Posted on 06 Aug 2010
Chartis, the property and casualty unit of American International Group, has stopped cutting commercial insurance rates as it was at the height of the financial crisis. But the insurer has less power than it used to have, so efforts to raise prices in some parts of the market are falling flat, according to brokers.
The performance of Chartis is important because AIG sees the business as the backbone of its future as an independent company. If Chartis struggles, it will be more difficult for AIG to repay tens of billions of dollars it owes the U.S. government and emerge healthy enough to generate returns for shareholders.
Investors and analysts will get an update on AIG's progress on Friday morning, when the insurer is scheduled to report second-quarter results. The company is expected to make 98 cents a share, according to the average estimate of two analysts surveyed by FactSet. That would be down from adjusted profit of $2.57 cents a share in the second quarter of 2008.
Any type of profit seemed a long way off in late 2008. AIG had been bailed out by the government, but it was still suffering as investors and customers worried it may not recover.
In the six months following the bailout, AIG slashed some insurance prices -- by more than 30% in some cases -- to prevent customers from moving policies to rival insurers or to win new business, according to the Wall Street Journal.
The cuts prompted complaints from other insurers including Liberty Mutual, Ace Ltd. and Chubb Corp., although AIG said at the time that rivals were just frustrated that the company was managing to survive, the newspaper reported.
AIG's commercial insurance premiums slumped 22% in the fourth quarter of 2008 versus a year earlier. Premiums from renewed policies fell slightly and new business premiums declined, partly from "the market reaction to AIG's financial challenges," the insurer said in March 2009.
Trying for rate increases
Now investors and customers are less concerned about AIG's ability to survive in the short term. That's relieved some of the pressure on Chartis, according to two commercial insurance brokers who spoke on condition of anonymity.
A recent survey of 40 risk managers by Barclays Capital insurance analyst Jay Gelb found that the "vast majority" of respondents insure some of their exposures with Chartis.
"Retention trends are expected to improve versus six months ago," Gelb wrote in a note to investors last month.
Chartis is even trying to get small rate increases on some commercial insurance policies. If a client has losses or is distressed in some way, the insurer will take the opportunity to charge higher premiums. For clients with records of few claims, Chartis is testing to see if small rate increases will stick, one of the brokers explained.
The other broker said that if AIG is insuring higher-risk commercial property exposures for a customer in Florida, the company will ask if it can get some of the more attractive business back that it lost during the crisis, such as environmental, directors & officers and excess casualty policies.
AIG may end up lowering commercial insurance prices still, but the company isn't cutting them any more than rivals, the broker added.
By the first quarter of this year, AIG sounded more confident about this part of its business, noting "increased business retention, new business submissions, and a continued stable rate environment."
An AIG spokesman didn't immediately respond to a question on Thursday afternoon about Chartis' commercial insurance pricing.
But Chartis doesn't have as much power to move commercial insurance prices as it once did, the two brokers said.
Property and casualty insurers have excess capital, which makes them compete more to underwrite risks. That pressures prices, producing a so-called soft insurance market. This is being exacerbated by the weak economic recovery, which is restraining demand for coverage among large buyers of commercial insurance.
Half of the risk managers Gelb recently surveyed said the market is soft. That's up from 30% of respondents six months ago. A soft market makes it more difficult for Chartis to raise prices.
Chartis has also lost some of its top underwriters in recent years. John Keogh, a senior vice president, joined Ace in 2006. Kevin Kelly, head of Lexington, AIG's big surplus lines insurer, became CEO of specialty insurer Ironshore Inc. in late 2008.