AIG Regaining Power to Set Rates

Source: WSJ - Erik Holm

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Posted on 08 Dec 2011

Three years after its near-collapse, American International Group Inc. isn't only back on the financial scene but also is regaining its power to set the agenda in some areas of the insurance market.

Speaking at a Goldman Sachs financial-services conference in New York on Wednesday, the head of AIG's property-casualty unit, Chartis, said his company has been aggressively raising rates in the U.S. this year, giving rivals the cover they need to do the same.

Chartis chief Peter Hancock's mere appearance at the conference marks a shift for AIG. Speaking engagements by senior AIG executives at financial conferences have been rare since AIG was bailed out by the federal government in 2008, but the company has begun courting private investors in recent months as the U.S. Treasury looks to sell its majority stake in the firm.

Mr. Hancock's comments also bring further hope to the insurance industry that years of pricing pressure could be easing. He noted that Chartis still isn't charging adequate rates for many types of coverage in the U.S., including property protection and workers' compensation.

Mr. Hancock, named to take over as the head of Chartis in March, said underwriters that price policies at Chartis began believing they could ask customers to pay more once AIG repaid its obligations to the U.S. Federal Reserve early this year.

"We started to assert our leadership position, which we traditionally had in terms of price-setting, and you can almost date it to the moment we repaid the Fed," he said. "When we started to ask for rate [increases], there was a lot of relief from the industry that finally we're back driving the bus in terms of getting a proper return on risk."

Chartis, which sells property-casualty coverage in roughly 90 countries, is now one of two major units at AIG after the company restructured and repaid its bailout. The other, SunAmerica, sells life insurance and retirement products in the U.S.

In the years before the financial crisis, AIG's property-casualty unit "had a lot of influence as to where the market went," said Paul Newsome, an insurance analyst with Sandler O'Neill + Partners LP. "It's declined quite a bit since their financial troubles. I don't think they're able to drive pricing like they did in the past, but even in their diminished capacity, they're a formidable part of the market."

Other insurers have been raising rates in 2011 as well, after years of declines. Executives at Travelers Cos. and W.R. Berkley Corp., speaking at the Goldman conference Tuesday, said the price increases are needed in part because insurers have struggled to earn worthwhile returns on their investment portfolios. In past years, insurers could count on investments to make up some of the difference if they underpriced a policy, but ultralow interest rates mean the margin for error has shrunk.

In addition, property insurers have paid out billions in claims from natural disasters in the past year. Ratings company A.M. Best put the pretax tally from catastrophes through the first nine months of 2011 at $38.6 billion in the U.S. alone.

Mr. Hancock said the company had increased commercial rates 4.6% in the U.S. overall, with property-insurance prices rising 8.8%. The company also is passing along more risk to reinsurers in the U.S. to shrink its exposure to large losses from catastrophes, or "cats," he said.

"For the most part, we've used too much reinsurance for our foreign operations and underutilized reinsurance for our property-cat exposure here," Mr. Hancock said. "So we are pulling back our capacity in the property-cat market here in the U.S. because we don't think we are getting enough rate even with an 8.8% increase year on year."

That effort is ongoing, Mr. Hancock said. "Until the pricing environment improves, the U.S. is going to be a shrinking part of our business," he said.

There have been indications of at least a slight industrywide pricing turn in recent days. MarketScout, a Dallas-based insurance exchange, said its data show commercial insurance rates up 1% in November, the first time its market barometer has shown an increase in nearly seven years. Insurance broker Marsh Inc. said Friday that commercial property-insurance prices had increased 1.7% so far in the fourth quarter.

Still, Sandler O'Neill's Mr. Newsome cautioned against assuming the industry troubles were in the rearview mirror.

"It's improving incrementally," he said. "We're seeing a steady improvement in the environment, but I don't think we're about to see a situation where prices are suddenly up 10% or 20% overnight."