I think we're on. Good morning, everyone. With me now we've got Brian Duperreault, CEO of AIG. For those of you that don't know me, significantly less important member of this panel, Meyer Shields, KBW Equity Research. I want to kick off with sort of a broad question. Our hope for this session is to have significant interaction with the people in the room. If you've got a question, we do have a centralized microphone stand at the very least, and Freddy will also be taking the microphone around. If you've got a question, by all means, just signal and we'll get the mic to you to make sure that everyone can hear the questions. Let me start off with a big one, and that is, you've been at AIG for a while now. What's been done? How do you see things panning out?
Any surprises over the past year plus?
Well, yeah, I can't talk about it in days or weeks or months now. It's years, right? I've been there a year and three months, something like that. Well, I think it's panning out pretty well. I think the biggest indication I think of where we are is the kind of people who've come to the company. That was one of the things I was probably the most concerned about was could we attract talent back into the company? The company had been losing people. It was a net loser of talent for a number of years. Would we reverse that trend? Boy, I tell you've just got a great team. I'd match them against anybody, the people we've been able to put together.
I think that alone is probably the prime indicator of what's going to happen because you put great people in a situation at AIG where we have an enormous capability, still very good relationships with our clients and brokers, and it's got capabilities second to none. You put great people together with that, you got something. That's good. That's moving well. I think look at some of the other indicators. The reserves have been relatively stable. I think that's another indication of kind of getting to a point of building a base that you can grow from. It's a volatile business. We still suffer from some of that. We're trying to fix the volatility. The problem with the volatility is if you've got a good book of business, and it's volatile, the movement is just the predictability becomes more difficult, right?
You get big swings, even if it's a good book of business. If it's not a good book of business, and you're taking on large limits, it's even worse, right? We haven't had a lot of great businesses. We have a lot of great businesses, if you look at our underwriting results, they haven't been very good, the volatility just adds to it. We had to dampen that down, get that down so that you can actually see what's going on because you get 10 large losses. Was that bad underwriting? Was that just the luck of the draw? You wouldn't have seen them in the past because they're reinsured away.
Trying to get that stability back has been an important part of what we're doing, I think to some degree, making purchases that reduce the volatility means you've got premium going out the door. If you buy Excess of Loss, it's like when you buy insurance, you go, "Well, nothing happened. Did I get ripped off?" Well, you bought protection. It comes at a cost. Some of that's flowing through the business. Any surprises? Like I told you, I was surprised that we were able to get the people. I was surprised at the reaction of the customers. Well, it was a positive reaction. Let me take this thing off.
We know who you are.
You know who I am. What I mean by that is when I first showed up, we had been going through a re-underwriting process, that had been happening, we said we like this one day, we say we don't like it the next day. Actually, sometimes we said, "Well, wait, we were wrong about that. We actually do like it." We were confusing the hell out of the market. I was concerned that the market would just say, "I'll just go find somebody else." They couldn't, or they wouldn't. I spent a lot of time with the customers, particularly in the early days, I was universally, not astounded, but surprised at the positive reaction. They want AIG back. They want to do business with us. The brokers who are representing them feel the same way, leaning in.
That was, again, a very positive surprise. The negative surprise was the organization structure, which made no sense, and we weren't organized to win. We had to sort that all out. Sorting that all out took some time, but it also delayed, to some extent, getting the talent in because we didn't know where to put them. You got crazy structure. You come in, I did that for a few people, like Peter Zaffino. They come in, I'll sort it out, but we didn't want to make that the mantra. We said, "Look, let us sort out the organization structure." We say, "Look, when you come in, this is what you're going to do. This is the plan.
This is your mission, your place in the sun. That was a bit of a surprise that the organization structure was as odd as it was, but we sorted that out. Maybe that. I hope that's a long-winded answer, but there you go.
No, that's fine. We're looking for as much information as we can get.
Okay.
Where are we now in terms of Having structure reset, having the right people, there's always going to be some sort of attrition or change, but there's a difference between fixing something that needed to be repaired and just typical going concerns.
Yeah. I think it's execution now. We're in the execution phase. Structure's right, getting the right people in. They're adding. You bring good people in senior levels now it's the next level down, next level down. That's still building. We're still building there. It's execution, getting our expense levels where they need to be. We've got to do that. That's execution. We've got to continue to look at the way we not only take business in but lay off. We're still looking at our reinsurance structure because I think there's still some more work to be done there. That's execution. It's getting the rates when you need rates or reducing the limits or finding the right attachment point for this particular risk. All that is work in progress. We're getting there.
That's why I said I believe we will cross the line. I've said it. Certainly by year-end, we'll be in an underwriting profit position, which is a milestone. It is not the goal. It is a waypoint. It is an indication of movement, and that's why I put that marker down.
