AIG has spent the best part of the past two decades pulling back from activities that helped bring it — and the global financial system — to the brink of collapse.
But when chief executive Peter Zaffino appeared on stage last year with Palantir’s Alex Karp, it was the latest signal that the century-old New York insurer was trying to take on more risk again.
“I can’t believe you’re willing to be seen in public with us,” joked Karp, who has courted controversy as the outspoken boss of the data intelligence company.
At its peak in 2000, before it helped bring down the US housing market with its risky financial bets on subprime mortgages, AIG was a $230bn financial services group operating in about 130 countries.
“Almost all of that has been stripped away,” said Paul Newsome, an analyst at Piper Sandler.
Zaffino has come to symbolise the rebirth of AIG — now a $46bn insurer mostly focused on the US — as a relatively conservative insurance carrier that is a fraction of its former size.
Since taking over in 2021 Zaffino has helped restore a lossmaking insurance portfolio to profitability, shaving roughly $1tn in risk exposure and selling almost all of the group’s stake in its life and asset management business.
However, at the event with Karp, Zaffino was promoting AIG’s hopes to use artificial intelligence to underwrite more risk, part of a broader effort to persuade investors he could deliver the final phase of AIG’s turnaround: growth.
AIG has “really been shrunk down massively”, said Newsome. “They need to add more business.”
But the re-risking pitch just became harder to make.
At its peak in 2000 AIG was a $230bn financial services group operating in about 130 countries © Brendan McDermid/Reuters
Zaffino on Tuesday announced that he would step down as chief executive in a move that sent AIG’s shares sliding 7 per cent. The company said he would be replaced by Eric Andersen, a longtime executive at broker Aon whom analysts described as experienced but relatively unknown.
One person familiar with Zaffino’s thinking said he planned to continue “setting the strategic course” in a new role as executive chair, while Andersen, who is to join as president before taking over as chief executive in June, would manage daily operations.
The appointment follows a tumultuous succession planning process at AIG.
The company in November cancelled the appointment of John Neal, the former chief executive of Lloyd’s of London, as president of AIG’s US group.
Neal, who had been widely seen as next in line for the chief executive role, faced an inquiry by Lloyd’s into possible governance failings connected to a close personal relationship with a woman appointed to the market’s executive committee.
AIG nearly collapsed in 2008 because of its multibillion-dollar bets in the credit default swaps market, but received a $185bn taxpayer bailout. Then, for more than a decade, it booked heavy losses on its insurance underwriting. Analysts said the company’s risk appetite remained too high in the decade after the financial crisis and that it did a poor job vetting clients.
AIG took “enormous amounts of risk on individual accounts, instead of selecting pieces of an account’s insurance risk”, said Meyer Shields, an analyst at KBW.
For example, it would boldly agree up to $1bn in insurance coverage for a single building, Shields said, rather than taking a slice of the risk — a strategy that made it popular with clients but led to deep losses.
Zaffino has steered a more conservative course and bought large amounts of reinsurance — coverage for insurers — to trim AIG’s volatility.
That brought losses under control, but the group has underperformed the broader US insurance sector since 2018, missing out on a highly profitable period.
The insurance industry has enjoyed a bull run of profits for the past two years, buoyed by price rises in 2023 and more restrictive terms and conditions that have helped carriers trim payouts.
AIG will be fighting to win more business as the property and casualty insurance sector enters a downturn, with prices now falling due to an influx of capital.
As part of its re-risking drive, AIG announced in October that it would buy stakes in speciality insurer Convex and its private equity owner Onex in a deal worth more than $2.7bn.
Convex, founded by London market veteran Stephen Catlin, specialises in niche lines of business such as cyber attacks, terrorism and credit default risk. Catlin told the FT that part of Convex’s appeal to AIG was its expertise in particularly complex or risky lines of business.
“Credit insurance is, in the current global geopolitical environment, quite a hairy risk to write,” he said, adding that political volatility had amplified default risk on some investment projects: “Who knows what [Vladimir] Putin or Xi [Jinping] or [Donald] Trump’s going to do?”
Convex’s credit insurance business includes so-called significant risk transfers, in which insurers agree to cover the default risk of loans for banks or private credit lenders, a practice with echoes of the credit default swaps that helped bring down AIG in 2008.
However, Shields said today’s credit insurance market was “nowhere near as unregulated, unsupervised, as it was back then”.
Former AIG chief executives Robert Willumstad and Martin Sullivan at a congressional hearing in October 2008 © Jay Mallin/ZUMA Press Wire via Reuters
AIG last year announced a $2bn deal for the rights to access the client base of reinsurer Everest, highlighting the challenges it faces in growing its business organically in a crowded market.
The company has also struck multiple reinsurance deals with Blackstone in which the alternative assets giant covers riskier portions of AIG’s insurance portfolio in exchange for a premium. The companies tapped Palantir to vet the portfolio of the most recent $300mn vehicle.
Zaffino said in September that AIG had pared back its investments in hedge fund strategies and alternative assets but now planned to grow in those areas.
“We were so conservative in terms of the overall percentage of asset allocation” to alternatives, he said, adding that the company saw potential profit in more illiquid investments, a strategy that was “not that complex”.
The market will be closely watching the group’s re-risking efforts under Andersen, according to analysts, given AIG’s brand and its reputation for clever innovation, alongside more dubious risk-taking.
“AIG may no longer be the 800-pound gorilla in the industry,” said Shields, but “it matters”.