EUR 850.00 For Business Accounts Only

Morningstar | AIG Has a Path to Mediocrity

The years since the financial crisis have shown that American International Group would have destroyed substantial value even if it had never written a single credit default swap, that noncore businesses needed to be shed, and that material issues in the firm's core operations needed to be addressed.We believe underwriting discipline is the key stewardship factor in the insurance industry, and precrisis management's focus on growth is the root cause of AIG's poor historical performance. The shift to focus on risk-adjusted returns and operational efficiency set a course in the opposite direction. We think that the strong underwriting background of the current CEO, Brian Duperreault, positions him to make progress on the one big issue AIG needs to resolve. We don't see any structural issues with AIG's business and think the franchise can earn adequate returns under capable management. The process will take time, but Duperreault has promised to return AIG to underwriting profitability in 2019.AIG's historical results have been plagued by adverse development from certain long-tail commercial casualty lines. AIG has posted adverse reserve development every year since 2008, while its peers have generally been posting favorable development due to low inflation. At the end of 2016, the company had to further boost reserves by $5.6 billion, a move that we believe led to Hancock's departure. In the past couple of years, adverse development has moved into recent accident years, suggesting the underwriting culture at AIG needs a fundamental fix. While AIG's history highlights how reserve development problems can be annoyingly persistent, and the company took another $800 million slug of adverse development in the third quarter of 2017, we believe AIG can move past this issue, given Duperreault's track record in building a successful underwriting culture at AIG's closest peer. Further, its recent reinsurance deal with Berkshire Hathaway helps to mitigate this risk going forward, as Berkshire will take 80% of reserve development charges in troubled lines. Resolving this issue should allow AIG to move its underwriting results to a level more in line with its peers.