Right. There were two comments that came out on the second quarter call that I wanted to dig into a little more. The first is, as you said, underwriting profit by year-end.
Yes.
The second is maybe a little caution on loss trends. If you're underwriting profit by the end of the year, then I think we're fine. I was hoping you could talk a little bit more about those two aspects of what you're seeing as milestones.
The aspects being loss trends versus
Versus
underwriting profit?
Yes.
That's the constant battle in our business, isn't it? You're constantly. We're predicting the future, for heaven's sake. Who can do that precisely, right? You've got some reasonable expectation of what you think is going to happen, loss trends, et cetera. You've got to stay on top of it. If you take your eye off of that, then you lose ground because then you've got to make it up by getting more rate necessarily than you would've if you'd done it in a steadier way. Anyway, I think Peter did talk about loss trends on the call. Look, there is certainly, I think he said with the exception of comp, maybe we don't make exceptions to comp anymore, I don't know. There is some price movement, too, right? You've got loss trends.
The question is, are you keeping above the loss trends with our rates? That's what we were trying to get across, is there are some that are a little higher than others, and don't ask me about all that stuff. You have to go by line of business, line of business. If it's excess, it's more extreme. You've got to be more rate conscious. You also have to be conscious about where you're attaching, because sometimes if you're not attaching high enough, it's like catching a falling knife. There's not enough rate in the world, right? You got to keep above it. That's equivalent of a rate, but you're staying above the loss activity. If you stay within the loss activity, your rate requirements are very, very high. You've got to pick your spots. There's a lot of ways to construct a portfolio.
The long story short is we are doing the right thing there, whether it's attachment point or getting rate above loss trend, I think we're confident that we're moving in the right direction. That would, again, give me the reason to say that we'll get the loss ratios to where they need to be, and we also need to get the expense ratios where they need to be. That's a very important part of getting into a profitable position. If I look at our loss ratios versus our expense ratios, the expense ratios are more out of line with the industry than our loss ratios.
Okay. I would look at it from a price taker's perspective, and that means that that's where you need to have most of the attention done. In other words, you're not going to dramatically change the industry's pricing levels.
Right.
It's an expense issue.
Right
which is something that you focused on.
Right
on the second quarter call.
Right. It's not a rate. I don't need to get rate. I need to fix the expenses.
Okay.
You know what I mean?
Yeah.
It takes less pressure off. The nicest thing about it from my point of view is I've got more degrees of freedom than maybe my counterparts do because I'm in more extreme positions. Expense ratio's too high. I can work on that. I don't have to get my underwriters to go crazy about price and risk. They can stay in the market, and we can still make an improvement. That's what's interesting.
Right. Again, I want to point out that we're welcoming questions from the floor as much as possible. We'll get the mic to Josh.
Hans, come on up.
Thanks. Brian, I think you're doing a good job with remaking the business for the long term, doing it the right way. I think some investors are frustrated with the perceived lack of progress in terms of getting the combined ratio down. I think you talked about some things that were working against that.
Yeah
In terms of reducing volatility. That costs money. The Swiss Re deal falling off, changing the mix. All those things are sort of headwinds. Reduced volatility is a good thing, but it's masking underlying improvement in the loss ratio. Is it possible for you to give us a sense for the magnitude of some of these volatility-reducing efforts and how much of a headwind that has been, and it's sort of offsetting the underlying improvement that you're seeing. Does any of that stuff go away? You're changing your reinsurance. Is this a permanent thing, or can you write smaller risks where you wouldn't need as much reinsurance going forward?
I'd love to write smaller risks where I wouldn't need as much reinsurance, but that's a whole new segment of business. Let's see if I can answer this question. Yeah. Can I quantify the actual effect of reducing the volatility? In terms of the cost to the company, that's a little bit harder to do. We've given you some indication, like the catastrophe program that we put in place for this year. Last year, we had $4 billion worth of cats, and we had basically no recovery. Now we go out and buy reinsurance of significance, and I think we said it moved a couple of points in the expected levels of catastrophe. That's an indication. That's a cost out.
If we didn't do it, you would see maybe a couple of points improvement, you left your company bare to having years where you could take $4 billion out of your book value, which is crazy. That's one indication. Some of the others would be proportionally the same, but the book of business wouldn't be as large, like the excess of loss program in Europe. That cost us, percentage-wise, a decent piece of the business, but it's kind of lost in the rounding error in terms of the whole. These are pockets of it. The volatility is interesting. You look at our investment income, it can be quite volatile. More volatile than I think I've been used to or others. All these investments have been good. They've been good book value builders. They can swing around a little bit.
