profit represents a significant milestone for AIG,” Mr. Duperreault said. “We remain confident that (general insurance) will continue to improve its financial performance and deliver an underwriting profit for the full-year 2019, as already evidenced by our first-quarter results.”
The insurer’s expense ratio for the quarter was 34.3%, which represents a 230 basis point improvement over the 2018 first quarter and a 60 basis point improvement over the fourth quarter of 2018.
AIG reported $654 million profit in the first quarter of 2019, compared with a profit of $938 million in the same period last year. The profit figure, however, was affected by the accounting treatment of an investment gain within Fortitude Re, a subsidiary that AIG sold a minority stake in last year. AIG’s adjusted after-tax income increased 44.1% to $1.39 billion.
General insurance, which includes its property/casualty operations, reported net written premium of $6.03 billion, down 2% compared with the 2018 first quarter. The unit’s underwriting income was $179 million in the first quarter of 2019, compared with a $251 million underwriting loss in the same period last year.
In North America, the general insurance unit reported a 52% increase in commercial lines net premium to $2 billion, largely due to the acquisition of Validus Holdings Ltd. Underwriting income of $54 million compared with a $89 million loss last year.
The general insurance unit’s major initiative for 2018 involved reassessing its underwriting strategy, which enabled AIG to “develop a cohesive risk appetite and to pivot to becoming a value-added partner to our brokers and clients based on our expertise, not just our capacity,” said Peter Zaffino, CEO of general insurance.
On the 2018 fourth-quarter results call in February, Mr. Duperreault, who returned to AIG as CEO two years ago, detailed how his new management team had abandoned AIG’s previous “go large” strategy.
In addition, AIG crafted a “dramatically improved, comprehensive and strategic reinsurance program for 2019,” Mr. Zaffino said.
Actions to change its business include adjustments in risk selection at its excess and surplus lines unit Lexington Insurance Co., Mr. Zaffino said. Lexington is seeing low double-digit rate increases for property and casualty risks, he said.
In financial lines, AIG reduced the size of primary limits it offers — cutting aggregate limits for North American directors and officers liability insurance by 20% over the past year — and pushed for rate increases, he said. The insurer has secured rate increases of more than 20% for primary D&O for corporations, more than 15% for primary private D&O and more than 10% for excess D&O, he said.
In North American property, AIG reduced its total gross limits by 49% over the past year. “Our average gross limit for risk management accounts declined 14%, our average deductible increased 25%, and we’ve been able to achieve high single-digit rate increases on our in-force portfolio,” Mr. Zaffino said.
In addition, AIG reduced the number of multiyear property insurance policies — which take time to unwind — it writes and “should see a meaningful reduction in long-term deals by the back half of 2019” and will have cut the number of long-term deals in half as it enters 2020, he said.
Overall, “we are seeing broad-based market support for premium rate increases across multiple lines,” Mr. Zaffino said. “At a high level, we’ve obtained rate increases of around 4% in commercial portfolio.”
And the increases are accelerating, added Mark Lyons, AIG’s chief financial officer. “For North American commercial in particular, the rate increases have been accelerating, and the March increase alone averaged over 7%,” he said.
AIG’s reinsurance business has also rate increases, Mr. Zaffino said. At the April 1 reinsurance renewals, Japanese reinsurance rates increased 15% to 25% on loss-affected property catastrophe layers, and layers not affected by catastrophes saw renewal rate changes ranging from flat to up 6%.
The Florida property reinsurance market has “underperformed” over the past few years “and we believe it will undergo a meaningful price correction at June 1” driven by significant catastrophe losses in 2017 and 2018, Mr. Zaffino said.
American International Group Inc. will make an underwriting profit by the end of 2018 despite reporting a 20% drop in first-quarter profit, President and CEO Brian Duperreault said Thursday.