American International Group executives see an improving future for pricing in the insurance industry, with rates increasing or stabilizing across the board.
The observations came during an analyst's meeting with executives of the New York-based AIG Domestic Brokerage Group (DBG) yesterday.
Kristian P. Moor, executive vice president for DBG AIG, said rates are seeing improvement with firming on property risks and increases on catastrophe prone business.
He said casualty rates are stable from a decrease of about 5 percent to an increase to about 5 percent. On AIG's casualty book, he said rates to date are down 3 percent. Terms and conditions are holding, he added, with the carrier getting the price it feels the risk should be underwritten for.
Discussing specific facets of the business, Kevin H. Kelley, chairman and chief executive officer of Lexington Insurance Co., the surplus lines insurer for AIG, explained the carrier will remain profitable by reducing its exposure in catastrophe prone areas, increasing deductibles, and tightening valuations.
The carrier has reduced its catastrophe exposure in sections of Florida, Texas and California, and will look to reduce similar exposures in sections of New Orleans and Hawaii in the future, he said.
The recent losses for the industry along the Gulf Coast has had a sobering impact on AIG, as it reassess its risk exposure. As a result, if the industry went through another loss event similar to losses in 2004 of around $27 billion AIG's property business would make a profit, Mr. Kelley said.
To be profitable, he said the company has pushed wind deductibles up to 5 percent of total insured value from 2 percent or less before Katrina. It is imposing flood deductibles up to 5 percent of total insured value, up from 2 to 3 percent. It is tightening valuations and increasing other deductibles to improve underwriting on flood, wind and earthquake risks.
The company, in a clarification issued after the conference, said it is also reducing net coverage on wind and earthquake by 20 to 25 percent in catastrophe areas.
Lexington is also looking to diversify its property portfolio by writing more than just catastrophe risks and balancing it with other lines including builders risk, home foreign, and excess product business.
"What we are trying to do is leverage our capacity that we do underwrite in the marketplace for maximum advantage in our property portfolio," he said.
Lexington sees "very, very strong rate opportunity for '06," said Mr. Kelley.
He said the insurer has negotiated a quota share reinsurance treaty (a set percentage of risk and premium), with no limitations or reinstatements on the quota share, which should help it with catastrophe losses.
On current market conditions, he said rates are continuing to tighten. Lexington is seeing rates up 10 to 25 percent on non-catastrophe and 30 percent on catastrophe exposure. Primary layers are being condensed and are shrinking on layer programs, and there no markets coming to help with the shortages.
"We see market momentum continuing to build," said Mr. Kelley.
Brian R. Meredith, an analyst with Bank of America, in an analyst's note, called AIG's assessment of the business upbeat and that Bank of America was keeping its "Buy" recommendation of the stock.
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