The other thing I'd say about masking or improvement, it depends on the line of business, how soon those improvements show up and you can feel confident in them. Okay. I can believe all day long we're doing the right thing, and I do. I'm not going to wishfully think my loss ratio down until there's clear evidence that it's occurring. In casualty business, you have an excess of loss book. The worst one in the world and the best one in the world looks the same at the end of the first year you're writing that business. It takes a while. I can go fix it, but we have to say, okay, here's been the trends, here's what we've looked at. The actuaries have heard the story too many times, and they're going to say, "Okay, I hear you.
Let's see it all play out. If you're right, you're right." You're still going to put loss picks up there and reserve levels to be prudent. You have to be because it's volatile business, right? You can do all the right things and have just a year in the extreme because it's a range. You're not going to see the casualty business emerging quickly. It just doesn't happen that way. It's going to take us. Let us see how it builds, and it'll bleed out. The difference between, say, where we are and some of the peers is if they've got a better book of business, they were conservative five years ago. That stuff tends to get released. You're putting it up this year and releasing it from the back year. If you do that every time, kind of balances out. I'm building up.
I got nothing to release. You're not going to see that until a couple of years play out. That's another I'm not going to rush that, and I don't want to be in a position where we've got to pick reserves again because we declared victory too soon. I firmly believe we're doing that, and we'll see if it happens.
Okay. There's a question, I guess, at the end.
Hi. Thanks. Brian, I was hoping you could elaborate a little bit more on the comments about the expense ratio as far as maybe give us some examples or some detail of where specifically you're too high on expenses. Is it too many underwriters relative to premium? Is it an inefficient claims organization?
Yeah.
Is it too many middle managers?
Yeah
like blocking and tackling, purchasing and real estate type stuff? If the answer is it's all of them, maybe you get to highlight the one or two that are the biggest issues.
Yeah. Well, we've been adding to underwriting.
Yeah.
I wouldn't put a finger there. I'm not sure we had an efficient process around the underwriters. I don't think we were allowing them to operate properly because we had, I don't want to say checkers checking checkers, but we had a lot of overlay, control. If you have problems with your underwriting, the first thing to fix is the underwriting. You don't fix it by putting people above them to control them. We have a lot of that. We had inefficient processes. We still do, where things just have lots of manual intervention. It gets to a point where, yes, you can take 5% off, 10% off, but if you do it across the board, you haven't fixed the problem. What we're trying to do now is be much more specific about do you really need this?
You can build up, you can justify it in a, the company hasn't been well-run, so we need all these things, and you're not addressing the right problems. I wouldn't call it the underwriters. That's not a problem. Claims are okay. I'm not sure. By the way, the claims expenses show up in the loss side anyway, and we're addressing that. I think we're probably Yeah, we could do more work with our legal costs, which that'll show up in a different part of the loss rate. That'll show up in the loss ratio. It's much more around the administrative process of getting the business on the books, In some degree but not much, the decision-making around should I write this risk or not? It's all about the process around it. It's been that way for a long time.
I said this in my town halls. My legacy will not be I leave this place kind of the way it was when I left, right? We have to move ourselves into the modern world of how you do business in our industry. Much more efficient. I hope that helps you. By the way, it always involves people, doesn't it? Expenses tend to be people. We announced our restructuring charge. It takes a while for that to play out, right? It's going to play out for the next several months. There's no instant gratification. It's not going to fall a couple of points immediately. It stretches out. We'll get there before the end of the year. Okay.
Hi. On the Q2 call, you said you were quite pleased. I know Meyer touched on this a little bit. You said you were quite pleased with what our reserves were. How much further along are you on the review? Would you say you are still quite pleased?
I think we did 20%. We're doing the next cadre of them. I always like to emphasize, it's not like we don't look at the other 80. You look at all the reserves every quarter. There's ones that get intense work. You look at the others, if there's something wrong, apparently wrong with part of that 80, it would've been moved up. That's one indication. Work's ongoing. Wait till the end of the quarter.
I'm taking that as unch from Q2. Is that the right way to take it?
I said I was pleased with the process. I think that the way we go about it is the right way, you're constantly addressing emerging information, some positive, some negative, and you blend it all. I think the process is good. I think there's a conservatism now in place in the reserving process, which I was talking about earlier, about not declaring victory too soon. I'm not signaling any problem.
Okay, thanks.
Okay.
I have another one just regarding S&P. How would you characterize your interactions with them? If you can speak in terms of runway to achieve results that would maybe cause them to rethink how they look at your credit.
I don't think they're unique, but they want to see is an improvement taking place in the portfolio. What's the trend? You getting better? You getting worse? You never stand still, right? The relationships we have with S&P are all about where are we with that, how are we doing? I think we have a good relationship with them. I think they feel good about where we are as a company and the progress, the kind of changes we've made. They love the fact we take volatility out, buy more reinsurance. They're all happy with all that stuff.
