AIG highlights commercial lines growth and improved underlying CR

As expected, AIG’s earnings call on Wednesday morning was dominated by commentary on pricing momentum in the carrier’s general insurance business, as management highlighted a strong commercial lines outlook after reporting solid growth in 2020 and improving underlying underwriting performance.

On the call with analysts, AIG predicted continued strong commercial lines rate momentum this year will drive further margin expansion by outpacing loss costs.

Peter Zaffino – who takes over as group CEO from Brian Duperreault next month – said the insurer continued to see “considerable improvement and tighter terms and conditions” in the fourth quarter.

In commercial lines, that translated to sustained strong rate momentum and improvement across all lines of business with the exception of workers’ compensation.

The division achieved overall rate increases of around 15 percent.

In North America commercial insurance, rate increases were at 21 percent in the fourth quarter, representing significant acceleration from the 14 percent reported in Q4 2019.

Zaffino said the improvement was driven by excess casualty, with rate increases of 45 percent; financial lines, with rate increases of over 25 percent led by D&O at 35 percent; retail property and Lexington wholesale property, which both achieved rate increases of around 30 percent; and Lexington casualty, which recorded average rate increases at 25 percent.

There was also momentum building in international commercial lines, with increases at 14 percent in the fourth quarter after accelerating from the first half of 2020.

AIG said the largest rate increases were witnessed in global energy at over 30 percent, while financial lines reported 20 percent increases. Lloyd’s specialty platform Talbot delivered average increases of more than 15 percent, said the insurer.

‘Material’ Validus NWP growth

Meanwhile, reinsurance platform Validus Re achieved a “material increase” in net written premium (NWP) at the key 1 January renewal, which Zaffino said led to a better balance across its portfolio led by international property.

The platform, which has seen a significant turnover of senior personnel in the last year, saw “solid” risk-adjusted rate improvements in US property cat, casualty, international cat, marine and energy, financial lines and specialty lines, said the executive.

US proportional business benefited from material underlying rate improvement, while rate improvements on the international portion of the portfolio were achieved “in essentially every territory”.

Commenting on the outlook for pricing, Zaffino said: “As we look into 2021, we expect to see rate increases continue. We expect to see these rate increases be above loss costs. And we expect that these rate increases will be balanced across our global portfolio and across multiple lines of business.”

AIG CFO Mark Lyons noted that there has been no evidence of deceleration, with a broad-based hardening across all lines and geographies.

“And I would just remind you that the timing was different internationally versus in North America, so it started a little bit later. Its trajectory is going to be different by definition,” he added.

On the call, management were asked about the specific impact of underwriting actions and hardening rates on the excess casualty segment of the commercial lines portfolio and what that means for the margin now being achieved in pricing.

The business had been the cause of relatively modest reserve strengthening away from the giant Berkshire Hathaway adverse development cover.

Zaffino highlighted the repositioning of the book from a largely lead excess position to a rebalanced portfolio that has seen significant growth in participation on mid-excess layers.

Lyons said: “The rate changes have not only been large, they’ve been compound over a period. The terms and conditions which drive this line of business are tighter and tighter.

“And whether you have a calm or an aggressive view of loss costs trends that could affect casualty business, getting further away from risk is the preferred way to go.”

He added that the indications are that rate adequacy is stronger on new business than on renewal business, “which you’d expect in a hard cycle of acceleration like we have now”.

“And we continue to see inferior rate adequacy on the business we’re not renewing. That’s what I call the implicit lift as opposed to the explicit lift,” he explained.

Commercial lines grow and underlying CR improves

AIG’s fourth quarter results included an overall underlying combined ratio – accident year ex cats – in general insurance that improved by 290 basis points to 92.9 percent.

The improvement was led by commercial lines, with the underlying combined ratio there down by 440 bps, with international commercial lines 490 bps lower and North America commercial 400 bps lower.

The adjusted combined ratio for the full year for the business was 94.1 percent, representing a 190 bps improvement on 2019.

“These combined ratio improvements reflect very strong performance as General Insurance continues to benefit from an improved business mix in the commercial portfolio driven by the strategy underwriting actions we have been taking,” said Zaffino on the call.

There was also solid NWP growth of 7 percent and improving underlying combined ratios in the unit for 2020, which AIG said was driven by improved retention of business and higher rates.

The North America commercial business grew by around 10 percent, with international up 5 percent after adjusting for foreign exchange movement.

The company’s North American personal lines business saw reduced NWP volumes, however, largely as a result of the move by AIG to transition a portion of its high net worth business to newly established Syndicate 2019.

That led to higher ceded premium, while personal lines was also impacted by the impact of the pandemic on lines such as travel and accident and health.

Overall, the insurer says it expects expansion in GI this year, however.

“While it’s still very early in the year, based on what we are seeing, we expect a similar overall growth trend to continue particularly in commercial, and we will achieve top line growth for the full year 2021,” said Zaffino.

Also on the call, Lyons reiterated the carrier’s target to achieve a sub-90 accident year combined ratio ex cats by the end of 2022. He said that the 94.1 percent result for the full year 2020 had been a “significant accomplishment”.

“But there is more to come with the significant re-underwriting of the book over the past few years as well as the current very firm commercial lens market. We’re highly confident that we will achieve more progress in 2021 and 2022 as we re-establish AIG’s leadership in General Insurance,” said the executive.

AIG 200 target unchanged

The other key element of AIG’s GI turnaround strategy is focused on expenses and other operational improvements as part of its AIG 200 programme.

Zaffino said the overall target of the initiative remains unchanged, with run rate savings of $650mn expected by the end of this year, with aggregate run rate savings of $1bn by the end of 2022, against total investment of $1.3bn.

That confidence is based on the carrier exceeding targeted savings in 2020 at costs lower than initially expected.

AIG exited 2020 with a $400mn run rate benefit, which was 30 percent ahead of guidance provided last year.

The company completed the sale of its shared services operations to Accenture at the end of the year, in a move it said streamlines its operating model, and has made “significant progress” in driving improvements in infrastructure and systems architecture while reducing real estate costs and other general operating expenses, said Zaffino.

“The success of AIG 200 to date demonstrates the discipline and rigor that the team leading strategic initiative is using. The team is taking decisive action as we execute to position the company for the long term.

“AIG 200 success to date also reflects the resiliency and flexibility of our global colleagues, who have embraced change while making significant contributions to our progress,” said the executive.

He added that a major focus of the coming year will be advancing AIG’s digital strategy through the use of data and process-enabling technologies as well as driving greater operational efficiencies and improved customer experience.

“We also expect to make significant progress in 2021 on a global data warehouse in support of our finance and underwriting transformations,” Zaffino added.