How AIG plans to improve underwriting performance

AIG is pulling back from lines with poor underwriting performance, a strategy that has already had a positive effect on overall profitability. But this area remains the wildcard for its targeted 9 percent normalized annual ROE (return on equity), according to CreditSights analysts.

The company generated a normalized ROE of 8.3 percent year-to-date. AIG’s combined ratio improved to 100.1 percent year-to-date in 2016 compared with 112.4 percent in the 2015 full year.

However, a review of the combined ratio shows that there is work to be done, CreditSights analysts said in a November 20 note following AIG’s investor day 2016. In order to improve its underwriting performance, AIG must continue to monitor and exit unprofitable lines of business, seek to divest unprofitable lines where possible, and continue its efforts to improve data analytics capabilities, the analysts suggested.

Furthermore, the company’s overall risk selection in terms of new business will be critical in achieving their goal. This will need to be achieved in a challenging operating environment with significant pressure on pricing due to overcapacity in the market. The premium rate environment has not been helpful to P&C insurers over the last year as rates across commercial product lines have been modestly declining.
In order to improve underwriting performance, AIG plans to reduce its exposure to product lines such as excess casualty in the US, environmental protection (asbestos and related risks), excess & surplus lines, and certain special risks such as aerospace.

At the same time, AIG intends to grow its international primary casualty operations, large limit property coverage, and cyber insurance division. AIG mentioned its ability to provide $2.5 billion worth of limit in the commercial property space and $1 billion of property terrorism coverage as its competitive advantages in the large limit space.