AIG in two-year casualty reinsurance deal with Swiss Re

Primary insurance firm AIG has begun its increased use of reinsurance, a strategic goal it outlined in a recent performance enhancement plan, with a just-announced two-year casualty reinsurance deal with global player Swiss Re.

AIG said in January that it would look to increased use of reinsurance capital as one of the ways it would look to improve its performance, in order to meet capital return targets and as it hoped to avoid being broken up by regulators.

And having also announced a strengthening of its reserves on longer-tailed risks in U.S. & Canada casualty lines at the time, it’s no surprise to see AIG begin by entering into an agreement to secure more of the future profitability of its casualty portfolio with the help of Swiss Re.

Under the terms of the two-year reinsurance arrangement a share of AIG’s new and renewal U.S. Casualty portfolio will be ceded to Swiss Re.

The insurer said that the reinsurance transaction represents “an important step in AIG’s strategy to improve its Commercial Insurance diversification and return on equity (ROE), and it highlights AIG’s focus on capital efficiency.”

“Swiss Re and AIG have had a strategic relationship for a number of years, and the trust and knowledge-sharing between the two companies facilitated this mutually attractive economic transaction,” explained Rob Schimek, CEO of AIG Commercial. “We have been very clear about our desire to partner with our reinsurers to help achieve our strategic objectives, and this agreement with Swiss Re is an example of what is achievable with longstanding counterparties.”

Christian Mumenthaler, CEO of Reinsurance at Swiss Re, added; “We are delighted to continue our long term partnership with AIG, providing solutions across their business. We know this portfolio, the leaders, and the underwriters very well and believe in AIG’s plans. As a result, we are happy to accompany them on this journey by taking a significant position in this business. It’s a transaction that allows both AIG and Swiss Re to improve their diversification.”

With AIG having been a significant sponsor of catastrophe bonds and other collateralised products over recent years it will be interesting to see whether the insurer looks to transfer any of its catastrophe exposures from its property portfolio to the capital markets.

The terms of this specific reinsurance agreement have not been divulged, but with Swiss Re stepping up to back AIG’s casualty book in a deal that the insurer described as “risk sharing” it is likely a quota-share type arrangement across the portfolio.

A two-year deal enables AIG to lock-in the reinsurance capital support at a pre-agreed rate, possibly a very important aspect of the deal when the insurer has already had to strengthen casualty reserves, providing more certainty in the level and cost of capital support for the insurer.

While the insurer is looking at reinsurance as a capital tool, to help it enhance profitability while also reducing its exposure and the risk it bears from its underwriting portfolios, the capital markets could play a meaningful role in this.

For now Swiss Re is helping AIG to secure its casualty profitability, a transaction which no doubt plays to Swiss Re’s strengths and ambitions as a leading global reinsurer looking to grow its book further in areas outside of catastrophe risk.