Well, just a follow-up. What would cause that maybe not to be so good is kind of the question.
Well, I guess if we start to go backwards, right? If all the changes that we said we were making didn't bear fruit, they wouldn't be happy. You wouldn't be happy, and nobody would be happy. They're not going to have something different than you would have in terms of what would make them unhappy.
Got it.
Yes. Got it.
Yeah. Hi. Thank you. Brian Duperreault, you said when you arrived, the organizational structure made no sense, I believe is what you said earlier. Could you talk about what did you see, why did it not make sense, and how have you changed it? Thank you.
One of the things, I'll start with one statement. That is, I always say I left an international company with U.S. operations, and I came back to a U.S. company with international operations. It became much too U.S.-centric. Therefore, the international wasn't emphasized very much. We had countries divided between Life and Retirement and personal lines, which was a General Insurance book, was over with the life, even though there's no sales compatibility, but it's over there. We had countries that were reported up to the Life and Retirement group, and other countries that reported up to General Insurance. It was all General Insurance. Life and Retirement is basically a U.S. operation. I said, "Look, the personal lines belongs over here. International should stand on its own two feet. It's a unique thing." We had our large account business.
I'll give you another example. That's one weird thing I found. A large account business. This is the business that the Fortune 500 companies basically do, where they keep a lot of the risk themselves. Stuff goes into captives, high retentions. It's done as a package. Life, workers' comp, GL auto, all come together. There's a lot of credit with it. As an underwriter, there's a lot that's retained, and your basic exposure's excess. It's brought in as a unit. I said, "Okay. I want to talk to the guy running that." "We don't have anybody running that." I said, "No. Maybe I'm not speaking English. I want to talk to the guy running the large account business." "No." I said, "I can't even believe it.
I don't even know how you did it." It would come in, the broker would bring it in, "Here's the deal." Then it would get parceled out. The workers' comp guy would do the workers' comp, the auto lady would do the auto, then it would somehow magically come together. It was nutty. I still can't explain it. I brought these guys in that I've known for years that worked with me at AIG, then at ACE, and they came back, and we've constructed this thing, and it's going to be great. They got a great track record. Sorting that out, the guy came in. It was five pages of, "You can't believe this. We don't do this, and we don't do that." If you don't have a unit, you're not keeping up with your rates. The whole thing was crazy.
That's just another example. I had to put a whole large account unit back together again. Lexington. Lexington is a surplus lines company. For you guys that maybe you know this stuff and maybe you don't, but this is where it's not admitted, so the regular market says no to this book, this particular risk, and then it shows up in the Lexington or other non-admitted companies, and it's pretty quick stuff. You got to make a quick decision because it's been hanging around. The broker guy needs this now. I need it now. You got to get in. This is almost renewal. It's almost expiration date. We had it blended with guys that do normal, regular standard business, and it would go through this review process, and it would go up the line and down the line.
We'll do it three days too late. If it's still around three days later, it's no good. We were adversely selecting ourselves. You got to put a specialist group in, and plus, we were upsetting the brokers because surplus lines brokers are very powerful these days, and they don't like the admitted guys, and vice versa. You better recognize who's bringing you the business and don't stick your finger in their eye by saying, "Well, we're" Because they think we were trading against them. It's all crazy. How would you organize that way? Because you don't understand the business. That's three examples. I'll stop. I'm boring myself now.
I don't know. I think it's less boring. I like the way I wrote this, I'm going to read this from here.
He likes the way he wrote it.
I like the way I wrote it.
That's good. I can't wait to hear this.
We talk about self-graded exams all the time. Superficial hypothesis. You have the right people and underwriting processes in place by year-end 2018. 2019 risk selection should be as good as anyone else's, which means 2020 underwriting results should be as good as anyone else's. Setting aside what you mentioned before about past years' reserve redundancies at other companies, does that make sense? Is that how we can expect things to play out?
Well, that's a very interesting hypothesis, and how do I argue against that one? It's kind of hard to. You do mention a very important thing. This is accident year pegged and put up, right?
Right.
Versus calendar year, which is a blend of stuff going in and stuff going out. Yeah, I would say there, where would we not match our peers? Okay. It's a little bit like the statement about the reserve releases because I may still feel that our loss picks from a pricing point of view should remain more conservative until we can prove they're not. We may still put loss picks out for accident year 2019 that might be above our peers, even though we believe we're matching them just because the track record here is such that you don't want to rush that one too fast. Your argument's right, but I think in practical circumstances, if I said, okay, because you get underwriters and they say, "Okay, look, I know, Brian, that the results are not good. I know that. Look at me.
