Brian Duperreault, CEO of AIG. Brian rejoined AIG last year after a couple of stints at both building a company and fixing another company. Most of you do know that Brian was CEO of ACE during a tremendous time of growth and expansion for that company, then took over leadership of Marsh & McLennan when that company was what I would call leaderless before Brian joined, following the investigations into contingent commissions. Brian's vision for AIG is really beginning to take shape, and our timing is excellent today. AIG just announced fourth quarter results last week. Maybe I'm going to start with a kind of a bigger picture question. I just used the word Brian's vision. Give us a sense, Brian, your vision for the company.
Maybe the way to think about it would be, you're not where you want to be yet. You've said that. Where are you aiming towards? If in three years you're there.
Describe that company for me.
I said you gave me a big picture question. I didn't want that one, though. Okay. No, just kidding.
We'll definitely.
I always get the, "What's your vision?" I look at you like, "The CEO's got to have vision." Look, at AIG, it's still a massive organization. It's still an incredible powerhouse. It's a company that the brokers want to see back. It's a company that the clients want to see back. I tell our people that I'm not here to make it what it was, because that's not good enough. It's what it should've been all along, right? There are many good aspects of the company that we want to ensure continue, and some things that weren't good and we need to change. At its fundamentals, this company is an underwriter. It's a risk-taker. It's the go-to company for the large corporations of the world, or those who have specific problems, or the brokers who need help because they've got something they need to place.
We can't do everything, but if we're professional, it gives us an amazing opportunity to differentiate. If you're solving problems, you have a reason to exist, and if you're just a capacity play, you don't. We're not. I think we lost our way in our ability to do that problem-solving, whether it's because we lost some discipline or we lost people or we lost focus, whatever the reason was. The need is there. The market need is there. For us, we need to get back to being basically the underwriting company in the world. The best at what we do. That requires people, technology, constantly improving your analysis and your ability to get data and analyze it and all that good stuff it requires. Probably the most professional claims group in the world. Can we have that?
Well, there was a time we had it, and there's no reason why we can't reclaim that place. We're not that far away right now. I would just like to see that. Again, not what we were, because we didn't do certain things right. Maybe that was the way we siloed and didn't cooperate, et cetera. We're going to fix that piece.
When you came in, you looked at the operating structure of the company, you kind of determined it didn't make a lot of sense, you've made those changes.
Yeah.
Can you talk about the new structure and what that achieves for the company, or what you hope it will achieve for the company?
Well, first of all, it's a mixed bag because you had personal lines, which is a general insurance effort capability, and it was in with life and retirement. Not using life and retirement's balance sheets, capabilities, anything. There was no synergies there. It didn't make any sense. It really belonged over with commercial. We created general insurance and life and retirement. This isn't like rocket science, pretty basic stuff. We start with that. We were, this is Peter Zaffino in particular and I, overwhelmed about the interest in coming back to the company or joining the company. In other words, there was a whole question about, do we have the talent? By the way, there's great talent in the company, but you could always use more. We had a lot of people coming in saying, "Look, I want to come back.
I want to join," or, "I want to return," or whatever. We'd have to say, "Wait a second, hold that thought. Our structure doesn't make any sense. I don't know where to put you." We had a kind of a much more generalist approach to how the company was organized, and I'm a believer in specialization, differentiation, unit integrity. I like smaller units, not some big thing. I'm not an economy of scales guy. We had to redo the structure, particularly in the general insurance side, to create these positions of specialization and capability where you are presenting yourself to the market with something the market needs because you've got expertise in it. We've done that now. That now allows us to go find the people and fill in the holes where we have holes.
I think that if you look at the structure, and it's been out, I think and about, so you can see it. I call it maybe 1.0 or 1.5 or something like this. There'll be more iterations of that, but the underlying theme of specialization and unit integrity will continue.
When a new CEO comes into an insurance company, you get a sense there is a desire to put the past in the past. You did take some reserve charges mostly in the third quarter. Was that what the effort was? Did you make a conscious decision to say, "Let's be more conservative, let's wall off these reserves and move forward in a clean way?
