AIG sees financial lines improvement after overhauling book

American International Group Inc. has repositioned its financial lines book of business over the past four years, significantly reducing its exposure to securities class-action risks, the insurer’s executives said Friday.

Detailing the changes in AIG’s third-quarter conference call with analysts,  the executives noted that AIG, which has been a long-time leader in the directors and officers liability insurance sector, has also curbed its primary limits significantly.

Changes to AIG’s underwriting strategy have significantly lowered its exposure to securities class actions, which historically account for 60% to 70% of public company D&O losses, over the past few years, said Mark Lyons, AIG’s chief financial officer.

“In 2017, AIG provided D&O coverage to 67 insureds involved in SCAs, which represented 42% of all U.S. federal securities class actions in that year, whereas in 2020 that shrunk to just 18%, and through nine months of 2021 it’s only 15 insureds or 14%,” he said.

Out of 5,500 total public companies about 200 class actions are filed each year, “so risk selection matters,” said David McElroy, CEO of AIG’s general insurance business.

Prior to the implementation of its turnaround strategy, which started in 2017, AIG was overweighted in technology companies, life science companies and health care companies, he said.

After reviewing all its property/casualty business, AIG has reduced the total limits it offers by $650 billion, and $65 billion of that relates to financial lines, with much of the reduction coming from primary D&O, Mr. McElroy said.

Large companies, which used to have $25 million in primary limits, are now offered $10 million in limits, he said. “Eighty-one percent of our portfolio is at $10 million versus what would have been $25 million four years ago.”

In addition, mid-cap public companies are now offered $5 million in limits, compared with $10 million or $15 million, Mr. McElroy said.

“We believe this portfolio today is a very different portfolio from a risk selection standpoint, from a balance perspective in terms of excess and side A versus primary, versus the limits, versus our controlling the aggregate,” he said.

AIG has also significantly curbed its North America not-for-profit D&O book, with a policy retention rate of just 15% between 2018 and 2021, with a cumulative rate increase over the period of nearly 130%, Mr. Lyons said.

“This purposeful change in risk selection criteria, away from billion-dollar-revenue, large private companies and nonprofit universities and hospitals to instead a more balanced middle-market book, will also drive profitability substantially,” he said.