Analysts are busy dissecting AIG's recent earnings call (AIG Q1 2024 Earnings Call Transcript), focusing on share buybacks, Corebridge deconsolidation, and the performance of specific lines like casualty and financial lines. But hidden within Peter Zaffino's words lies a revelation, a strategic maneuver that could redefine AIG's position in the property catastrophe reinsurance market and unleash a torrent of earnings potential.

While meticulously outlining AIG's successful January 1 reinsurance renewals, Zaffino casually dropped a bombshell: AIG has the potential, and perhaps the risk appetite, to significantly increase its net retention on its catastrophe program post-Corebridge deconsolidation. He even provided a tantalizing glimpse of this potential by calculating the impact of raising their catastrophe attachment point to $500 million worldwide. This seemingly innocuous detail reveals a strategic depth that most have missed.

AIG currently boasts the lowest attachment point in its peer group for property catastrophe reinsurance. This means they cede a larger portion of their risk to reinsurers at a lower threshold than their competitors. This conservative approach has served them well during a period of heightened uncertainty and volatility in the market, characterized by record-setting catastrophe losses.

But Zaffino's comment hints at a shift in strategy, a calculated gamble. As AIG sheds the weight of Corebridge, its balance sheet will be freed, unleashing significant capital flexibility. This newfound freedom, combined with a demonstrably improved gross underwriting portfolio, allows AIG to entertain retaining more risk on its own books.

The numbers speak for themselves. Zaffino revealed that raising the catastrophe attachment point to $500 million would have resulted in a 15% increase in Commercial net premiums written in the first quarter alone. This translates to a significant increase in potential underwriting profit, especially given the favorable pricing environment in the property catastrophe market.

The potential financial impact is staggering. If AIG were to raise its attachment point across its entire global portfolio, we could witness a dramatic surge in net premiums written, potentially adding billions to its top line. This would translate to a substantial boost in earnings, propelling AIG towards its ambitious 10% plus ROCE target and potentially beyond.

This strategic shift is not without its risks. Retaining more catastrophe risk exposes AIG to greater earnings volatility, particularly during active catastrophe seasons. However, Zaffino's confidence in AIG's "terrific gross portfolio" suggests a belief that the potential rewards outweigh the risks.

AIG's conservative approach to reinsurance purchasing in recent years has been a testament to Zaffino's disciplined leadership. But with the Corebridge deconsolidation looming, we're witnessing a bold, calculated move to leverage AIG's strengths and capitalize on a unique market opportunity.

The sleeping giant of property catastrophe reinsurance is awakening. And as AIG sheds its shackles and embraces greater net retention, the market should brace itself for a new force, a force capable of reshaping the competitive landscape and delivering unprecedented value to AIG shareholders.

Hypotheses and Potential Impact

"Hypothesis 1: AIG will raise its property catastrophe attachment point to $500 million worldwide in 2025. Potential Impact: Based on Q1 2024 data, this could result in a 15% increase in Commercial net premiums written, potentially adding billions to AIG's top line."

"Hypothesis 2: AIG's strong gross underwriting portfolio will enable it to absorb increased catastrophe losses without sacrificing its sub-90 combined ratio target. Potential Impact: This would translate to a significant increase in underwriting profit, potentially exceeding $1 billion annually."

"Hypothesis 3: AIG's increased net retention will make it a more attractive partner for reinsurers, leading to improved ceding commissions and terms. Potential Impact: This could further enhance AIG's underwriting profitability and reduce its overall cost of reinsurance."

Projected Impact on Net Premiums Written

The following chart illustrates the potential impact of AIG raising its catastrophe attachment point on Commercial Net Premiums Written.

"Fun Fact: AIG, founded in 1919 in Shanghai, China, initially focused on selling insurance to American businesses operating in the Far East. It quickly expanded its reach, becoming a global insurance powerhouse and a symbol of American financial strength."