We've made all these changes. We don't do any of those dumb things anymore. We don't write that bad stuff. I don't have those lousy accounts." You go, "Okay, that's great." A year comes, and it's like there's no change because they did something new that was dumb. They didn't do the old dumb thing. They did something new that was dumb, right? Now we are putting really good people in, and I trust them, but I'm telling you just let it play out. You got to let it play out. If you're in a changing portfolio structure, right? You say, "This is the portfolio of the past, here's the portfolio of the current." Obviously, there's some changes in it, right?
The prediction of it versus that gets a little more complicated. You got rid of risks, and you raised rates, and you did these other things, you raised limits. I'm just saying, yes, you're right, technically, in prac- Give me a little time.
Okay. Fair enough. As always, if there are questions, please.
Yes. You started out talking about you wanted to reduce volatility of the business, best I understand, Validus is a pretty volatile company. Can you comment on how the acquisition will reduce volatility of your business and results?
Yeah.
How we're achieving that goal?
That's good. That's good.
It's a good opportunity to talk about that.
Good opportunity. By the way, Validus, they had an underwriting profit last year in the CAT. They reduced volatility. They were using the retro market. They're very good at what they do. I like businesses that have some extreme to them, provided you get paid for that. Provided you get paid for the extreme. You guys don't like it because it's volatile, it builds book value over time. You have one bad year, 10 great years, life is good, right? Validus has proven, its track record is excellent in being able to play in that game brilliantly, right? Where they continue to excel. That's why I want them in. We have other businesses where I was not convinced that we were getting paid for the volatility.
Like if you have a large property risk and you're saying, "Okay, well, I'll do $100 million," "Well, I'll do $500, I'll do $1 billion." The $500, extra $500, did you get price for that? Did you get value for that? I know you're getting volatility. Is the pricing there? At some point, maybe the risk reward isn't there. It's selective attack on the volatility where we don't think we're getting the price for it. That clear it up?
Well, sort of. I mean, just for me, I don't think the highs of the non-CAT years, the ROE was high enough. I mean, I think Validus' highs were 15%-16%. We go to years that you break even. Are the highs high enough for return over the cycle given what's going on in reinsurance?
Yeah. Well.
That's an opinion, I guess.
Yeah. I mean, I thought they did a good job in terms of the returns over time. We're entitled to our own opinion, right?
I want to jump in on that just really quickly before you go to your question. That is another element that Validus brings to AIG is AlphaCat.
Yeah.
The theoretical ability to assign different.
Yeah
capital to parts of the volatility within AIG. Can you talk about that a little?
Well, I think there's huge potential for the whole ILS market within our portfolio. I guess somebody else has made the same decision, right?
Seems like.
When you think about underwriting is, in its essence, it's looking at this risk and matching it with capital. This gives us just another capital to use to match it. We're risk originators, so you can kind of leap a little bit ahead into the future to say there should be ways where we can actually construct business which would be immediately matched.
That says the cost of capital, you're using it to your advantage because you're saying, as underwriters, I can find a cost of capital and match a risk with that, a cost of capital and match it with that. It gives you much more flexibility. Over time, I think this can be quite a useful tool. It does reduce volatility, and I think Validus has done a very good job of using their market presence. A piece of business comes in, and for them, it better fits the ILS market than their own. That's where it will go. I think it's a good tool, and I think you're going to see more of it, not less.
You mean at AIG or in industry-wide?
AIG, I think it's an indication of others who see the same thing.
Right. Okay. I'm sorry. I got in your way.
No problem. I'm wondering how the valuation of your stock impacts at all your thinking in terms of timing of M&A. You've been very clear with the Street that there are things that you, or capabilities you're looking for AIG. I'm just wondering, given where the valuation is today, how that can impact that timing.
Well, it's a limiting factor. I'd like to have a currency I could use in addition to cash. It's a limiting factor. It doesn't completely shut me down depending on what might be there, but you have to recognize it as a limiting factor. We bought Validus with cash. There's certain things that we can do that will fill in the portfolio, and don't have to be massive because it's usually something large where I'm going to use the stock anyway, right? It's limiting, but it hasn't stopped us from pursuing acquisitions, and we'll see where it goes. If the currency gets up, it gives me more degrees of freedom. It won't stop me from looking.
We've talked a fair amount so far. I'm sorry, was there a question there?
There's a question right here.
Right.
He wins. He wins. He gets to ask the question.
Brian, how do you think about the investment portfolio today, and what is it that you're really looking for it to achieve, and just what are some of your thoughts about it?
