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AIG's 1st post-financial crisis underwriting profit punctuates P&C turnaround

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AIG's 1st post-financial crisis underwriting profit punctuates P&C turnaround

The circumstances surrounding American International Group Inc.'s report of an underwriting profit for 2019 were distinctly different than the last time the company accomplished the feat over a full calendar year.

CEO Brian Duperreault used the occasion of AIG's fourth-quarter earnings conference call to laud a turnaround that he described as having occurred on a "scale and timeline never before seen in our industry." But the topic of consolidated underwriting profitability did not even register on Feb. 28, 2008, when AIG executives discussed results for 2007 and their decidedly downbeat outlook for what would become an infamously disastrous 2008.

"AIG's results in 2007 were clearly unsatisfactory," then-CEO Martin Sullivan said in reference to earnings that were characterized by large investment-related unrealized market valuation losses and net realized capital losses, which fully obscured the $4.50 billion in underwriting profits AIG's general insurance operations produced.

Duperreault, in contrast, was in a celebratory mood Feb. 13 as he highlighted the underwriting gain of $89 million that AIG's general insurance segment produced in 2019.

"I honestly can't remember the last time AIG had a full-year underwriting profit," he said, not surprising given that he had just been appointed CEO of Marsh & McLennan Cos. Inc. weeks prior to AIG's 2007 earnings report.

Although modest in size, the profit represented what AIG executives described as a key milestone in the various initiatives they instituted beginning in late 2017, which included a repositioning and de-risking of the company's portfolio through aggressive actions to reduce policy limits, restrict the sale of multiyear policies, make more liberal use of reinsurance and broadly exercise underwriting discipline.

Accompanying the underwriting profit was AIG's first sub-100% calendar year combined ratio since 2007. The consolidated general insurance result of 99.6% was nearly 12 percentage points better than the 111.4% recorded in 2018, and excluding the impact of catastrophes, the calendar-year combined ratio improved to 94.8% from 100.9%.

AIG's reported calendar-year combined ratios didn't just exceed 100% during the four-year stretch from 2015 and 2018: They ranged between 111.4% and 122.9%, reflecting effects from catastrophes and adverse prior-year reserve development.

Improvements were also evident in the North America portion of the general insurance business. Although an underwriting profit remained elusive, the calendar-year combined ratio of 101.7% represented a decline of 17.1 percentage points from 2018, reflecting 4.4 points of improvement in the adjusted accident-year combined ratio, a significantly lesser impact from catastrophes and reinstatement premiums and a swing to favorable prior-year development from adverse development.

The underwriting loss in the general insurance North America business narrowed to $220 million from $2.31 billion in 2018, and its adjusted pretax income, including the impact of net investment income, swung to a positive $2.71 billion from a negative $8 million.

Statutory underwriting loss still likely

The nature of the data in the company's GAAP report suggests that AIG is still likely to report an underwriting loss when statutory combined annual statement for AIG's U.S. property and casualty companies becomes available later this year.

On a statutory basis, the AIG U.S. P&C group as consolidated by S&P Global Market Intelligence generated a net underwriting loss through the first nine months of 2019 of $973.5 million, as compared with a loss of $2.24 billion in the year-earlier period. The combined ratio for the nine-month period improved to 109.6% from 120.6%.

And on a GAAP basis, AIG reported an underwriting loss for the fourth quarter of 2019 in North America general insurance, although the figure of $19 million compared favorably to red ink of $871 million in the fourth quarter of 2018. The calendar-year combined ratio improved to 100.6% from 125.3% year over year.

The combined annual statements, which present consolidations of the AIG U.S. P&C group as it existed as of the applicable year-end dates, last showed a net underwriting gain in 2007. The smallest underwriting losses in the subsequent 11 years were $487 million in 2013 and $557.2 million in 2014. In each of the other nine years, AIG's net underwriting losses have exceeded $1.89 billion.

Improving AIG results, whether in the form of underwriting profits or smaller underwriting losses, may have materially positive implications for the U.S. P&C industry as a whole. In 2018, for instance, the industry's net underwriting gain of $3.11 billion would have more than doubled had AIG's loss been excluded from the total. In 2016, AIG's $5.09 billion net underwriting loss was the difference between an underwriting loss of $2.39 billion for the industry and a $2.69 billion profit.

AIG offered guidance that suggests the potential for incremental improvement in general insurance underwriting results across geographies in 2020. Its range of guidance for the accident-year combined ratio of between 93.8% and 94.8% excluding catastrophes would be no worse than the 2019 result.