AIG (NYSE:AIG) has been aggressively raising its property and casualty insurance rates in the U.S. this year. The company increased overall commercial rates by 4.6% in the U.S., with property-insurance prices rising by 8.8%. The company is also passing along more risk to reinsurers in the U.S. to shrink its exposure to large losses from catastrophes.  According to Peter Hancock, CEO of AIG’s property and casualty unit, the company still isn’t charging adequate prices for many types of coverage in the U.S. and is shrinking domestically while it expands overseas. Other insurers such as MetLife (NYSE:MET), Hartford Financial (NYSE:HIG), Prudential Financial (NYSE:PRU) and Manulife (NYSE:MFC) have also been raising rates this year after years of price decline.
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We have a price estimate of $19.72 on AIG’s stock, about 15% below the current market price.
Raising prices was essential for insurers since they have struggled to generate worthwhile returns on their investment portfolios. Before 2010, insurers could under-price a policy and make up some of the difference by earning investment income, but the current low interest rate environment leaves little room for the insurers to sell a policy at a discount. In addition, the huge claims from natural disasters in the past year also pressured insurers to raise prices.Notes: