AIG starts marketing $2bn casualty quota share

AIG has embarked on the next stage of its reinsurance overhaul by approaching the market to discuss the purchase of two new major US casualty treaties, The Insurance Insider can reveal.

Sources told this publication AIG had begun marketing the proportional and non-proportional covers for its US general casualty book this week in Monte Carlo.

The dual purchase fits in with the global insurer’s strategy under group CEO Brian Duperreault and general insurance CEO Peter Zaffino to lay off more risk to reinsurers and to utilise the reinsurance market more strategically.

It is understood that AIG held a broker request for proposal lasting a number of months earlier this year, with Aon handed the mandate to place the quota share and Willis Re picked to handle the excess-of-loss placement.

Sources said Aon would look to place a 30 percent quota share on a general casualty book with $2bn of subject premiums. The book includes primary casualty, general liability and mid-excess business.

The deal will be the biggest new US quota share cover brought to the open market in years.

The response from reinsurers will be a litmus test of the market’s belief in the portfolio remediation work undertaken by AIG’s new management team given the weak historic performance of the book.

Meanwhile, Willis Re will market a non-proportional treaty to cover AIG’s excess casualty book, with substantial vertical limit believed to come in excess of around $25mn.

The new covers will replace a number of quota share deals – the biggest of them with Swiss Re – that have rolled off risk during the course of the year, or which are due to expire shortly.

Sources suggested the proportional cover would be placed for a 1 December or 1 January inception, while the non-proportional cover would be placed in the fourth quarter.

It is believed the US excess casualty exposures could be rolled into the new international casualty treaty that AIG purchased in the first quarter rather than via an entirely new placement.

AIG’s reinsurance buying ethos has changed since Duperreault replaced Peter Hancock as CEO in May 2017.

For many years Hancock’s AIG was the posterchild for a reinsurance-buying philosophy that emphasised diversification as a risk management tool and which was comfortable taking increasingly large net bets at group level.

In contrast, Duperreault and Zaffino have steered the company towards the increased use of reinsurance, as the global insurance giant looks to reduce its volatility.

On the carrier's third-quarter earnings call last year, Duperreault said "it's not my style to take large limits and retentions of risk". He also said AIG would look to "dampen" some of its volatility through its reinsurance purchases.

AIG’s executives have also stressed the value the company can get from working in partnership with reinsurers to optimise its own book.

On AIG’s second-quarter earnings call, Zaffino said the focus to date had been on “reducing volatility, [and] making sure we’re addressing some of the large limits”.

“And as we look to the back half of the year, we’re going to look at our entire portfolio, in particular casualty, and be very strategic on how we look at reinsurance with partners in the reinsurance market, and we would expect to see a benefit from that in 2019.”

Duperreault said improved reinsurance buying would be one of the levers that would put it in a position to deliver a combined ratio of less than 100 percent in 2019.

In the first quarter, AIG bought a $75mn xs $25mn international casualty treaty, reinsuring a book that had previously largely been run net. The treaty is led by Swiss Re.

This followed a raft of reinsurance changes at the turn of the year, as AIG reduced its risk tolerances.

The revamped 1 January purchases included a new $2bn aggregate catastrophe cover, a “top or agg” cat deal and a new international cat treaty.

All told, AIG is understood to have purchased around $2bn of additional cover and lowered its first-event retention to around $750mn-$1bn.

Guy Carpenter, historically AIG’s biggest broker and previously its lead casualty broker, was the biggest winner at 1 January.

It was the flag broker on the main US occurrence cat cover, the sole broker on the aggregate deal and co-broker on the “cat and agg”.

The global insurer also dropped the retention on its per-risk cover from around $125mn to $75mn, with the deductible on its marine treaty slashed from $50mn to $10mn.

Duperreault is under pressure to demonstrate to investors that he and his team have made progress in turning around AIG’s underwriting performance, with disappointing results dragging the shares down almost 10 percent in the year to date.

He has been widely credited for assembling a quality team including the likes of Zaffino, general insurance chief underwriting officer Tom Bolt, CEO of international general insurance Chris Townsend, Lexington CEO David McElroy and chief actuary Mark Lyons.

However, market sources have suggested the team has found AIG’s issues more entrenched and fundamental than expected.

On the firm’s second-quarter earnings call, Duperreault said he was confident AIG would deliver an underwriting profit “as we exit 2018”.

After a second-quarter calendar-year combined ratio of 101 percent that was flattered by low cat losses, the executive said the company expected to deliver 2 percentage points of improvement from new efficiency savings.

With Validus set to dilute the combined ratio by a further percentage point, AIG would look for the remaining improvement to come from a combination of “underwriting actions” and “reinsurance strategies”.

“Looking ahead to 2019 and beyond, our goal is to deliver top-quartile financial performance relative to the industry,” he said.

And as Duperreault moves into 2019 – his third full year in charge – investors will expect the delivery phase to begin.

AIG did not respond to a request for comment.