Well, what I found was I got this question right from the beginning, and I said, "I think the process makes sense." I think there's a logic to it. One of the component parts of that is what is your underlying philosophy around the reserves? Do you have a margin of error in them? Do you expect that things can go wrong, right? I'm not sure that existed in the AIG of the past, but the one I showed up in had that philosophy. They believe in that. I didn't have to change the approach to how one posts reserves. You have to have some margin of error because it is an estimate and there's swings around that. I think that was good. That was a good start. How one analyzed the business, I think was fine, is fine.
There is to me an underlying theory here that isn't just reserving, right? It's making money. It's a whole lot easier to put reserves up on business that's actually profitable. Because if it's profitable, you know there's a ceiling, which is we're not profitable. You got move, it's much more contained. If you got business that's over the line, how high is up? Hard to say. If you're placing business with very large limits and therefore great volatility, that exacerbates bad results. They can get horrific. Part of the underlying approach to reserving is effective, say, use of reinsurance or reducing your gross lines to dampen volatility so you don't have the same kind of extreme estimates you got to make. If you've got a book that's $50 million of premium, you're putting $100 million limits out, and you got one claim.
First of all, you're not making any money anymore. Is there a second claim lurking out there? If it's $100 million, that's a big chunk of change you got to put up in a reserve. It makes you crazy trying to estimate these things if you're an actuary. Dampen the volatility, emphasize selection, get the profitability. That changes the whole way reserves are done, too. We're doing that as well. I think the process is fine, and I think the underlying approach in terms of conservatism is what I would've hoped to see and I did when I came in.
With the reserve, before you joined, we had gotten used to fourth quarter coming around, AIG takes the reserve in its U.S. commercial business. You took a sizable charge in the third quarter. There was still an expectation there'd be some cleanup in the fourth quarter, yet the company released reserves. My question to you is, did that surprise you when you went through that analysis?
First of all, I say, "Okay, what's the reserve analysis? What do we have?" Once you establish a philosophy that, look, we want to be conservative, not crazy, there's got to be some margin of error, where does my role then end? It ends about there, right? I'm not going to say, "Put that reserve up, take that one down." You can't have a process where the CEO is intervening and managing those things, right? I have to sit back and say, "Okay, how did you do it?" It's much more of the process. What were you guys thinking? How did you analyze this, what are your conclusions? If they're reasonable, they're reasonable. I think the conclusions are reasonable. Did that surprise me? No, I think you got reasonable people making reasonable assumptions. The conclusions are reasonable.
In that sense, no, it didn't surprise me at all.
It's just given the trends in that business over these several years.
Okay. You did your job.
Yeah. In the fourth quarter, you did add to the reserves in the commercial business internationally.
Yeah.
My sense is that business is really quite different than the U.S. business from a tail standpoint. Can you just talk to that?
Well, for sure, generally speaking, even the longer tail lines aren't as long. It is a shorter tail. Your actions come home to roost much sooner, good and bad. You saw that some of that development was in short tail business. Sorting that out is a little odd. Getting to the profitable position, which is more important to us, we still need to do a little bit more work. I think it had some characteristics that were similar, like the large line example I gave earlier. That was particularly true in Europe, where they were taking very large limits on small premium bases, and the ability to get that right is much more difficult with that kind of extreme. Cutting that back, I think we're in a good shape there, and you'll see a different reinsurance structure going forward. I'm very comfortable.
I wanted to move on to M&A. When a company like you says, "Hey, we're interested in M&A," I'm assuming every investment banker in the world will come to you. The question I have is, are you pleased with the opportunities you're seeing? You're seeing everything? Anything interesting?
By the way, you're absolutely right, it's usually the same companies on page two, same company on page four. I get most of the same ideas. Maybe there aren't that many new ideas in the world. The Validus one, nobody brought up to me. It helps to have some of your own ideas, too. I am trying to fill in white space, be strategic, but also with companies that I would like to associate with. After you buy them, you got to work with them, and if they're no good, it's a miserable life. You got to pick the right people. If you say, "Okay, look it, I want this, this, and this," and Validus, by the way, boy, if I could do more of those, I'd do them all day long. Great people, strategic for us, accretive.
