AIG President and CEO Brian Duperreault faced analysts on Valentine’s Day looking both ahead and back. He elaborated on continuing steps taken to restore the struggling insurer to health, and what went colossally wrong there before he arrived in mid-2017.
The extra-long earnings conference call was held a day after American International Group released its Q4 results, which included a $622 million net loss, and a $1 billion underwriting loss for the insurer’s General Insurance arm. Investment income challenges and high catastrophe losses were largely to blame. Against that difficult backdrop, Duperreault remained insistent that his newly-strengthened executive team has positioned the insurer for a long-awaited rebound.
“I have done turnarounds throughout my career and remain committed to completing this one,” Duperreault told analysts. “I am more confident today than I was a year ago that AIG is on the right path. We continue to focus on making sustainable changes that will yield long-term profitable results.”
Once again, analysts focused on Duperreault’s pledge that he repeated throughout 2018 that the struggling General Insurance arm will reach an underwriting profit in 2019. Now that time has come, so this was a time for him to walk back that statement if things had changed. The AIG CEO remained insistent.
“I am reaffirming that we are entering 2019 expecting to make a [General Insurance] underwriting profit,” Duperreault said of the question he has been asked multiple times over the last year. Specifically, he expects a combined ratio below 100 for 2019. It was 115 in Q4, a spike caused, in part by higher catastrophe losses from Hurricane Michael and the California wildfires.
“A combined ratio below 100 is an inflection point. It is by no means where we expect to be longer-term,” Duperreault said, emphasizing that that threshold is the start of what will hopefully be longer-term improvement. “Crossing over to profitability for the first time in over a decade is an important milestone we will achieve in repositioning AIG for the future.”
The Unintended Consequences of “Going Large”
A lot of what Duperreault did to make his case that AIG has better days ahead was to focus on problems he found at the insurer after he arrived in May 2017. Some of the biggest challenges, he said, involved fallout from the “go large” strategy used by predecessors.
“While I had some understanding of the “go large” strategy before I arrived at AIG, I had not appreciated the extent of the issues it created or that it had been deployed throughout the company,” Duperreault said.
As the insurer refocused on insurance fundamentals rather than “principal capital management,” Duperreault recalled, there was a discovery of “unintended consequences” from the “go large” strategy that involved a vast extension of AIG’s risk appetites.
“It created outsized risk and volatility for AIG,” Duperreault said. “By expanding risk to encompass very large limits on gross and net balance, it added significant risk to [our] earnings pattern and balance sheet.” This was exacerbated, he said, by “certain risks being written on a multi-year basis.”
Duperreault said the company’s private client group within personal insurance became an “unexpected trouble area” in 2018. The issue here, he explained, involved geographic zones for the insurer having a “disproportionally large and dense accumulation” of insurance in catastrophe prone areas. Since then, he noted, the insurer has repositioned its portfolio in this area and reduced risk.
Also, Duperreault insisted that his team “has been digging through every aspect of General Insurance and it has made progress in transforming the business.”
As well, there has been a renewed focus on the company’s life and retirement arms, which Duperreault said had “suffered from inadequate investment in technology,” a practice that has changed since his arrival.
Duperreault said his strategy, in part, of focusing on core underwriting, a reduction of overly risky underwriting and restocking his executive team with industry stand-outs is largely in place. He added, however, that there is more to come.
“We’ve set the tone of what we want to do. The implementation is being done, risk by risk. As they come up for renewal you make adjustments and things bleed off,” Duperreault said.
He also offered a caveat as well, that the 2019 first quarter won’t necessarily be smooth sailing, despite AIG’s prediction of a General Insurance underwriting profit.
“The first quarter is going to be risker in terms of volatility than the fourth quarter,” Duperreault said. Still, he pointed out that the insurer will continue focusing on monitoring and managing its expenses with an eye on longer-term stabilization.
This “is a significant task for us over the next several years,” he said. “That journey is a little longer.”