Lexington submissions soar in Q3, despite slashing limits

AIG General Insurance CEO Peter Zaffino has hailed the strong turnaround at E&S unit Lexington while revealing details of the accelerating price increases the insurance giant is obtaining.

On AIG’s earnings call today, Zaffino described the turnaround in Lexington’s business over the past year as “powerful”.

“Casualty submission volume increased 62 percent in the third quarter and we were successful in further diversifying in the middle market while reducing total limits by 58 percent and improving rates by 31 percent,” he said.

“In property, submission volume increased 47 percent while we reduced total limits by 74 percent. In addition, we increased deductibles by 18 percent, continued to improve terms and conditions and achieved third quarter renewal rate increases of 15 percent which we expect will continue to increase, particularly due to the recent global cat activity.”

AIG is benefiting from the drastic actions it has taken in other parts of the business as well. Zaffino revealed that for North America retail property business AIG reduced total gross limits by over $20bn, or 37 percent, in the third quarter and by over $80bn, or 49 percent, year to date. In this area, average deductibles increased by 27 percent in the quarter and 30 percent year to date.

“These significant underwriting actions are reducing volatility, improving attritional loss exposure and significantly reducing cat exposure,” Zaffino commented. “Multi-year agreements represented approximately 30 percent of the retail property portfolio at the end of the third quarter. These agreements will be approximately 20 percent of the portfolio by the end of 2019 and will trend lower during 2020, which will drive additional momentum in our reunderwriting efforts.

“In the third quarter we saw North America retail property rate increases accelerating as there was a broader pull back in market capacity and disciplined underwriting was more prevalent.”

Zaffino noted high-teen rate increases in retail property, and increases in the mid-20s when the impact of long-term agreements is excluded. “We expect to continue to see rate increases through the remainder of the year and into 2020,” the executive added.

“This market dynamic is different from the past because we now see the industry as a whole is acting more rationally and this combination of changed behavior and external forces reaffirms my belief that this market cycle is sustainable for the perceivable future”

AIG’s Brian Duperreault

In North America financial lines, AIG reported 30 percent increases across commercial D&O led by increases exceeding 35 percent for public D&O. The insurer reduced primary commercial D&O aggregate limits by over 40 percent in the quarter compared to a 30 percent reduction in the second quarter. It reduced primary commercial D&O policies with limits greater than $10mn in lead layers by over 40 percent.

Zaffino said AIG is also focused on investing in attractive growth opportunities, highlighting accident and health as an example.

“A&H represents more than $3bn in gross premiums written and is one of our best performing businesses,” he said. “We believe A&H will be a strong engine of future profitable growth because global demographic trends and demand for A&H products match up well with our product offerings and global footprint.”

Commenting on the overall rate environment, Zaffio said the improvement in some lines is at the highest level in over a decade.

“The overall third quarter rate improvement for general insurance excluding Validus and Glatfelter was in the high single to low double digits,” he said. “North America commercial rates increased in the low double digits compared to a high single digit rate increase in the second quarter. International commercial rates increased in the low to mid single digits on average across all geographies consistent with the second quarter.”

Unprecedented change

AIG chief financial officer Mark Lyons also highlighted the magnitude of the portfolio reshaping at AIG on the earnings call.

“This level of change is unprecedented in my 42 years in this business, but there are nuances, however, that should not go unnoticed,” he said.

He pointed to the drastic changes at Lexington, saying the large increase in submission volume “signals the igniting of the wholesale distribution channel along with its emphasis on smaller accounts that have more localized exposures and lower capacity.”

Lyons added that Lexington’s risk quality has also broadened thereby improving overall rate adequacy as well.

Lyons also highlighted the acceleration of rate changes in the past year. For example, AIG’s E&S D&O business combining primary and excess coverages had a 9 percent increase in the fourth quarter of 2018, 11 percent in the first quarter of 2019, 17 percent in the second quarter and 28 percent in the third quarter.

Likewise, Lexington’s casualty rate increases were 6 percent in Q4 2018, 8 percent in Q1 2019, 20 percent in Q2 and then 31 percent in Q3.

Lyons added that AIG was “extremely pleased” that the rate increases extended beyond the US, with a 9 percent weighted increase in Canada, 10 percent in the UK and 6 percent in continental Europe.

On the earnings call, AIG president and CEO Brian Duperreault gave a positive outlook for the industry.

“This market dynamic is different from the past because we now see the industry as a whole is acting more rationally and this combination of changed behavior and external forces reaffirms my belief that this market cycle is sustainable for the perceivable future,” he said.

The commentary around rates and market conditions came against a background of AIG reporting third quarter adjusted after-tax income of $505mn, or $0.56 a share. This was an improvement on the $301mn, or $0.34 a share, loss in 2018’s third quarter but below analysts’ consensus forecasts of $1.00 a share.

AIG’s core general insurance operations reported a combined ratio of 103.7 percent, down from 124.4 percent, driven by lower cat losses, continued underwriting actions, reinsurance and expenses discipline.

The underwriting loss of $249mn for the quarter was lower than the $1.73bn underwriting loss in the prior-year period.

Duperreault commented the results were “in line with expectations”.

Analysts welcome underwriting/expense improvements

The miss was driven by AIG’s life and retirement earnings, said analysts at The Buckingham Research Group.

“However, cutting through the noise, AIG reported another quarter of underwriting and expense management improvement, which have been focal points for the company in the past,” the analysts said.

KBW analysts commented that the market “seems to understand that AIG’s P&C improvement story remains intact”, and noted that management reaffirmed its expectation of a double-digit return on capital employed by year-end 2021 despite interest rate pressure.

As of 1.15pm EDT, AIG’s share price had increased 1.34 percent on last night’s closing price.