AIG buys pre-wind season retro for Validus, XoL for Private Client Group: Zaffino

Speaking during the second-quarter earnings call for insurance giant AIG, the insurers’ CEO Peter Zaffino explained that the company took steps to bulk up its hurricane reinsurance and retrocessional protection in advance of the wind season beginning.

Discussing reinsurance renewals in general, CEO Zaffino said that at AIG, “We purchase our major reinsurance treaties at January 1.

“However, approximately 20% of our overall core reinsurance purchasing occurs in the second quarter, as we have a number of core mid-year renewals, predominantly in specialty classes, and they were all successfully placed.”

On top of this, the insurer also purchased some additional coverage for the hurricane season, focused on its Validus and Private Client Group books.

Zaffino said that, “In addition, we decided to purchase additional retrocessional protection for Validus Re, and a low excess-of-loss reinsurance placement for Private Client Group, ahead of the wind season.”

Which shows the insurers desire to minimise catastrophe losses into the two segments of its business that have been more affected by activity in recent years.

As a reminder, the Validus Re book is the one most shared with the AlphaCat Managers ILS operation, while the Private Client Group business, of higher-value property and high-net worth linked risks, is the one being shifted to third-party capital backing and a new MGA structure.

Also recall that the Validus book is being sold to RenaissanceRe in a deal expected to close later this year. AIG will want that book to hand over as cleanly as possible, as it could retain reserve exposure under the deal.

Commenting on the mid-year reinsurance market renewal conditions, Zaffino said, “Overall, the market exhibited more orderly behaviour during mid-year renewals, amidst more stable trading conditions compared to January 1.

“Reinsurer appetite for more discrete purchases increased somewhat, enabling a number of buyers to make up for shortfalls in coverage experienced at January 1.

“Overall, mid-year property cat pricing increased 25% to 35% year-over-year in the US, driven by Florida. This was the second year in a row of substantial rate increases.

“International renewals, driven by Australia and New Zealand, saw a price increases of 20% to 50%, with higher increases resulting from loss activity in the region.”

He went on to highlight the influence of catastrophe losses on AIG and the insurance industry in the first-half, saying “the majority of which were due to secondary perils.”

““A majority of insured losses continue to occur in the United States, highlighting the difficulty of managing volatility in the largest insurance market in the world,” Zaffino said.

“Against this challenging backdrop, and a strengthened reinsurance rating environment, we maintained our conservative risk appetite and continue to have one of the lowest peak peril net positions in the market, while managing our overall reinsurance spend.

“Additionally, through each of our renewals, we maintained all of our principal relationships with our key reinsurance partners.”

While AIG is exiting the reinsurance business with the pending sale of Validus to RenaissanceRe, the company expects to still benefit from exposure to the market.

Zaffino explained, “While we are exiting the assumed reinsurance business through the sale of Validus Re, our ownership of RenRe common stock, that we will receive as part of the purchase price consideration, coupled with our ability to invest up to $500 million in RenRe’s capital partner vehicles, will allow us to continue to participate and benefit from partnering with a world class reinsurer with less risk and capital requirements.”