Well, I think you've seen, and I didn't initiate this, we reduced the hedge fund components of our investments. Remember, we've got two different animals to deal with here. We've got the Life, and that's a spread business in many ways, and you got to think about your investments along the lines of what you're taking in and what you're promising. You've got the General Insurance, which investments is an important part of it, but it doesn't turn on investments very much. In other words, I'm not sure I get credit for outsized earnings and investments in the General Insurance. The focus is all on combined ratios. I have to look at how we do the General Insurance a little differently than we do the Life. I'm still looking through that because we do have a viable investment.
It's good business, don't get me wrong. It builds value. It's horses for courses, I guess is the way to put it. You do want to match your assets and liabilities. In Gen, it's a little less important, relatively short durations, so it's a little less important. You think more about stability and consistency and predictability on the General Insurance side. That answer the question?
Yeah.
Good. Okay. We've talked a lot about internal issues. Obviously, one of the levers, one of the aspects of the AIG story is the distribution, and I would imagine you've got some goodwill with one in particular.
Yeah.
What role do broker relationships play as AIG continues on this path of improvement?
Well, our book, particularly the commercial book, is really driven by brokers. We do have some smaller brokerage business, but predominantly it's larger players. I think having been on the other side, you want to be a market, by the way, you want to be a market that they need you, not just you're there as a commodity play, right? You want to be in a position where they need to go to you, that if there's an RFP.
Two brokers competing against each other and are divvying up markets, you want to be one that they're fighting over. "I got to have AIG because I don't want to be frozen out and not get AIG and have them steal the march." We're in that position, which is interesting. We're a market where the broker really feels they need to be part of us. It's a very interesting business because it's still very personal. Particularly large account business, very personal. There are relationships. The broker's obviously not working for me, they're working for the client, as they should, but they're also trying to get stuff done. Working with somebody that they trust, that will not waste their time. There's a certainty to it. They're effective.
That's a big deal to a broker because a broker needs to get it done, and they just can't hang their hat on you, and then you disappoint them because you stretch it out, and then you say no, you said yes, then you say no, you waffle. This relationship thing, it's this three-way relationship, the client, the broker, us. Peter Zaffino says he goes to see clients now, and he says, "They like me. When I was working for them, they would just treat me one way. Now I'm a carrier, they like me so much more." It's a very interesting three-way kind of relationship that occurs. Again, I don't know if I mentioned this, the brokers were really surprising. Again, when we talk about early days, of really wanting to weigh in. They need a company that can get it done.
If you got a problem, they need a problem solver because anybody can place all the other stuff. It's that problem that they got to solve because they got to solve it. The client's expecting them to get whatever issue fixed. AIG has been that company for decades, and they want that company back, and they're doing everything they can to help us.
Okay. Just surveying to make sure. I see if there are questions in the room.
One aspect of fixing the casualty book, I know your predecessors worked a lot on isolating the 5% of the casualty book that maybe was responsible for the bulk of the reserve development. I wonder if that's a process that's ongoing or if it's something that's maybe it's not that simple when you're talking about these large accounts that have several product lines. While one line might not be profitable, the other lines more than make up for it.
Yeah. I think there's a little bit of that in that large account book that I mentioned, in that part where they have comp GL or auto. They tend to be driven by comp at the end of the day. I don't know. How do I answer that? I think the casualty book. It was just as much a property, by the way. Picking the right guys, it wasn't just casualty. In fact, I think the casualty guys might have been a little better than the property, actually, fixing the portfolio. I characterize it this way. Okay, this is classic portfolio management. You guys, portfolio managers, you're always looking at adding and subtracting. Things change, right? Companies look good one year, they don't look good the next. That's a constant thing in portfolio management. We have the same issue.
I have always believed that the most important thing in the portfolio was the risk itself. Less important was the price. You got a market-driven pricing process. You're not just going to beat the market by 10 points. I mean, the market gets to a certain price. The question is, are you putting the right business in the books, particularly where it's volatile? If you can select businesses that are above average, in other words, their loss costs are lower, but they're getting average rates, you win, right? The other way around. When I looked at what they were doing, I felt that they were spending too much time on the price and not enough time on who they were pricing. That 5% may look good, it could have actually been completely the opposite.
It had a high price because it deserved an even higher price. Another one could have had a low price, but it was actually priced by the market because it was a good risk, and it was sought after. If you don't put those two together, you can make a lot of mistakes. I felt we were getting adversely selected. Portfolio management is portfolio management. It's just, what's your philosophy around how to construct it? I have always felt the risk itself drives it first and foremost. You shouldn't write bad business. I don't care what the price is. There's an adage, every risk is writeable. It's just a question of price. I don't believe that. I don't believe that at all. There are businesses I don't want on the books.
There's not a price in the world to justify putting them on the books. We've changed the philosophy.
