Wall Street Whispers: AIG Pricing Critics Persist

Updated to include information about Chartis lay-offs.

NEW YORK ( TheStreet) -- The he-said, she-said over American International Group's ( AIG) premium pricing hasn't gone away, but seems less credible than it did a couple of years ago.

These days, it seems, AIG may simply be doing what any competitor would do: Be competitive.

Claims that AIG was aggressive on pricing -- particularly in its property and casualty (P&C) business, now called Chartis -- pre-date the company's bailout in September 2008. But its ward-of-the-state status seemed to turn sour grapes into a legitimate concern.

Executives at competitors like Liberty Mutual ( LMG), Chubb ( CB) and Ace ( ACE) were soon launching attacks - calling AIG's business practices "stupid" and "irresponsible" in quarterly conference calls. While they had to tap the market for funding in difficult times and focus on returns for shareholders throughout the crisis, AIG had an enviable position: Government backing and a stock that was not much more than a playground for speculators.

Underpricing in the insurance industry often comes during times of so-called "soft markets," or when lack of demand forces carriers to cut their premium in order to maintain or gain market share. The danger comes if the premium the insurer charges will not pay for the risk it is taking, creating an "underwriting loss" that could threaten its balance sheet.

The widespread criticism led to an investigation by the Government Accountability Office. While the G.A.O. didn't find enough evidence of atypical, widespread undercutting on AIG's part to pin any blame, it also didn't give the insurer a clean bill.

"We have not drawn any final conclusions about how the assistance has impacted the overall competitiveness of the commercial property/casualty market," Orice M. Williams, the agency's director of financial markets and community investment, told Congress in March.

The uncertain conclusion has left the door wide open to more criticism. But AIG's answer all along has essentially been: Boo-hoo.

"Chartis' pricing has been consistent with the market, and in fact, we have performed significantly better than most industry measures," a spokeswoman said in response to questions from TheStreet. "This is a direct result of our underwriting discipline. We refuse to follow pricing to unacceptable levels of return."

Company insiders and some analysts also point out that, if AIG were stealing so much business, its premiums would probably be faring a little better.

Chartis' results have been showing the same trend lines as competitors' for quite awhile. Last quarter, its premiums rose 7% but that was largely due to the acquisition of Fuji Fire & Marine Insurance Co. Chartis' U.S. premiums dropped 4% -- the biggest decline in a year. On Wednesday, the company said it would lay off 34,000 employees, or 2% of its workforce, "to reflect our business objectives."
AIG
AIG CEO Robert Benmosche

In a recorded statement along with the results, CEO Bob Benmosche was careful to note that Chartis maintained "price discipline where the market rates are unsatisfactory." Chartis CFO Robert Schimek has similarly brushed off suggestions that the company is desperate for business. At a conference last year, he asserted that Chartis "has walked away from premium" when the client didn't fit the bill.

Many argue that premiums don't tell you the whole story.

For instance, there has been surprising strength in the personal line business - despite fewer homes, new cars and new businesses to insure, says one analyst that collects pricing data from major P&C insurers. On the commercial side, there's been less demand with pickier clientele.

"You can't delink the pricing and unit pieces that make up the premium," the analyst said, who declined to be identified in order to protect client relationships. "Right now, it's a soft market for commercial property-casualty lines. It's been an OK market for personal lines and it's been moving around on the annuities and life insurance side."

Similarly, the GAO said it faced "a number of challenges" in analyzing data on P&C premiums. Among those were "the unique, negotiated nature" of some policies, "subjective assumptions" in determining prices and the fact that losses may not occur for years, making it hard to determine whether premiums were "adequate."

Nonetheless, sources in the insurance industry are still calling foul.

Thomas Adams, a lawyer who consults with financial-services firms, says insurance clients haven't stopped complaining about AIG's pricing schemes.

