By David Bull

Feb 12 - (The Insurer) - AIG has reassured investors that its rate increases in North America casualty lines are outpacing loss cost trends, and also revealed that it has reallocated around $150mn to reduce its so-called “uncertainty provision” in excess workers’ compensation to excess casualty.

The rate increases include those in the mid-teens in its wholesale and excess casualty books in North America, said the carrier’s CFO Keith Walsh.

On AIG’s earnings call on Wednesday morning, Walsh noted that the provisional reserve was created in 2022 in response to uncertainty around inflation and other variables in the post-pandemic macro environment.

The provision, which is included in AIG’s IBNR, has been carried in lines the insurer views as most susceptible to rising inflation, with a large portion of the total booked in its workers’ comp reserves.

Walsh said that this year AIG undertook a “through review” of the uncertainty provision which was set above the loss picks from actuarial reviews and “refined” its analysis, including the allocation of the provision across its lines of business.

He stated that the uncertainty provision did not reflect any emergence and that the overall estimate remained unchanged.

“However, we have decided to reduce the provision in excess workers' comp and reapportion approximately $150mn of the provision within excess casualty. We elected to move this portion of the reserve to excess casualty as development factors and the length of the tail can drive a wider range of outcomes on our reserves.

“To be clear, our traditional reserve methods are not indicating any emergence in excess casualty, but we felt, given the nature of the provision, it was more appropriate to be situated within this line,” Walsh explained.

He added that the insurer’s reserving philosophy is to “react to bad news quickly and wait to recognise good news over time” as it monitors developments.

Commenting on rates and pricing, Walsh said that Q4 global commercial lines pricing, which includes rate and exposure, was up 5 percent year-over-year, excluding workers’ comp and financial lines.

In North America commercial, renewal rates increased 3 percent, or 7 percent excluding workers’ comp and financial lines. Exposures were up 2 percent, with an all-in pricing change above loss cost trend.

Walsh noted that property market conditions were under pressure in the fourth quarter with increased competition across both the admitted and E&S markets, while the underwriting margin remained “healthy”, supported by cumulative rate increases over several years and AIG’s “disciplined approach”.

In North America financial lines the insurer said it continues to experience headwinds, but sees signs of rate reductions moderating.

In international commercial, overall pricing was flat or up 2 percent excluding financial lines.

“While rate is below trend, we feel good about our book given we’ve had over 60 percent cumulative risk-adjusted rate since 2018,” said Walsh.

“Our well-diversified portfolio allows us to navigate different market conditions effectively, prioritising lines of business that offer the most compelling risk-adjusted returns while upholding our underwriting standards,” he added.

AIG reported fourth quarter adjusted after-tax income per share of $1.30, up from $1.28 in the prior-year period and ahead of Wall Street forecasts of $1.24 a share.

The New York-based company reported a general insurance (GI) combined ratio of 92.5 percent that deteriorated from 89.1 percent in the prior-year period driven by cat losses and reinstatement premiums that were 3.4 points higher at 5.5 points in the quarter.

Cat losses in the quarter were $325mn, with $301mn in AIG’s North America commercial business including losses from Hurricane Milton and adjustments for prior quarter events, largely from Hurricane Helene.

There was a positive impact of $82mn from favorable prior-year development driven by US property, Canadian casualty and global personal insurance as well as the amortisation benefit associated with its adverse development cover.

Its GI adjusted accident year combined ratio of 88.6 percent was 0.7 points higher than in Q4 2023.

Overall gross written premiums in the quarter grew 5 percent to $8.02bn, with net written premiums up 6 percent to $6.08bn, while underwriting income was 29 percent lower at $454mn.

On a comparable basis, stripping out divested Crop Risk Services and Validus Re, net written premiums were up 7 percent to $5.95bn.

On that same basis, the GI reported combined ratio was 3.3 points higher at 92.5 percent, with the adjusted accident year combined ratio up 0.3 points to 88.6 percent.