AIG shares trade up after CEO targets 20%-plus operating EPS CAGR

By David Bull

March 31 - (The Insurer) - Shares in AIG traded up 3% on Monday morning after chairman and CEO Peter Zaffino highlighted its “unprecedented” improvement in underwriting profitability and issued guidance for the next three years that included a 20% or higher compound annual growth rate in operating earnings per share.

The guidance for 2025 to 2027 also included a 10% to 13% core operating return on equity and a general insurance expense ratio of below 30%.

Speaking at the carrier's investor day, Zaffino added that AIG is targeting a dividends per share CAGR of more than 10% for 2025 to 2026.

“I think that’s a lot of guidance. It’s ambitious, but we will achieve it,” said Zaffino, who has overseen a major turnaround at the insurer since joining in August 2017 and then taking the reins as CEO in 2021.

One driver of performance is expected to be new business growth, with the executive highlighting the major expansion that has taken place at wholesale-only E&S unit Lexington.

He said that the business can do better than keeping pace with the industry on a projected 10% CAGR basis in a market that has seen submission volumes surge.

“I want to challenge us to think differently. I want to think about 20%-plus,” he said.

This could be achieved by adopting a new way of doing business, he suggested, with better data ingestion and the use of emerging technologies such as large language models to get underwriters to quote and bind more over time.

At Lexington, new business submissions have increased from 30,000 in 2018 to 300,000 in 2024, with a bind-to-submit ratio that has reduced from 4% to 2%. New business premium has increased from $300 million to $1 billion, however.

AIG’s investor presentation laid out a roadmap for adopting technology that would enable the bind-to-submit ratio to increase to 6%, with the flow of new business submissions increasing to 500,000 a year by 2030, with 140,000 representing new premium, for total new business premium of $4 billion.

“I give Lexington as an example because it is the one that is right there in front of us, but there are a lot of other businesses within AIG that we’re going to be rolling this out and adopting it,” he said.

A NEW COMPANY

Speaking to investors, Zaffino pointed to some of the challenges he and the new management team faced coming into the business.

“The problems that existed were not hard to identify just because there were plenty. But the bigger ones were there was no underwriting culture. The underwriting discipline was not as strong as we would have liked. We had massive aggregation and exposure issues that needed to be dealt with.

“There was no end-to-end operational capabilities, and we had no insight really in our data. There was no consistency. And we had the highest expense ratio, in the bottom decile of all of our peers, with no real path to kind of get to a place where we would have a better expense ratio. And by the way, we hadn't visited south of a 100 combined ratio in a very, very long time,” he commented.

He said that the entire company needed to be restructured, with a need to “elevate the talent level”.

In slides, Zaffino illustrated the level of change in the AIG ranks, with 100% of his leadership team new and 80% of the company’s top 100 leaders also new.

Among underwriters, 67% of the 3,100 on staff are new, while 45% of AIG’s 4,200 claims professionals have arrived as part of the overhaul of recent years.

“What would I draw from that? We’re a new company. I mean we have the same name, but there’s so many differences that we want to outline today, and you can see the dramatic change,” he said.

Zaffino added that the combined ratio has improved by 28 percentage points from 121% in 2017, which comprised an 83% loss ratio and 38% expense ratio, to 93% in 2024.

That compared to an industry average of 103% in 2017 and 96% last year. He noted that AIG’s peer average improved from a 99% combined ratio to 94% over that timeframe, while the upper quartile of those peers improved from 96% to 93%.

He also showed a slide that demonstrated the transformation in underwriting performance after a 10-year period from 2008 to 2018 during which AIG reported a cumulative $33 billion underwriting loss.

In the last four years, AIG has delivered underwriting profits of $1.05 billion, $1.81 billion, $1.94 billion and $1.92 billion.

Zaffino described the change as “unprecedented, because no company would have survived that 10-year period”.

“We began the re-underwriting, the repositioning, reinsurance … and we started to bend the curve … and then it became a more profitable portfolio. And then we started to become more reliable, more consistent. And you can see over the last three years, we’ve averaged around $1.9 billion of underwriting profit,” he said.

Zaffino highlighted the major limit reduction at AIG as part of the re-underwriting of its book, with gross limits almost halving from $2.7 trillion in 2018 to $1.4 trillion as a result of the carrier’s reinsurance strategy and repositioning of its book.

“That’s been through excellent underwriting … and excellent underwriting is risk selection, limit deployment, attachment point, terms and conditions and pricing. And it’s largely in that order,” he said.

On catastrophe exposure, the changes mean that in 2017 16 points of AIG’s loss ratio came from cats, whereas in the last four years it has been 4 points to 5 points. Meanwhile, the carrier’s share of industry losses has gone down from around 3% to less than 1%.

In severe losses – single losses that are greater than $10 million – the impact has decreased by 70%.

REINSURANCE: ‘YOU HAVE TO KNOW WHAT YOU’RE DOING’

In its presentation to investors, AIG said its reinsurance philosophy is designed to reduce volatility and optimise its long-term position.

Zaffino added: “You have to know what you’re doing. Anybody can buy reinsurance. Anybody will sell reinsurance … but with Charlie Fry (we have) the best reinsurance buyer in the world. This is a very strategic part of our business, and it’s different.

“We start with balance sheet protection. What’s the financial impact? How do you reduce volatility and control it (so) it becomes more predictable? What’s the gross underwriting strategy? Because you need to know what you’re going to put into reinsurance. First, you need to know what you’re underwriting, so having that correlation is really important.”

The AIG CEO talked through a number of slides demonstrating the dramatic reduction in retentions over the last few years across property and casualty reinsurance structures, as well as the combination of vertical and sideways protections the insurer is able to call upon.

“This is built for vertical and horizontal and extreme tail. I think it’s very conservative … I think it’s incredibly responsive. But also you’ll now know why we’re confident in terms of large losses – if there are things that happen to go different than what’s modelled, we have unbelievable reinsurance protection,” he said.

As an example, he noted that the carrier’s North American excess casualty book has recorded 254% of cumulative rate increases, but gross limits have reduced by 80%, even as the portfolio almost doubled in size from a net written premium perspective from $243 million to $474 million.

“Part of that is we readjusted some of the reinsurance, but most of it is through excellent underwriting … Barbara Luck and her team driving outcomes and the business is performing exceptionally well.

“But you can just see not only do we have the confidence in the portfolio, the way it’s been underwritten, we also have a lot of reinsurance protection and a very thoughtful strategy in terms of how we’re going to position that business,” he said.