It's an interesting development over the course of the year. I'll backtrack a little bit. We were in Bermuda in May, it seemed like the one really hard line of business at the time was runoff.
Yeah.
We look at AIG, specifically we look at DSA Re and bada boom, you've got a runoff insurer.
Yeah
That now looks like it's going to be competing for business in, if we're right about inflecting loss cost, this should be a really hard line for the next couple of years. How are you thinking about that? What's the opportunity?
That's interesting. I have to say, I have never really sought, call it legacy here, right, runoff, as a market opportunity. To me, it was probably the dregs of the past, all isolated. It's hard to say, "Ooh, that looks good.
I'll give you the price then.
Why is it there in the first place? No, my thought process wasn't around let's get into the legacy business. We had legacy, and we wanted to create a legacy company in Bermuda where we would get really good capital advantages because it's a composite company. It gave us optionality. I didn't put it up to actually get in the business. What happened was as soon as we announced it, we had all these unsolicited offers to acquire parts of it, right? Or all of it. We decided to get together with Carlyle because I think we have similar philosophies about the business. We need to stand it up. If it's going to actually be an operation and take in new business, it's going to have to be stood up. It's going to have to have its own processes.
They should be separated from the processes of the Life and the Gen. We're working on that. That's going to take us some time. You saw the announcement. Once that occurs, let's look at the market then. Is it still a good market? I don't know. If it is, I guess I'd have to consider it as another leg to a stool. Look, I can tell you one thing. It's like death and taxes. Legacy is predictable. New business today is the next generation's legacy because it just isn't as good as you thought it was. There's always legacy being produced in our business. I do think it has legs in that regard. Do we want to get in that business? I don't know. It gives us the option.
Okay. I want to spend a little bit of time talking about stuff that's working at AIG.
Yeah. Let's do that.
Life and Retirement. How do those lines look? How do those businesses look?
Well, I think the one thing to really focus on with Life and Retirement is the diversity of our annuity capabilities. If you pick different kinds of annuities, there may be a company larger than us, but no one has the spread of capabilities, which then allows us to be in the one market that actually is favorable and reduce activities in the one that's losing favor, where you're just not as comfortable with the pricing. That, I think, and being very conservative, and these guys are quite conservative, I think it's a very nicely balanced portfolio. We do have some life. We do a little bit of international life. That portfolio of annuities, I think, is something that needs to be focused on.
We've done a couple of meetings where we bring people in to explain it because all of the dialogue is about General Insurance, and probably should be, given that's where the turnaround needs to take place. It's sort of unfair to them because they do a great job, so it's nice to put them in the spotlight.
We never talk about stuff that's working. That's one of our-
You never talk about it, right.
Right.
Kevin never gets a question.
True enough. In the same general topic, in Europe, there are a lot of insurance companies that are life and non-life. In the U.S., fewer, especially now that Hartford has fully divested its variable annuities. What are the upsides and downsides of having life and non-life?
You're a product of your education and training. It never really was even a question when I joined AIG. We had life and we had non-life. We had international and domestic. I wouldn't say it was all love and roses. There was some fights between the life and the gen in certain countries. The benefits of it were very clear. In capital management, diversification, investments, the capabilities that you would have as having life can bleed over into gen and gen into life. You get great capital management. We actually get a great benefit from a tax point of view, too. More importantly is the capital management that you get and the diversification of earnings. You can do life and do it badly. I don't think it's more complicated.
I got to tell you, I've got a guy, Kevin, who's just terrific as a leader of the Life and Retirement business. We probably should call it retirement and life because it's more retirement than life. By the way, the demographics of the world are definitely in our favor. If you think about your strong suit is retirement, not just here, but all over the world. It's business. It's got legs. It's got profitability. It's got balance, good return on its equity. Why wouldn't you want a part of the company? I never even thought about it.
Right.
It's just the way it is. I went to Japan. I ran Japan for a few years, life and gen, and it was beautiful.
Right. We didn't see that at Ace. Ace was overwhelmingly non-life.
No, they didn't have any Life today. I was trying to get Life part of ACE when I was there. I think he continues-
Right
to try to do that.
Okay. I want to make sure I'm not overlooking any questions in the room.
Given that you have the two sides kind of working differently, some going well, some a little bit more rehab and idiosyncratic to what you need to do, kind of going back to the question around M&A, how do we think about the next priority for M&A in terms of the different businesses? Do we want to spend more time fixing what needs to be fixed internally versus we got something doing really well, let it stand on its own two legs and continue or grow that more inorganically?
