By David Bull

Feb 12 - (The Insurer) - Based on the current $50bn top-end estimate for industry losses from the California wildfires, AIG chairman and CEO Peter Zaffino has said that 2025 has the potential for insured catastrophe losses to exceed $200bn, which could “recalibrate the entire industry”.

The executive was talking to analysts on the carrier’s Q4 and full-year earnings call on Wednesday after it reported adjusted after-tax income per share of $1.30, ahead of the Wall Street consensus forecast of $1.24.

In its earnings release, AIG had disclosed that its expected net loss from the recent wildfires is around $500mn before reinstatement premiums.

On the call, Zaffino highlighted the escalation of industry losses from natural catastrophes in recent years, including specifically from wildfires, at a time when attachment points on cat programs have been rising for most primary carriers, which has altered the distribution of losses between insurers and reinsurers.

He observed that the average annual insured loss from 2000 to 2024 was around $4bn globally from wildfires, of which $3.5bn stemmed from the US.

But over the last 10 years that annual average has roughly doubled to around $8bn, with $7.4bn occurring in the US.

Zaffino noted that current industry insured loss estimates for the California wildfires are coalescing around $40bn, with some estimates from “credible catastrophe experts” reaching as high as $50bn.

However, with economic losses estimated to be in excess of $250bn, there is a protection gap of as much as 80 percent – in contrast to the top 10 largest insured cat events on record, for which insurance typically covered 40 to 50 percent of the economic loss.

“The California wildfires demonstrate the increased loss from secondary perils and the magnitude of tail events that are not captured well in modelling,” said Zaffino.

“In a month with one of the lowest model probabilities of loss, the California wildfires alone would make the first quarter of 2025 the second most costly first quarter for natural catastrophes on record,” he continued.

The AIG chief noted that 15 years ago, adjusted for inflation, $100bn was viewed as the “benchmark” for an outsized cat year.

“But with the last eight years averaging more than $140bn, this thinking is clearly outdated,” he added.

Zaffino said that taking the upper-end California wildfire loss pick of $50bn and adding the average annual insured loss for the past eight years with the assumption of an active but not abnormal wind season, “2025 could be a year of more than $200bn of insured catastrophe losses. This could recalibrate the entire industry”.

Increased industry retentions

AIG renewed its core commercial North America cat tower at 1 January, keeping its retention unchanged in nominal terms at $500mn for the third consecutive year, despite growth in its underlying portfolio, according to Zaffino.

He revealed the carrier was also able to expand coverage and maintain its core international occurrence attachments and renew its dedicated tower for high-net-worth $(HNW)$ business with an attachment point of $200mn.

It also improved its $500mn of aggregate protection by reducing the annual aggregate deductible for North America, creating a specific non-peak section and expanding coverage for its HNW portfolio.

Zaffino said that overall for North America, depending on loss distribution, AIG’s modelled net loss exposure including reinstatement premiums is in line with 2024, while its second- and third-event exposure is “materially lower” following the renewal.

But the executive also commented on increased retentions overall in the primary insurance industry.

He cited an Aon study that revealed that over the past 10 years retentions have risen significantly around the world, with US attachment points on average increasing by 280 percent.

“With the increased retention and increased catastrophe activity, much more of the risk is now being retained by insurance companies. In 2023 and 2024, primary insurance carriers are estimated to retain approximately 90 percent of the insured loss from natural catastrophes, with the reinsurance industry absorbing 10 percent,” Zaffino observed.

"This is in contrast with the period prior to 2023, when reinsurers would typically share a significantly higher proportion of insured loss with the distribution of losses between insurers and reinsurers at approximately 50:50 on average,” he added.

“Meanwhile, AIG is focused on maintaining lower excess of loss attachment points, including meaningful aggregate coverage to manage frequency of loss tailored to our geographic exposure and to the type of perils that we are exposed [to],” the executive commented.

Zaffino also highlighted moves AIG has made since 2022 to reduce its overall California exposure.

“This decision, coupled with our 2025 reinsurance structure, has effectively reduced our exposure such that the expected loss to AIG from the recent wildfires is approximately $500mn, before reinstatements and barring any unforeseen additional developments,” he continued.

Successful casualty renewal and Lloyd’s launch

Zaffino provided further details of AIG’s recent reinsurance renewal cycle, as well as the 1 January launch of its dedicated reinsurance syndicate at Lloyd’s backed by Blackstone.

For its major proportional treaties, he said the insurer was able to improve or maintain its ceding commission levels, which was a “strong recognition of our underwriting expertise and our position as a market leader across multiple classes”.

He also revealed that the spun-off Private Client Select MGU for HNW business had been “validated” with the addition of five of the “leading underwriting companies in the world” taking a 30 percent quota share of its homeowners and auto portfolios.

Meanwhile, the executive said casualty renewals had been more orderly for companies that have strong underwriting portfolios.

“We were pleased with the successful renewal of our core casualty treaties at favourable terms. This renewal cycle again signals the strong external industry recognition that AIG continues to be a leader in the casualty market.

“We remain optimistic on the outlook for our casualty portfolio and see considerable opportunities ahead while being cautious and very focused on maintaining our high underwriting standards,” he said.

Commenting on the Blackstone partnership on the Lloyd’s reinsurance syndicate, Zaffino described it as an example of how “insurance risk can be directly connected to sophisticated investors to generate attractive returns for both parties”.

“The syndicate provides AIG with a long-term meaningful reinsurance partner and an additional source of fee income,” he said, adding that Blackstone has access to a “high quality, well-diversified underwriting portfolio” by taking a “sizeable” participation on the majority of AIG’s outward reinsurance treaties at market terms.