It's geographically spread. They are really good at what they do. Boy, that ticks all the boxes. If I can find another one like that, I'd do it in a heartbeat.
On the Validus deal, on the fourth quarter call, you seemed to suggest, unless I misunderstood it, that the cash-on-cash return that you expect in that deal was somewhat below your cost of capital. How do you square that? From most investors' standpoint, the question, why'd you do the deal, then?
Well, I wouldn't characterize it exactly that way, so let's put it that way. I do think if you look at the cash returns given tax, et cetera, that it's quite beneficial to us. Lookit, an acquisition, if it is strategic, you're probably paying a fair price for it, and we paid it a fair price. It's definitely worth the money, and long term, it's going to return over and over again because these great people will be deployed to do even more for us. My first standard is it accretive? Is it strategic, and are you getting great people? That pays for itself. In all the deals I've ever done, if that was the standard, and you guys never ask me another word about it. I do a deal where it was financially good, not strategic, it just never works out.
It just never works out. I hate financial deals. I hate just synergies and you put two companies together, and you squeeze some expenses out, and what do you have? You got nothing. You got less expense, probably a mediocre outcome. That is my standard, and it always worked out for me, but this one is even better than the ones I've done before.
With Validus, you do pick up what I think is a very good Lloyd's platform. AIG had a Lloyd's business before, which they exited. Is this a very different kind of Lloyd's?
Want me to square that circle? No. I think if you look at some of the things that have occurred at AIG all go back to the crises and sales that were either forced upon us or we made for other reasons. In the case of the previous Lloyd's operation, we really didn't own them. We had, I think, a minority interest in them. We were more capital providers, and they were out doing. By the way, they were very good. By the time I arrived, the decision had been made to sell the remaining interest. I did not have a Lloyd's operation when I walked in the door. I think the decision that was made was fine. I think they were great companies, Ascot. They're really good people. In any case, we didn't have a Lloyd's operation.
I think we needed one, and this gave us a great way to get a Lloyd's operation in addition to all the other things that Validus has.
How do you feel about the reinsurance business? Only because reinsurance, while it's not.
It's been dying my whole career.
Yeah.
It's going down. Nobody needs it anymore. Lookit, it's not true. Is it a competitive market? Is it more competitive than, say, it was after Andrew or after Katrina, Rita, et cetera? Yeah, it's more competitive. The returns are a little bit less. They're still good. I remember I was sitting at Hamilton prior to joining AIG, looking at that market as a participant and understanding what the returns were and the characteristics. I think it's got legs, just in general. For us, there's a particular benefit. Lookit, it's a small percentage of our total, so we get the benefit of capital synergies. They have an ILS capability, which I wanted to have, and you can start one from scratch, but things starting from scratch carry a lot of risk. Here, they've got a great track record, brilliant people in it, running it.
For us, that business has its own, and that's a variation on reinsurance, but it has its own runway, maybe a separate runway. What I mean by that is, we're risk originators, so there are businesses that we can take on. Now, if you think of what underwriting is, underwriting is basically the skill set around evaluating a risk, pricing it, and placing it somewhere. Most of the time, we place it in our own balance sheet. We will place some of it in a reinsurance market. This is another tool to place it in an ILS market. Fundamentally, to me, the ILS market is not going away. It's a tool. Its capital return characteristics are different. That helps you then in your management of risk, you can find a home for a risk that you couldn't take on yourself.
You put it over there because it has a different risk characteristic. You can originate risk with the sole purpose of putting it in the ILS market. That, I think, is a future for us. We have to do it. It's more of a prediction than a reality, but I think it's got great legs there. If you look at reinsurance as a taker of risk, particularly cat risk, even though we're risk originators, we're not everywhere. We're not going to take risk in a place we're not in. How do you get a balanced portfolio? It's reinsurance, where you can exit large accumulations here, take in accumulations over there that balance your whole portfolio. It's a management tool for risk, and it's got its own return characteristics. It's not just cat. Reinsurance is a multifaceted industry. It's not just cat.
You could apply to insurance at some point, too.
Mm-hmm. That was a long answer. Sorry.
That's okay. That was helpful. The life insurance outside the U.S.
AIG had been a dominant player there. Obviously isn't any longer. You've kind of talked about it as a potential place to invest.
Right.
Is it feasible that you can rebuild that business?
Yeah, it's feasible. The probabilities are lower than general. It's hard to do greenfield life business. Time that it takes to get the returns, it's 7 years before you're starting to get your returns back. I don't have that patience. None of you guys don't have that patience. It almost forces one to acquire. Now, we've got great capabilities. Our retirement capabilities are, I say to everybody, the demographics, they're on our side. We can help people who are outliving their money find ways to just solve that problem. That problem exists everywhere, not just in the U.S. We do have the capability. Wouldn't it be nice to deploy it? Practically speaking, we'd have to acquire. Can I find one? Maybe, but maybe not. It is a white space. It would be a strategic initiative, but we're not crazy about it.
If I can't find a way to do it, we've got other places to deploy the capital. That's what's so good about having a diversified portfolio.
Pause for a second to see if there are questions in the audience. If you have a question, just raise your hand. We'll get a mic to you. Answers are very complete.
There you go.
I want to talk about ceded reinsurance. I guess one, your philosophy on buying reinsurance, but you've shared in the past, I'd love to hear it again. More specifically, what was behind the decision not to renew the Swiss Re quota share contract?
Well, it helps if I tell you my philosophy because it fits in, right? Well, first of all, reinsurance doesn't solve your gross problem. You've got to make money with your decision making and the business you're taking in. Reinsurance doesn't make unprofitable business profitable, right? We're not going to go out to do that. It does help on volatility. It does improve your predictiveness, right? The things you can do, it helps you tailor where you could take on a piece of business, and there are elements of it that you don't like, but there are others who may, or you don't have enough of it to make the risk return make any sense in the capital deployment. There are others who have a lot more of that. They take it from others.
This reinsurance, it's a way of tailoring your risks to fit your standards. It takes volatility out. It gives you eyes and ears on your business that are not yours. These are people independent of you who come in and say, "We've looked at your underwriting, it stinks, and you can't get it placed." Well, that tells you better go fix the underwriting. They give you insights. Your underwriting is good, but could be better over here. Here's the trends we're seeing generally. There's this market intelligence and specific commentary on your own underwriting capabilities. I think they're invaluable. It can be a capital management thing. Look, particularly if you're writing new business, you probably want to share that, hedge that risk, don't have it dominate. You want to balance it out.
Like in the cat business, it's a volatility question, we're getting reinsurance to fix the portfolio. I wanted to have a balanced portfolio, use reinsurance to balance your portfolio. We have tremendous amount of capital, it's not generally speaking, we're not buying it for capital reasons, not at AIG. I've had companies where I had to do it for capital reasons. Interesting. Just a variation on that, though. If you get into your portfolios, I talk about unit integrity, those units carry their own capital. We assign it to them. They don't think about the big balance sheet of AIG. They think about the thing they got and the capital they have, and they're more inclined to protect capital because it's smaller, more variation on a theme. There's a bit of that going on.
In the case of Swiss Re, we just looked at our needs, the benefits of the reinsurance. Would it make sense? Is it a reasonable trade for us? We just decided that in this particular case, it wasn't. Scott.
Prior to you re-arriving at the firm, the prior development would seem to have indicated that more of the underwriting kind of across the organization was being done on a relationship and sort of volume basis with less focus on profitability. Is that a fair statement? If it is a fair statement, are you past that? Have you changed that fully to the degree that you'd like to?
This failure had many fathers, this failure. Some of that was there. There were some other things going on. I will say that when I arrived, there wasn't a mentality around production at any cost. There was a recognition that portfolio management, understanding the construction of your portfolio and doing the right thing and picking the right business, that was all there. I'm not sure that it was completely thought out or deployed correctly, but at least they were in the right direction. What I interjected was to say, "Look, I want us to do that. Don't get me wrong. You have to understand your pricing, your overall pricing." When you think about underwriting, particularly at the levels that we're talking about, commercial underwriting, U.S., large business, all the decisions are discrete. There isn't some average price you get at Walmart, right?
This price is for this risk, and this risk is different than any other risk you're going to see this year, because they're all different. Is it a right price or is it right or wrong? Well, if nothing happens in that risk, it's a great price. If something happens in that risk, it still might be a great price. You have the portfolio price build up of discrete decisions. Where am I going with this? You're not going to win the game on trying to get a price alone because it's a competitive market. Okay? If you price down, you could ruin your whole portfolio. The first thing an underwriter has to do with this kind of underwriting is decide, is this a risk I want? Do I have a reasonable chance of success with this in my portfolio?
Is it a bad actor? A lot of times you'll find the portfolio isn't rife with bad business, but there's an element that's so bad that it destroys all the good work you did otherwise. Another way to put it is, if you can just eliminate some bad decisions, the overall portfolio can actually be quite good, even under the worst pricing conditions. Selection, selection. First thought of an underwriter. What we're doing now is saying, okay, go back to selectivity, back to having unit integrity and specialization so I have underwriters who can make that decision, who understand this particular business as well as anybody, and they can sort out, this is a good risk and this isn't. Okay? Then you overlay, because you still have to tell the underwriter, "Well, I hear you, pal.
You're making some great decisions, but your overall pricing is no good. You need a 10% across-the-board increase in this business, or we can't write it anymore." You get that by making a discrete decision one at a time. Maybe you get 12 there and five here, and maybe you go flat on this one because it's so damn good. You'd want it in your portfolio no matter what, right? It's not an easy game to play. It's very hard. That's why underwriting is so difficult, particularly at the high end. You've got to get the best guys possible with the best tools. Underwriting, it's the army. You get 10 people putting one soldier on the battlefield, right? You get 10 supports there. Same thing with underwriting. You need actuaries, you need claims people, administrative types. Everything helps you make this decision.
At the end of the day, it's that underwriter. When I said, you're the underwriter, it's that point. I need you, and you have to make the decision, and I'm going to hold you accountable, but you want to live that life that way, don't you? They go, "Yeah, they do." They want to be able to make the decisions, live with the consequences, but get the best tools possible. That's been the change happening in the company. I didn't start it, but I am certainly directing it now. Yeah.
Can you talk about casualty pricing, where we are now, and where it needs to be, if it needs to be to a certain level where you can make a reasonable underwriting profit?
Yeah. Well.
How hard would it be to get there?
Yeah. Well, if there's any business where your selection matters right now, it's casualty because there is price going up. I'm not sure it's much better than the loss cost trends, so you're treading water, which means, what does that mean? Will I get out of it? No, it means it's a lot harder to put your portfolio together because you got the wind, and so you got to manage your way through that. It's a little harder to put the portfolio together. You're probably not in growth for the risk that you can get. I say the industry probably needs to do more, certainly needs to do more than what the pricing is now. For us, that just means we just have to work a little harder to make money at casualty. There are other lines of business where maybe the pricing is considerably higher.
The tailwinds are helping you do your job, and you have a little bit more capability of pricing portfolios because you're getting a tailwind, but not the case in casualty. It's kind of balanced.
Roughly speaking, what accident year you think last year will be equal to in past years regard to casualty pricing?
Well, I think the pricing in casualty has been so-so at best for quite some time. Now it's improving, I don't think for an industry, it's acceptable levels of pricing.
Other questions in the audience? We've got time for one more. Let me just touch on personal lines, Brian, which has been a good business for you both in the U.S. and outside the U.S. The company had pulled back from a number of regions where the past management felt they didn't have scale. You kind of said that's white space still. That's something we can expand into. The question is, can you reenter these markets in a different way where scale is not necessarily the critical thing?
Start from scratch businesses in the general insurance business, particularly if you've already been in the country or you're in the country because you know it, you know the people, you know the competition. Personal lines, though, it's a little harder to do that. Personal lines in the U.S., forget about it. It's not just the U.S. Your ability to make a dent in places around the world, much harder because there's a volume question. You got distribution you got to feed. That's a long-winded way of saying I'd be more likely to acquire capabilities for personal lines than to start them from scratch, most of the places. For us, we're probably spending more time on the small commercial, middle commercial market than the personal lines market outside the U.S.
I'm going to wrap it up here, Brian. Fantastic. Great running it. Thank you very much.