Competitors Question AIG Moves
AIG denies accusation it’s slashing rates to retain business
By Douglas McLeod
November 20, 2008
Posted Nov. 24, 2008
NEW YORK—American International Group Inc. is increasingly the target of complaints from competitors that it is slashing rates to hold on to commercial property/casualty business, complaints the insurer maintains are unfounded.
Edmund F. Kelly, chairman, president and chief executive officer of Boston-based Liberty Mutual Group Inc., last week chided AIG during a conference call with analysts.
"AIG has intensified its efforts to increase its market share, or at least preserve it," Mr. Kelly said. "In fact, it's fair to say they are doing some very stupid things in the market."
Charging that AIG management is "paying little attention to actually what is going on in the trenches," Mr. Kelly added, "if this is not reined in, it could be very destabilizing for the market."
The remarks followed similar, but less pointed, comments by other insurer executives in their recent analyst conference calls.
Whether AIG is systematically cutting rates, or the extent to which this is happening, is unclear.
Some brokers say they have recently renewed casualty programs with AIG at rate reductions of 10% or more, but a representative of another large broker said its executives have seen little evidence of rate-cutting in casualty lines.
AIG denies the accusations.
"We are not sacrificing rate to retain market share," an AIG spokesman said in a statement. "In fact, since mid-September our U.S. commercial insurance operations have had several points of rate improvement compared to year-to-date results.
"It is possible that allegations of price-cutting are coming from markets frustrated by their inability to win significant market share from AIG," the spokesman said. "Fortunately, our market strengths and customer relationships were built over many years and are not easily replicated."
U.S. and Canadian commercial property/casualty pricing eroded by about 8.8% in the third quarter for AIG but started to improve modestly in mid-September, and AIG's client retention rate is normal, said John Q. Doyle, president and CEO of AIG Commercial Insurance.
Any effort by AIG to keep clients by reducing rates could ultimately create more problems for the beleaguered insurer, some observers say.
Despite AIG's denials, "I have heard stories to the contrary that AIG was, in fact, cutting prices in an attempt to retain customers," said Stewart Johnson, a portfolio manager with Stamford, Conn.-based investment bank Philo Smith & Co.
If that is the case, "it's very likely the underwriting results will deteriorate, and that puts downward pressure on the value of those businesses," Mr. Johnson said.
Comments about the turmoil at AIG and its pricing practices have recently accumulated in investor meetings and conference calls of rival insurers.
Several insurers reported sometimes dramatic increases in submissions from potential clients, and they suggested—without saying so directly—that the increases are related to financial stress at AIG and some other insurers.
Evan Greenberg, chairman and CEO of Switzerland-based ACE Ltd., told analysts that underwriting submissions were up more than 50% in October compared with the prior year, with large-account submissions up 80%.
He attributed that to "the weakness that is occurring with other insurers in terms of either rating downgrades…or those owned by the government today."
Chubb Corp. executives said they have seen a significant rise in submissions for professional liability and other commercial lines.
At the same time, several insurer executives have accused AIG of undercutting competitors' price, some without naming the insurer directly.
"When it comes to the one large player who is under stress, they are an outlier right now in the pricing environment today," ACE's Mr. Greenberg told analysts. "They are aggressively cutting pricing in an irresponsible way to maintain business. And it's worrisome."
Though Mr. Greenberg did not mention AIG specifically, he is widely understood to have been referring to the insurer.
"We are seeing much more aggressive pricing come from the carrier in order to hold onto their base of business," James S. Tisch, president and CEO of CNA Financial Corp. parent Loews Corp., said when asked about AIG during an investor meeting earlier this month.
Similarly, John J. Degnan, Chubb's vice chairman and chief operating officer, was asked about AIG's pricing behavior in an analyst conference call last month.
"Clearly, we have seen some erratic and inconsistent behavior on the part of a couple of our competitors," Mr. Degnan said. "Where pricing has gotten aggressive, it generally relates to the carrier's own renewal book, so it's clearly an attempt on their part to protect their own book rather than to grow the business."
Brokers report varying experiences.
One large broker representative, who requested anonymity, said the broker's casualty executives have seen no evidence of unusually large rate reductions from AIG.
However, a smaller consultant, who also requested anonymity, said he recently has seen clients renew AIG policies at double-digit rate reductions.
Neil C. Krauter, chairman and CEO of New York broker Krauter & Co., said he has seen AIG offer reductions averaging 10% on casualty business, similar to the cuts being offered by many insurers nine months ago.
"We haven't seen AIG slashing prices or looking to do ridiculously stupid deals," Mr. Krauter said.
"Clients are appreciating the fact that at least there is an alternative out there that is not looking to raise prices," he said.
Senior Editor Judy Greenwald contributed to this report.
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