Even if James Bond were American International Group’s chief executive instead of Brian Duperreault, he couldn’t orchestrate a quick enough turnaround to prompt S&P to change the outlook on the group’s “A+” financial strength rating to stable.
Tracy Dolin-Benguigui, a director for S&P Global ratings, drew the analogy between ‘007 and AIG’s leader during a webinar early last week, four days before the rating agency officially affirmed AIG’s ratings, also retaining a negative outlook on those ratings.
Also commenting on the fact that strategic decisions and operating performance are now bigger factors driving S&P ratings decisions for property/casualty insurers generally, with individual carriers no longer distinguished from one another by the amount of capital they hold, Dolin-Benguigui specifically addressed the challenges in front of Duperreault in fixing the core earnings of AIG.
“We’re really looking at [AIG’s] operating performance. To be clear, this was not a capital story. We continue to expect [AIG to maintain] AA capital,” she said explaining the rationale for putting the negative outlook on AIG’s ratings back in June 2017.
In addition, while she noted that an adverse development reinsurance cover placed with Berkshire Hathaway’s National Indemnity is a credit positive, protecting AIG for legacy risk, “our concerns really circle over the more recent accident years, 2016 and 2017.”
Duperreault has dubbed 2018 as “The Year of the Underwriter,” and his management team is “laser-focused” on fixing the core commercial book. But that isn’t happening quickly, according to Dolin-Benguigui.
Borrowing the James Bond analogy from an S&P colleague, she said that if “Brian Duperreault was the James Bond of insurance, he’s not riding a speedboat. He’s on a cruise ship.”
“They’re getting the right team in place, but it will take time to really move that cruise ship around. That’s something we’re watching,” she said, also noting that “there could be a potential delay in actual progress being made given that the company is still lining up [the] management team.
“As that comes to fruition, we would have a better idea in terms of addressing the outlook,” she said.
Dolin-Benguigui also clarified that a negative outlook doesn’t necessarily mean a downgrade is coming. “A negative outlook just means a one-third probability of a downward rating action. We did affirm the ratings in June. So, two-thirds we’re still [viewing] it to be squarely in the A+ rating” category, she said
Overall, 90 percent of the P/C groups rated by S&P carry stable outlooks, and the median rating is A, the S&P analyst said at the beginning of her webinar presentation, as she explained the rating agency’s sector view.
“When we speak about a stable outlook generally that means an equilibrium of ratings up and down over the next 12 months but we’re still very cognizant of some of the business pressures for the sector,” she said, going on to deliver some insights about pricing adequacy, reserve adequacy, and capital supporting the ratings.
Among other things, she noted that price increases in the first quarter have not erased the need for additional rate in lines like commercial auto, excess casualty, large commercial property and professional liability, that reserve releases of $13 billion across the industry last year were higher than S&P expected, and that favorable loss cost trends for workers compensation seem “too good to be true” in the eyes of S&P analysts.
Specifically asked what could change S&P’s stable outlook for the P/C sector, she said that a single event is unlikely to prompt a revision.
“A few years ago, everyone thought that a 2017 loss event-size could change ratings. But you have to put it into context relative to capital redundancy. The industry is really sitting on a lot of capital redundancies,” she said, beginning to respond to the question.
“The best answer I could provide would be a confluence of events, where it’s not just a catastrophe event alone, but it could be significant adverse reserve development that could be partly driven by inflation, or even underpricing in a number of business lines. It could also be a change in risk perception,” she continued.
Going further, she stressed that strong capital is not the “be all” determinant for the highest rating levels. “From a company-by-company perspective, capital itself is no longer a differentiator for ratings. So, we may take more rating actions based on strategic decisions,” alluding to some moves in the first quarter. Earlier in the webinar, she specifically put “A” ratings for The Hanover Insurance Group and for Infinity Property & Casualty on credit watch negative. The Hanover’s announcement of strategic alternatives with respect to its London specialty unit Chaucer, and an announcement by Kemper (rated “A-minus”) of its intent to buy Infinity, prompted the rating actions, she said.
S&P may also take actions “based on operating performance—companies that really are outliers relative to the rest of the pack,” she said. The negative outlook on AIG seemed to fit in this category.
On a positive note, across the industry, Dolin-Benguigui noted that technological innovations will reshape P/C industry results in the future. “But that’s beyond our rating horizon of one year,” she said. “It could take 10 years to unfold.”