The new approach to reinsurance that Brian Duperreault plans to employ at American International Group Inc. could have an industrywide impact on underwriting metrics for U.S. property and casualty lines.
AIG intends to create a new Bermuda-domiciled company to reinsure its runoff general insurance lines, allow a quota-share agreement with Swiss Re AG involving new and renewal casualty business to expire, and enhance its North American property-catastrophe reinsurance program. All told, the moves could materially impact the amounts of net premiums and losses reported by AIG's U.S. P&C subsidiaries in certain of the affected lines of business.
Offshoring runoff business
Past actions by U.S. property and casualty insurers to shift business on- or offshore have materially impacted statutory underwriting results for certain lines of business in specific calendar years as the associated business moves into or out of the scope of U.S. statutory data.

AIG announced in its Feb. 8 earnings release the formation of DSA Reinsurance Co. Ltd. as it seeks to consolidate its legacy P&C and life books in a single legal entity under one management team. DSA Re will reinsure more than 80% of AIG's $38.6 billion in legacy life and retirement runoff reserves and $6.2 billion of the company's legacy general insurance runoff reserves, which includes certain long-duration business in Japan.
More details about the mechanics of the transaction may be forthcoming. In the meantime, however, AIG's description of the contents of its legacy P&C business in its most recent 10-Q, including asbestos and environmental exposures and lines such as excess workers' compensation and environmental impairment and public entity liability, aligns closely with the description of the business of Eaglestone Reinsurance Co. in its 2016 annual statement.
AIG repurposed Eaglestone to serve as the reinsurer of certain runoff P&C risks in 2011 as it entered an adverse development cover regarding asbestos exposures with Berkshire Hathaway Inc.'s National Indemnity Co. Over time, it grew from essentially a shell company at the end of 2010 to hold $5.63 billion in loss and loss-adjustment-expense, or LAE, reserves as of Sept. 30, 2017, gross of the National Indemnity cover.
Asbestos accounted for 31.5% of Eaglestone's gross reserves as of Dec. 31, 2016, with excess workers' comp, which AIG has described as "one of the most challenging lines of business from a reserving perspective," accounting for 26.5% of the total.
Eaglestone, like many of AIG's P&C units, posted large underwriting losses in calendar years 2014 through 2016 as a result of adverse prior-year reserve development. Its losses had the effect of adding nearly a full percentage point to the U.S. P&C industry's combined ratios for the other and product liability lines in 2015 and 2016 as well as 0.9 percentage point to the industry's 2014 workers' comp combined ratio. The runoff business was not subject to nearly the same degree of reserve development in 2017, however.
It remains premature to determine the extent to which Eaglestone's business will be reinsured into DSA Re, but several previous transactions — among them one involving another AIG unit — may offer relevant parallels to the extent such a shift occurs.
AIG transferred the business of AIU Insurance Co. to a Japan-domiciled affiliate in 2013. In accident and health, one of the business lines most heavily impacted, the P&C industry's combined ratio was a full percentage point lower in 2013 when excluding AIU. Net premiums written grew by 0.6% without the inclusion of AIU's results but fell by 5% with them.
The accounting for adverse development covers entered by Enstar Group Ltd.'s Clarendon National Insurance Co. and Sussex Insurance Co. with Bermuda affiliates materially impacted the industry's growth rates in workers' comp net premiums written in both 2015 and 2016. Intercompany transactions involving the onshoring of business to MCIC Vermont (A Reciprocal Risk Retention Group) from a Bermuda affiliate added 11.2 percentage points to the industry's 2014 combined ratio in the medical malpractice business.
Quota-share ends after two years
Duperreault's predecessor as CEO lauded AIG's "shoulder-to-shoulder" relationship with Swiss Re in remarks during an appearance at a February 2017 investor conference, as he predicted that the two-year quota-share agreement under which AIG ceded a certain portion of its new and renewal U.S. casualty business would be renewed on favorable terms. But at the same event in 2018, Duperreault explained his decision to not renew the agreement.
"We just looked at our needs, the benefits of the reinsurance. Would it make sense? Is it a reasonable trade for us? And we just decided that in this particular case, it wasn't," he said.
AIG declined in the past to discuss specifics regarding the Swiss Re treaty, but a review of disclosures in the 2016 annual statements of the company's P&C units may offer some context. Their aggregate amount of premiums ceded to foreign and domestic Swiss Re companies increased by $981.5 million to $1.37 billion in 2016, the first year the quota-share was effective.
Gross premiums written by AIG's U.S. P&C units, excluding premiums ceded to affiliates, decreased by $3.15 billion in 2016, but the amount of premiums they ceded to unaffiliated reinsurers increased by $86.5 million to $5.20 billion with the most significant increases in cessions observed in casualty lines: workers' comp, other liability and commercial auto liability.

To the extent that AIG ceded the same percentage of gross workers' comp business to unaffiliated entities in 2016 that it had in 2015, the P&C industry would have shown an increase of 1.5% in net premiums written as compared with 0.2% as originally reported.
Duperreault has stated on more than one occasion that he views reinsurance as an important risk-management tool, particularly in the areas of managing volatility and controlling loss exposure.
With the simultaneous decisions to allow the casualty quota-share to sunset and to enhance the property-catastrophe reinsurance program, AIG not only may be setting the stage for a reduction in volatility but also a shift in its mix of property and casualty premiums on a net basis.
While the ratio of premiums ceded to unaffiliated entities to gross premiums, excluding affiliated reinsurance, increased in 2016 in AIG's casualty lines, it declined during that year in various property lines. Had AIG ceded the same percentage of fire and allied lines premiums to unaffiliated entities in 2016 as it had in 2015, for instance, the industry's net premiums written in that business would have fallen by nearly 1% that year as opposed to the growth of 0.4% as originally reported.
Despite the ongoing shifts in philosophy in Duperreault's first year on the job, he said that AIG would become a predictable buyer of reinsurance.
A more stable AIG from the perspectives of premium volume, reserving and use of reinsurance would be a significant change for the P&C industry, overall, given the extent of the company's impact on various underwriting metrics across business lines not just in the last couple of years, but over the past decade.

