AIG expects reduced volatility with Validus sale

American International Group Inc.’s sale of Validus Re, which it announced in May, will significantly reduce the volatility of the insurer’s business and cut its catastrophe exposure, AIG’s top executive said Wednesday while discussing the company’s second-quarter results.

AIG is also seeing continued growth as insurance rates continue to increase across most lines, said Peter Zaffino, chairman and CEO, on a call with analysts Wednesday.

The insurer announced the sale of Validus Reinsurance Ltd., a reinsurer it only bought in 2018, and AlphaCat Managers Ltd., an insurance-linked securities company, to RenaissanceRe Holdings Ltd. for about $3 billion in cash and stock.

The sale, which is expected to close in the fourth quarter, will continue AIG’s efforts to streamline its business and reduce volatility, Mr. Zaffino said.

“This business is capital intensive, and disproportionately contributes to AIG’s overall volatility,” he said.

AIG’s turnaround strategy, which dates to 2017 and included massive reductions in gross limits written, has been made harder with the retention of volatile reinsurance treaty business, he said.

After the sale, AIG’s worldwide net probable maximum loss at the one-in-250 years return period will reduce by 45%, Mr. Zaffino said. The insurer’s worldwide hurricane PML will reduce by 60%.

While reinsurance rates have increased significantly this year, catastrophe losses continue to exceed historical averages.

Among other structural changes in the second quarter, AIG completed the secondary offering of its life and retirement business, Corebridge Financial, and launched its Private Client Select managing general agency for wealthy personal lines customers.

AIG reported $1.49 billion in net income for the quarter, a 45.9% decrease from the same period last year. Much of the difference relates to the 2019 sale of its majority stake in runoff reinsurer Fortitude Group Holdings. It sold the business on a co-insurance basis.

On an adjusted basis, AIG reported a profit of $1.89 billion for the quarter, up 22.5%. Its core property/casualty division, general insurance, reported a $1.32 billion profit on an adjusted basis, up 4.9%.

AIG’s investment income increased 38.6% to $3.28 billion in the quarter.

Premium written also grew during the quarter, with gross written premium up 8.5% to $10.4 billion and net written premium up 9.8% to $7.54 billion.

Its North America commercial lines business reported $3.41 billion in net written premium, up 16.9%, and international commercial lines reported $2.22 billion, up 9.1%.

AIG’s combined ratio for the quarter worsened to 90.9%, compared with 87.4% in the prior-year period.

The insurer reported $250 million in catastrophe losses for the second quarter, compared with $121 million in the same period last year.

Insurance prices continued to rise in the second quarter and exposures increased 2%, Mr. Zaffino said.

For its North America commercial business, rates increased 8%, he said. The biggest increases were seen in its surplus lines business Lexington, where rates rose 23%, with wholesale property up more than 35%. Retail property was up 30%.

AIG continued to see pressure on financial lines – which includes directors and officers liability insurance – due to increased competition, Mr. Zaffino said.