AIG’s AlphaCat sees ILS growth, as insurer discloses $458m Q2 Covid-19 hit

AlphaCat Managers, the insurance-linked securities and collateralised reinsurance investment manager entity of insurance giant American International Group’s (AIG), has returned to outright growth in terms of ILS assets under management (AuM), for the first quarter in a while.

It’s the first increase in ILS assets reported by AIG for the AlphaCat Managers unit since the third-quarter of 2019, as the third-party component rose by $100 million in the second-quarter of 2020.

AlphaCat Managers ended Q2 2020 with $4.3 billion of total assets, $4.2 billion of which was from third-party investors, AIG disclosed in its results late yesterday.

The insurer also disclosed that AlphaCat Managers drove some $6 million of income in the second-quarter, down on the $10 million reported for Q1.

Underlying this is a -$2 million loss from direct investment activities in the AlphaCat unit, AIG explained, which was buoyed by a second quarter of $8 million in fee income from asset management activities, to give the $6 million of AlphaCat ILS income for the quarter that AIG has recognised.

AIG reported its second-quarter impacts from the Covid-19 pandemic, revealing a $458 million net of reinsurance impact to its General Insurance business.

That takes AIG’s total disclosed Covid-19 losses so far to $730 million.

View a running total ($22bn) of insurer and reinsurer Covid-19 loss disclosures over at our sister site Reinsurance News.

In addition, AIG reported $126 million of losses related to rioting and civil unrest, as well as $90 million of natural catastrophe losses, all of which resulted in its General Insurance unit reporting a combined ratio of 106% for Q2 2020.

Adjusted though, AIG said that its General Insurance combined ratio would have been 94.9%, which is 120bps better than the prior year and driven by improvements in commercial insurance and expense discipline, which should be welcomed by shareholders.

Covid-19 also impacted AIG’s life and health business, as elevated mortality contributed to a reduction in pre-tax income for that unit. But AIG does not break out the financial costs of the pandemic on its life side.

Overall though, some large one-offs have driven AIG to a $7.9 billion net loss for the second-quarter of 2020.

The insurer said this was largely driven by a $6.7 billion after-tax loss related to the sale and deconsolidation of Fortitude Re and $1.8 billion of after-tax net realised capital losses, largely mark-to- market in nature and affecting variable annuity and interest rate hedges.

Brian Duperreault, AIG’s Chief Executive Officer, commented on the quarter, “We are effectively navigating the current complex environment due to the strong foundation we built over the last three years. While unprecedented and on-going, COVID-19 remains an earnings, not a capital, event for AIG. We also increased our financial flexibility ending the second quarter with over $10 billion in liquidity.

“Our core businesses performed well in the second quarter. In General Insurance, the underlying underwriting profitability improvement was driven by our focus on portfolio remediation and expense discipline. Life and Retirement benefited from its diversification and agility, and continues to meet client needs despite an uncertain economic environment.

“We also executed two important transactions in the second quarter that significantly enhanced our risk profile and helped to position our core businesses for growth. The sale of our majority stake in Fortitude Holdings de-risks our balance sheet and reduces our exposure to long-tail runoff liabilities and interest rate risk. Our Personal Insurance high net worth portfolio benefited from the formation of Syndicate 2019 and new quota share reinsurance agreements, which will enable us to unlock the strategic value and growth opportunities of this business through a new, innovative capital model.

“I am proud of the many ways we are managing through this challenging period in time. Our colleagues continue to show strength and resiliency as we remain focused on supporting our clients, each other and our communities. I remain confident that AIG is well-positioned for the future as we make progress toward becoming a top- performing company and leading insurance franchise.”

AIG doesn’t reveal much on the performance of its reinsurance book, which is where premiums from its AlphaCat ILS unit largely are derived.

The fact AlphaCat has raised some third-party capital at a time when the market has been so challenged by Covid-19 bodes well for the units ability to raise more as we move through the remainder of 2020 and close to the all-important January 2021 renewal season.