The segment globally delivered an accident-year, ex-cat combined ratio of 85.3%, a 400 bps improvement year-over-year. General insurance – which includes personal lines – delivered 2.9 points of favorable prior-year development, and cat losses of just 1.8 points. The expense ratio is down to the low 30s, with AIG 200 complete, and $1bn of run-rate expense savings realized.
Given the starting point, this is a remarkable achievement and the fortunes of the business look to have been transformed. It increases my conviction stated in March that from here AIG will report commercial lines results that are closer to an index of the markets where it operates. (For background see: “AIG’s P&C business: Fixing the unfixable”)
With that work behind management, there are three near-term questions for the business to resolve – and then a fourth that is longer term.
First, can they solve the cat problem that the high-net-worth (HNW) business is suffering from?
The chunky limits required, the concentration of HNW exposures in peak zones and the way exposures stack with commercial lines makes it challenging to have significant market share and effectively manage volatility.
This has not emerged as a new problem in 2022, and AIG already made a major move to find ways to syndicate this risk by establishing a Lloyd’s syndicate in 2020 to reduce its own share of the risk. It also bought a comprehensive reinsurance programme for the book, which included 1-in-500-year protection to minimize the tail risk it presented.
Nevertheless, this remains very much a work-in-progress and AIG took the step in the second quarter of withdrawing from writing homeowners business in certain states – believed to include California and Florida – where it did not believe it could charge appropriately for the risk in the standard lines market.
These moves have helped the firm to reduce its gross wildfire PMLs by 35%-40%, underscoring the rationale for moving away from the over-regulated admitted market.
On its earnings call, AIG cited challenges around loss-cost increases, inflation and reinsurance pricing.
The latter is certain to get worse, as the Bonfire of Cat Limits from reinsurers looks set to force cedants to pay significantly more for less comprehensive cover as we head into 2023.
Zaffino – now rejoined by outwards reinsurance chief Charlie Fry – indicated that AIG would look to open up a fresh pool of capital to syndicate the cat risk by bringing in third-party capital. That will be easier said than done given the dreadful sentiment among capital markets for taking on cat risk.
With no obvious home for excess cat risk in the value chain, the problems AIG’s management faces with this component of its business look knotty – but commercial lines was even more intractably broken.
Second, can AIG find a way to unstick the slightly gummed-up growth machine in commercial lines?
As previously noted, one of the central challenges for AIG’s management team is to effect a massive cultural shift within its workforce. Imposing tight central controls and a culture of saying ‘no’ to brokers was central to landing the turnaround.
But now AIG needs to empower underwriters to get out there and find growth – something which they must find a way to do as growth is increasingly being chased across the market.
Early signals suggest that the pivot to growth is proving to be a greater challenge than imposing discipline. As you would expect.
Even allowing for the FX adjustments (only ever referenced by firms when they are a headwind), GWP was up 5% across GI, as 8% growth in commercial lines was offset by 3% shrinkage in personal lines.
Commercial lines growth was slower than in Q1 when it was 11%, FX-adjusted, and lower still relative to the 13% registered in Q4. The international unit was a clear drag on US growth, with NWP down 1%. Lexington was a bright spot, with the E&S unit growing 31%.
Overall commercial lines growth tracked just slightly ahead of the 7% rate increase. And the deceleration comes as other commercial lines insurers surprised on the upside with growth, partially boosted by the increase in exposure units resulting from factors including higher property values and increased payrolls.
Last quarter, I said that the growth challenge represents a test of whether AIG can establish a compelling value proposition to clients and brokers as business is more heavily competed over. It has yet to prove it can pass that test.
Third, can AIG land an IPO in an incredibly uncongenial environment, or live with the opportunity cost of waiting?
AIG confirmed that the IPO of its life business – which will be known as Corebridge Financial – had been delayed.
For some time investor sources have said that the IPO is soft slated for September, with Zaffino confirming that timeline today, but there is a lot of skepticism AIG will choose to pull the trigger at that point.
Zaffino said that market conditions had not been “conducive” in the second quarter, and they would continue to watch the market carefully.
The IPO markets have been pretty dead, with businesses that have been able to wait largely choosing to do so.
A whole host of insurance businesses have done significant IPO prep work, but without launching, with this list including not just Corebridge, but specialty insurer Skyward, growth brokers Keystone Agency Partners and The Liberty Company. That group will now be joined by Fidelis Balance Sheet.
Some banking sources believe that these other insurance-focused businesses will be reluctant to go until they see AIG successfully clear the market with the life IPO.
The issue for all of these businesses is that they are hostage to the macroeconomic environment and not in control of their own fate.
Pushing the IPO quarter-to-quarter is the likeliest outcome for AIG – and for various others – but all must face the possibility that this could be a multi-quarter weak IPO market.
And there are costs to waiting. Waiting for a better valuation creates uncertainty for staff and distraction for management. It also delays the cleaning up of AIG's story, and pushes out the timeline on redeploying the capital into P&C – or returning it to shareholders.
The fourth – and longer-term question – is what kind of business will a resurgent AIG want to buy?
Once the life IPO finally gets away, Zaffino’s focus is expected to shift towards the long-term shape of the P&C business. Along with the proceeds from the life IPO and further sell-downs, this will create resources to support M&A – particularly if the separation supports a positive re-rating of the stock.
I’ll return to this fantasy M&A another day. And, of course, we’re unlikely to get any real guidance from the company, which will want to retain its freedom of maneuver – leaving this an exercise in educated speculation.
But this is what the medium-term looks like for AIG. And the surer footed they are around the day-to-day management of the business, the more likely it is that management feels confident enough to resume dealmaking.
This time I wouldn’t expect it to pay up for a cat reinsurance franchise...
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