"I've come in contact some people with deep knowledge of AIG's current business and structures," says Adams. "Regarding the pricing, these folks made a compelling argument that, thanks to an effective subsidy from the Fed, AIG is able to undercut their competitors to get more business. I don't know if the Fed and Treasury are complicit in this or not, but perhaps the hope is that if AIG can get more business it can grow its way out of its problems."

When such criticism was lodged against the insurance giant in the dark days of 2008 and 2009, it carried more weight . But in interviews with TheStreet this and last week, consultants, data analysts or financial advisers have indicated that AIG isn't being devious, it's just being competitive.

"From what I've seen on AIG, they're very, very aggressive and I think there are reasons for that," says Dan Weedin, who advises clients on insurance providers at Toro Consulting. "No. 1, they took such a hit a couple years ago. They lost business; they lost people who were working for them; they went through the whole rebranding - with 'Chartis' and all that. Now they've got to bring in business; they've got to replace what they lost."

Weedin says AIG has been aiming big. The insurer has gotten aggressive on acquiring and keeping big, corporate P&C accounts whose pockets run deep. But it's inclined to sidestep small-to-mid-sized P&C players if the price doesn't make sense for the size of the relationship.

Weedin explains that small-to-medium sized firms may only be paying $50,000 a year in premiums, while big corporate accounts can deliver $5 million a year. Several factors go into figuring out the price-to-risk-premium for a particular client - from its claim history to its line of business. But the bigger the company, the more opportunities to build out the relationship. And the bigger the overall revenue figure, the more wiggle room an insurer has to offer a discount or value-added perks.

"You can be pretty creative," says Weedin.

Indeed, in July, Chubb Chief Operating Officer John Degnan said that in some "large property accounts," competitors had stolen business by offering "double and even triple" the traditional limits for flood and earthquake insurance without raising premiums for the added coverage.

If AIG is, indeed, targeting big game with low rates and added perks, it wouldn't be the first time.

Adams, the lawyer, himself came up against AIG's bidding wars himself as a managing director at recently-bankrupted mortgage-bond insurer Ambac ( ABK) as well as Financial Guaranty Insurance Co. during the boom years. Even then, Adams says, AIG "always won and always had much lower pricing."

Joseph Padduda, a former AIG executive who is now principal of managed-care consulting firm Health Strategy Associates, has also heard that AIG has been "very aggressive" in trying to get new business in areas that seem attractive. He says it's "reminiscent of the 'old' AIG that was very good at identifying niches and selling into them."

But those moves certainly aren't occurring across the board.

For instance, Adam Sherman, who helps individuals select insurance policies at Firstrust Financial Resources, indicates that insurers - including AIG - have been behaving as one would expect in any competitive landscape. They've been cutting premiums on products with slack demand, such as term life insurance or annuities without a guaranteed return. But the industry has kept rates constant or raised prices on products where demand has remained resilient, such as whole life insurance or annuities with a minimum return-on-investment.

"I've really not seen very much going on with AIG's life portfolio very much this year," says Sherman. "I haven't noticed price wars."

Weedin indicates that even in the P&C market for large, corporate clients, insurers are picking their battles. If there's no competition, he estimates that rates could up 5% higher for renewals. If there's some competition but an established relationship between insurer and client, Weedin thinks rates "could go up a little bit," but not by much. If there's heavy competition for a key client, though, prices will go down and terms will get better.

"With those large, corporate clients, everyone is given good customer service because nobody wants to lose that business," says Weedin. "So, all things being equal, what's the differentiator? As of right now, it's price."

Therein lies the challenge for AIG and its competitors in the months ahead: With everyone chasing the same clients, it will be a challenge to stay on top without looking weak. Indications that AIG is desperate could once again raise questions about its viability and spook the very clients it's trying to capture and retain.

"The No. 1 thing that insurance companies are looking at is, they need to make acquisitions," says Weedin. "They need to get new clients in. They are being very aggressive - whether it's AIG, whether it's Firemans Fund, whether it's Travelers ( TRV). Insurance companies are being very aggressive - if they like the risk."

-- Written by Lauren Tara LaCapra in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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