Insurance giant American International Group (NYSE:AIG) is expecting to face losses from the recent California wildfires somewhere in the region of $500 million, while in a strategic shift the insurer expects to use reinsurance more heavily to control its property and casualty books and reduce volatility.
AIG executives spoke last week during the insurers third-quarter earnings call, saying that reinsurance could become an increasingly important piece of the company’s strategy, with lower retentions to ensure coverage pays out, but also with a greater use of reinsurance capital to control its own net line sizes.
AIG suffered around $3 billion of losses from the recent catastrophe events and it seems executives believe that a greater use of reinsurance could have helped to reduce that burden.
Brian Duperreault, new CEO of AIG, explained that the company is set to adopt a new philosophy on underwriting risk, including the use of reinsurance, saying, “We will partner closely with our reinsurers, as they provide another valuable set of eyes into our book. Reinsurance is a capital management tool that allows us to better balance our capital and risk across our global businesses, as well as manage our gross limits.”
Peter Zaffino, EVP and Global Chief Operating Officer of AIG, provided more colour, explaining that AIG’s losses from the recent hurricanes and earthquakes failed to trigger its catastrophe reinsurance programs, as the triggers were set too high.
Each event was not sufficient to reach attachment points meaning that losses fell within AIG’s retention on its catastrophe reinsurance treaties.
“Going forward, we will take a long-term strategic approach to reinsurance working in close partnerships with our major reinsurers,” Zaffino said.
He continued, saying that in 2018, “We will look to take a lower net retention on our property cat book. Take less per-risk net retention in property. Reduce our net limits on certain casualty lines. And look for opportunities to further reduce volatility in our results, as we position the company for long-term profitable growth.”
Zaffino also said that AIG is looking for double-digit risk adjusted rate increases in its property book of business.
Duperreault also stressed that having reinsurance partners is vital for the business, saying that, “We’re going to see real value out of the reinsurance.”
Zaffino said that AIG would be looking at its per-occurrence catastrophe reinsurance structure closely, potentially changing this strategy for 2018.
On the Californian wildfires, AIG said its early estimate is for a loss of around $500 million, pre-tax and net of reinsurance, from the wine region fires.
This again is likely to miss AIG’s current catastrophe reinsurance program attachment, so will largely be retained by the insurer.
Perhaps AIG will come back to the alternative capital markets in search of aggregate reinsurance, with catastrophe bonds one route where the insurer could benefit.
An aggregate AIG cat bond could have triggered in 2017, given the level of losses the insurer looks set to experience with the addition of the wildfires and with cat bond pricing remaining competitive it will be interesting to see if AIG returns to the ILS market in 2018.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.