AIG Update: Raising Property & Casualty Insurance Rates to Offset Tough Year

AIG: American International Group logo
American International Group

AIG (NYSE:AIG) has been aggressively raising its property and casualty insurance rates in the U.S. this year. The company┬áincreased 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. [1] According to Peter Hancock, CEO of AIG’s property and casualty unit, the company still┬áisn’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.

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  1. AIGs Chartis raising rates, Market Watch, Dec 7, 2011 []