Well, I think you have to think growth. There are times when you grow inorganically and times when you can grow organically, and I think you got to be able to have the ability in both, right? Let's just start with that. We're fixing the Gen. It is a work in progress. It's execution time. I wouldn't do an acquisition that got in the way of that. It could be a great company, but if it creates kind of dislocations, we got to reorganize or we got 2 of this and 2 of that, and we only need one and all that, I would not do that. That kind of limits what I would do. Large commercial, probably wouldn't do it right now. Not until we have a solid base.
I don't like financial acquisitions anyway. I don't want to acquire a company I've got to fix. Because all it does is suck your resources away from either people doing really well over there and you're sucking them away, and then they take their eye off the ball on the stuff that was working. I hate financial acquisitions. I don't like acquisitions justified on synergies, where you just got to fire a bunch of people to make it work. There better be more than that to the acquisition story. Just continuing along these themes, if you look at AIG, we're global. We're in a lot of places. We do a lot of things, yet there's very large pockets of business. Then it drops off. We are very big in Japan. We've got a large U.K. operation. We do large commercial in the U.S.
We've got a large life operation in the U.S. We don't have Life and Retirement, basically, other than a little bit in the U.K., anywhere else in the world. I said the demographics globally are in our favor. I would look if I could, but it's not easy to find. If I could, I'd try to diversify the life business and make it a little bit more international. Validus was a good example of businesses that we didn't have. It didn't disrupt the commercial business. We weren't in Lloyd's. We didn't have a reinsurance operation. We didn't have an ILS operation. We didn't have a crop business. I could add those to the General Insurance without having any disruption. They stayed in their own place, doing their thing. Those are kind of my rules. That they better make you better.
Any acquisition better make you better. It either makes you better because you're not doing what they do or they've got better people or they got better systems or they got something better. I don't do acquisitions where I got to make them better.
One talking point I made a big deal of early on was that the second person you brought on board after Peter was Seraina.
Yeah.
Can you give some insight into what's going on at Blackboard?
Blackboard is in construction, right? We still got the in construction sign on it. What is the premise? The premise is that we can be better users of data and the analytics around it without completely replacing the underwriter. Okay? There is this thing, the machine's going to do everything. That's not the case because our business is idiosyncratic. Each risk is a little different. You might think there's some average price, you still got to triage. Underwriters, they're information hounds. They try to get as much information as they possibly can to make a good decision. You're constantly trying to get insight, particularly on how good the company is. Are they good managers? Are they worried about their own business? Then they'll worry about the risk around their own business, and they'll be a better insurance.
There's so much data out there that we're not using a lot of the stuff that we could use to make better decisions. The second thing is there's still decisions to be made, right? You still need underwriters to make the call. Do they need to make the call on 100% of the analysis? Blackboard says, no, they probably only need to be in play about 10% of the stuff. Can we make the underwriter 10x? Can we make the underwriter 10 times more efficient by triaging, by taking all the stuff that comes in and saying, "Okay, you don't have to worry about this. Here's the price. You don't have to worry about that. Here's the price. These will all be fine. Here is the thing you need to concentrate on. This is what makes this risk different than the others.
Spend time on it, get it right, The rest of it, don't worry about." Whereas the underwriter today will spend time on a lot of things, because you have to, that we could do better for them by giving them the answers and pointing them in the right direction. That's Blackboard. It's an interesting thing because it involves a different intake of data. It involves a different relationship with the producer, It involves a different organization structure within the company to do it right. We're working on it, I believe that it's going to be very successful. Seraina's an extremely good executive. She really is good. One of the concerns I had with Seraina, did she really want to do something this experimental? Because she's been used to running large organizations.
She's been in a number of companies, She's very good at that. She loves this because she loves the innovation side of it. The other thing is we've got a very good partner in a Two Sigma.
Who's a quant investment company that knows how to use data brilliantly to make good decisions. I said, "Okay, I want to take your genius and match it with our genius, Can we come up with a real interesting hybrid of an insurance company?" That's where we're going. Far, so good. That's all I can tell you.
Okay. I'll take it. Before I throw my last question out, I just want to see if there's anything in the room. I intentionally left this for last because I think.
Oh, the last question.
Oh, it's not a bad question. It's just about pricing, but I don't want it to be seen as the priority.
Okay.
What do we think in pricing?
Well, I think I talked a little bit about it before. We do look at loss trends and our ability to get price against that, and I'd say we're confident right now that we're getting price above trend.
Just about everywhere, but not everywhere, but just about everywhere. That's good. The second thing is the turnaround in our business is going to be at least as much affected by improvements in our expense ratio as it is about the pricing. I'm just not as dependent on the pricing for the turnaround because we got further to go than the other guys.
Right.
Okay? I think it gives you a degree of comfort, but we're pretty confident about where we are price to trend.
Okay. With that, you all join me in thanking Brian for a very informative-
Thank you. Thank you very much