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AIG expects wide industry COVID losses; cuts insurtech unit

AIG CEO Brian Duperreault

American International Group Inc. estimates it will pay $272 million in first-quarter losses related to COVID-19 and expects the pandemic will generate the largest ever industry loss, hitting numerous lines of business, the insurer’s executives said on its earnings call Tuesday.

AIG’s business interruption losses from the pandemic, however, will be limited because most of its policies exclude virus-related losses and the policies it writes that offer communicable disease coverage have strict terms and conditions, they said.

The insurer also announced it has placed its less than three-years-old insurtech unit Blackboard U.S. Holdings Inc. in runoff and took a $210 million charge related to the decision.

AIG reported first-quarter net income of $1.7 billion, more than double its $654 million profit for the same period last year. Excluding various items such as the benefits of hedges on its investment portfolio, adjusted after-tax income was $99 million, compared with $1.4 billion a year earlier.

Net investment income was $2.5 million, down from $3.9 billion in last year’s first quarter.

AIG’s general insurance division, which includes its property/casualty insurance operations, reported a first-quarter combined ratio of 101.5%, compared with 97.4% in the same period last year.

The division reported gross premium written of $10.09 billion, down 1.1% from the same period last year. Net written premium fell 1.9% to $5.92 billion.

General insurance reported pre-tax catastrophe losses of $419 million for the quarter. The $272 million in COVID-19 catastrophe losses relate to travel insurance, contingency coverage, commercial property, trade credit, workers compensation and reinsurance, and the remaining catastrophe losses were mainly weather-related, according to the insurer’s earnings statement.

On the earnings call, AIG CEO Brian Duperreault said: “We believe COVID-19 will be the single largest cat loss the industry has ever seen, and it will continue to have significant global economic ramifications for the foreseeable future.”

Peter Zaffino, president and global chief operating officer of AIG and CEO of its general insurance division, noted that prior to the coronavirus pandemic the largest catastrophe on record was 2005’s Hurricane Katrina, with $65 billion in industry losses.

“Going forward, COVID-related losses will impact all aspects of underwriting insurance from absolute limits available, limits deployed to certain lines of business, terms and conditions, coinsurance and structure of coverage, just to name a few,” he said.

In addition, retrocessional reinsurance capacity will contract, and capacity will also be restricted in the insurance-linked securities market, Mr. Zaffino said.

AIG is not expecting to pay business interruption on most of its property policies, he said.

The “overwhelming majority” of AIG’s business interruption policies contain a virus exclusion “and otherwise require a showing that the virus caused direct physical loss or damage that was the cause of the business interruption,” Mr. Zaffino said.

Numerous policyholders have sued their insurers – including AIG – seeking coverage for business interruption losses related to government-mandated closures aimed at stemming the spread of the virus. For example, in Zwillo V Corp. d/b/a Westport Flea Market Bar & Grill v. Lexington Insurance Co. filed in federal court in Kansas City, Missouri, a restaurant late last month sued AIG’s surplus lines unit arguing that the coronavirus constitutes direct physical loss and triggers coverage under the civil authority section of its policy, which it says does not include a virus exclusion.

On the call, Mr. Zaffino said that “the small fraction” of policies where AIG provides affirmative coverage for infectious disease losses include small sublimits for the exposure and terms and conditions limiting coverage to specified diseases that must be shown to be physically present and have led to government-enforced suspension of business operations.

Looking forward, Mr. Zaffino said that COVID-19 could lead to reduced business for AIG from insurance related to travel, mergers and acquisitions, aerospace, marine and energy, and workers comp.

However, much of AIG’s business is written on an excess basis above, for example, a self-insured retention or captive, and is not directly correlated to reduced payrolls and sales for businesses, he said.

Meanwhile, at the end of March “AIG made a strategic decision to discontinue Blackboard, our internal insurtech startup, in light of current market conditions,” said Mark Lyons, AIG’s chief financial officer.

The unit was launched in 2017 and led by Seraina Macia. The executives did not comment further on Blackboard.

 More insurance and risk management news on the coronavirus crisis here.