AIG to set up new third-party capital structure for HNW business: CEO

American International Group (AIG) is looking to take control of its reliance on and access to reinsurance capital for its high-net-worth property business, and plans to set up a new third-party capital backed structure to support a shift of cat-exposed property underwriting to the non-admitted market.

AIG’s Chairman and CEO Peter Zaffino gave a long explanation of the insurers planned strategic changes when it comes to high-net-worth property underwriting, during its second-quarter earnings call yesterday.

Zaffino explained that AIG is committed to the high-net-worth insurance business, which includes the AIG Private Client group, but noted that the business has become increasingly challenging, especially with it sitting in the admitted insurance marketplace.

“This is a business we will continue to invest in, where there attractive opportunities for profitability improvement,” Zaffino said.

He explained that AIG intends to position the high-net-worth client business to be less volatile and more-balanced, with less density of risk as well.

Reinsurance is a key factor, given the often peak peril exposures high-net-worth property insurance comes with.

Zaffino explained, “Currently, the level of reinsurance we purchase and the commensurate modelled ceded profit is a headwind to net premiums written growth and to combined ratio improvement.

“This has been intentional, as we are not willing to take volatility on frequency or tail-risk on cat in our high net worth business.

“Adding to this, the inability to pass on increased loss and reinsurance costs through rate increases, or limit management, largely due to regulatory constraints further deteriorates margin in the short-run.

“But we have made a deliberate decision to continue writing this business, as we believe the trade-off is appropriate in the near-term, given the opportunity we see over the long-term.”

He continued to say that it is unlikely reinsurance costs reduce for the AIG high-net-worth underwriting book, instead seeing it putting even more pressure on this segment of the business in future.

“For a business that is primarily underwritten in peak zones, with high insured values, reinsurance costs will likely increase and in some cases materially,” Zaffino said.

Here, Zaffino segued into an explainer on the retrocessional reinsurance market, why it has been so challenged and related that to AIG’s problems in securing reasonably priced reinsurance for its high-net-worth property books.

Retro markets provide roughly $60 billion of capacity, but only $20 billion of indemnity retro, Zaffino said, largely supported by alternative capital providers.

Dynamics in retrocession have “materially changed” he said, from higher costs that have been rising faster in retro than in reinsurance, a shift to occurrence retro structures with aggregate less available, the fact aggregate and lower-attaching retro structures have come under significant stresses of late, that attachment points have typically risen 50% or more in retro, while at the same time risk-adjusted rates have also risen by over 50% even though retrocessional exposure has technically declined.

Zaffino said the retro market and how it has changed provides a good insight into the complexity of peak peril reinsurance zones, which is where the AIG high-net-worth books are largely concentrated.

“When you couple these factors with the additional adjustments going forwards for inflation, model changes, trapped capital, you have a very complicated and challenging market,” Zaffino said.

Adding that, “If you review global insured nat cat retrocessional losses over the last decade, nine out of ten years have had larger contributions from secondary peril aggregate losses, than peak peril losses. Which highlights the complexity of modelling catastrophes.”

Because of the dynamics in reinsurance and retrocession, AIG has concluded that “to continue to provide high-net-worth clients with comprehensive solutions that meet their emerging risk issues, we needed to move the property homeowners product to the non-admitted market, particularly in cat exposed states,” Zaffino said.

AIG has exited the admitted personal property homeowners market in certain states, he explained, saying that the level of aggregation assumed, inability to pass on rising reinsurance prices, or to raise rates, plus limitation in how coverage itself could be changed, makes it less appealing.

Moving forwards with the AIG high-net-worth strategy, Zaffino said that the insurer moving its homeowners and possibly other products in more states, in to the non-admitted market.

But key to AIG’s goals, it seems, is taking greater control over the availability and utility of reinsurance capital to support its high-net-worth underwriting business, which continues a trend at the carrier, as it has attempted this before, in a way.

AIG launched Lloyd’s Syndicate 2019 back in 2020, which was designed to bring third-party capital support exclusively to provide reinsurance to AIG’s Private Client Group (PCG) portfolio of risks, a division of the insurer with a leading market position in the attractive to access High Net Worth segment.

Backing that syndicate was some insurance-linked securities (ILS) capital, with Hudson Structured Capital Management Ltd. (doing its insurance investment business as HSCM Bermuda) a lead backer alongside other investors and we understand funds.

As we said at the time, the Lloyd’s syndicate could act as a kind of reinsurance sidecar to AIG’s private client book, enabling investors to share in the performance of its underwriting and origination, while AIG got to control a larger slice of its reinsurance capital needs for that part of its business.

Yesterday, during the AIG Q2 earnings call, Zaffino explained that this ambition, to leverage third-party capital appetite for risk to help in reinsuring its private client and high-net-worth book remains at AIG.

He explained, “We plan to set up a structure that over-time we expect to be supported by third-party capital providers, in addition to AIG.

“This structure will provide more flexibility to manage aggregation, price, limit, terms and conditions, and to innovate to solve evolving client needs.”

Which sounds very like the original strategy with the Lloyd’s syndicate 2019.

Although, perhaps in a more traditional sidecar-like, or insurance-linked securities (ILS) structure.

So this isn’t really a shift in strategy, but it is a clearly stated goal to leverage the efficiencies of third-party capital and capital market investors to help in moderating aggregate exposure and providing reinsurance to a peak catastrophe peril exposed book of property insurance business.

How attractive that might be will depend on investors view-point, as well as how the portfolio to be backed by thirdparty capital is constructed.

Syndicate 2019 was not particularly successful for the third-party backers in its first two years, with reported combined ratios of 118.2% for 2020 and 113.6% for 2021.

Third-party investors lost money backing that syndicate of private client group business, so for this newly planned third-party capital structure, perhaps the design is planned to be different, to take a slice of the reinsurance tower for the high-net-worth homeowners book, rather than a ground-up portfolio of risks.

It’s perhaps notable that AIG previously bought catastrophe reinsurance to support its private client group, or high net worth, business, that covered the syndicate 2019 portfolio. So perhaps this is the layer, or kind of opportunity for third-party capital.

Either way, it’s encouraging to see AIG continuing to recognise the efficiencies possible by tapping third-party investor appetite for property catastrophe insurance linked returns, as well as the benefits of capital market technology for achieving that.

Of course, AIG also has its AlphaCat Managers insurance-linked securities (ILS) asset manager unit which could manage the capital from investors and establish this high-net-worth sidecar-like structure, ultimately making its operation even more efficient.