AIG is expecting its Covid-19 losses will trigger a reinsurance recovery under its international catastrophe treaty, while its losses are also mounting in the United States and have eaten half-way through its U.S. cat treaty retention, President and COO Peter Zaffino explained yesterday.
Yesterday, AIG reported the second-quarter impacts to its P&C business from the Covid-19 pandemic, revealing a $458 million net of reinsurance impact to its General Insurance business.
That took AIG’s total disclosed Covid-19 losses so far to $730 million.
On top of the Covid-19 pandemic losses and reserves, AIG also revealed $126 million of losses related to rioting and civil unrest, and $90 million of natural catastrophe losses, which drove its General Insurance unit to a combined ratio of 106% for Q2 2020.
Speaking during the global insurer’s Q2 earnings call yesterday, Peter Zaffino, AIG’s President and Global COO, as well as CEO of the General Insurance division, warned that the insurer expects to benefit from reinsurance support in paying its Covid-19 claims.
AIG has been analysing its commercial property portfolio to identify where Covid-19 claims may fall and Zaffino said that, “Our second-quarter estimation process for commercial property, as with all of our lines of business potentially impacted by COVID-19, was fact-based, both in terms of actual claims experienced in the quarter and the specific terms & conditions under policies where we provided affirmative coverage for infectious disease-related losses.”
Adding, “Our second-quarter aggregate estimate reflects our best view at June 30th.”
On the reinsurance program and how it may assist AIG in paying its claims, Zaffino said, “It provides meaningful protection against our overall gross losses related to COVID across our most impacted lines.
“With respect to property losses, in addition to our global property per-risk treaty, our property catastrophe reinsurance includes separate occurrence towers for North America and International and we have a substantial global aggregate cover.”
These reinsurance towers of AIG’s will contain an element of capacity support from the capital markets and insurance-linked securities (ILS) funds, it’s expected, particularly the catastrophe occurrence towers and the aggregate protection layers.
However, the capital markets and ILS funds do tend to be more exposed to residential property, than commercial, so the majority of AIG’s recoveries are likely to fall to the traditional market.
Zaffino highlighted where recoveries are expected to be made, “Based on our current expectations of COVID-related losses, through the second-quarter, we expect to recover under our international per-occurrence catastrophe treaty.”
He further explained that, “We have approximately half of our retention remaining before attaching under the North America per-occurrence catastrophe treaty,” as well.
With Covid-19 losses likely to rise further for AIG, across its property book and the potential for some business interruption losses to perhaps be litigated and forced, it seems prudent to assume that the remaining retention will be further eroded over the next quarter or more and that the North America catastrophe reinsurance will, at least, come closer to being triggered.
Both of the per-occurrence reinsurance towers have a reinstatement limit associated with them, Zaffino said.
He also explained that AIG bulked up its aggregate reinsurance protection in advance of the mid-year renewals, to ensure it had sufficient coverage for frequency type cat and weather events, as Covid-19 was likely to erode some of its protection.
“In light of Covid-19 we anticipated that reinsurance capacity could contract and, as a result, we purchased an additional $500 million of aggregate limit early in the second-quarter,” Zaffino said.
This means that AIG still has, “Substantial protection against exposure to natural catastrophes throughout the remainder of the year and in particular going into peak wind season.”