The very strengths in its balance sheet, surplus, underwriting and personnel that have made the Commercial Insurance unit of American International Group (AIG) a market leader are keeping it competitive even while the parent company struggles with its financial crisis, according to AIG Commercial Insurance executives, who maintain they are encouraged by the number of customers who have stuck with AIG Commercial Insurance during the crisis.
Staying in the game under current circumstances has taken some work, however, and nothing is being taken for granted, say John Q. Doyle, president and CEO of AIG Commercial Insurance, and Rob Schimek, chief financial officer, who are involved in regular meetings to communicate the message that AIG Commercial Insurance is still a well-financed, major player. One recent teleconference had close to 10,000 listeners.
“We know we have a lot of work to do, but we are encouraged with where we are in a relatively short period,” says Doyle.
AIG Commercial Insurance companies, to name just some, include AIG Casualty, American Home Assurance, Commerce and Industry, Granite State, Illinois National, National Union Fire, New Hampshire Insurance, The Insurance Company of the State of Pennsylvania, AIG Excess Liability Insurance, American International Specialty Lines Insurance, Lexington Insurance and AIG Excess Liability Insurance International.
While overall AIG may be downsizing by selling off some companies, AIG Commercial Insurance is expected to remain sizable. Its worldwide property and casualty businesses generated $40 billion in revenues in 2007, which would rank it 59th on the Fortune 500, still ahead of all of all of its primary commercial property casualty competitors. The surplus behind its domestic commercial lines business alone tops $26 billion.
In the following interview (conducted Oct. 8, 2008) with Insurance Journal’s Andrew Simpson, Doyle and Schimek discuss how AIG Commercial Insurance is working to retain, even add, business and the effects that the current financial crisis at AIG and on Wall Street are having on AIG Commercial Insurance.
What can you tell brokers and risk managers and customers about AIG Commercial Insurance today in light of the pending sales of assets. Will Commercial Insurance units to be sold?
Doyle: We are telling our customers and our brokers in the commercial insurance space that AIG Commercial Insurance is the focus of the company going forward. Our new CEO, Ed Liddy, made that statement within, I think, 24 hours of him taking office at the company. He confirmed it again last Friday at an investor conference. So, our global commercial insurance operations are core to the new AIG.
Mr. Liddy also said that the focus for AIG right now would be on retaining current customers. What specific steps have you taken to communicate with brokers and risk managers and customers? What’s the message you have been trying to get out and what has been the response to that?
Doyle: While we are working hard on retaining current customers, we are also working hard on writing new business as well. Our entire team of underwriting staff has been aggressively getting in front of our customers and brokers over the last several weeks.
Our message is fairly straightforward and it is to emphasize the financial strength of our insurance companies. It is to talk about the competitive strengths that we’ve had in our business and making sure that we continue to emphasize those competitive strengths because they have not gone away.
Some of those strengths are our risk appetite, the breadth of products that we offer, our geographic footprint, our commitment to markets and the services that stand behind our policies, be it loss control or claim services. Those attributes of AIG Commercial Insurance are different than the folks we compete with.
I would say that message has been well received. Our client retentions remain strong and we appreciate the fact that our clients and brokers are giving us the opportunity to share that information with them and get that information to them. They’ve been patient with us and are willing to work with us and the early results are positive. We know we have a lot of work to do, but we are encouraged with where we are in a relatively short period.
Are the early retention signs stronger in certain lines than others?
Doyle: Sure, they vary a little bit from line to line although not radically from any one line of business to another.
I think of AIG as being willing to write things that other people won’t sometimes. Is that an advantage?
Doyle: I think so and I was referring to that issue when I talked about our risk appetite. We’re known for having a broad risk appetite and I think it’s one thing for a competitor to stand up and say, “Hey, I’m ready to step in and write AIG business” and then it’s another thing for them to actually look at the risk and do it and so far so good.
How closely are you monitoring this?
Doyle: Well, our various key indicators are something we’ve always monitored closely, but for sure over the last several weeks we’ve been looking at retention ratios and hit ratios and price changes and the various things that we monitor with greater frequency than we normally do. But, again, those are key indicators of our business that we’ve always watched closely.
Are you cutting prices to keep business or gain new business?
Doyle: There is no indication in the rate change results in our business that would indicate that we have needed to do anything differently on pricing since the event. I think when it comes right down to it and customers ask us why they should continue to do business with AIG Commercial Insurance, I think the simplest way to respond to that is to state the fact that the balance sheets of these companies are stronger than they were the last time you renewed with us.
Well, obviously, that is not something you would take from reading kind of mainstream media that it is the case. So if you have been comfortable with us, you should continue to be comfortable with us. We obviously don’t take that for granted. We know we have to earn the business and we work hard to earn it and continue to do so.
So there has been no real change in your underwriting appetite as a result of the events?
Doyle: No, our fundamental strategies, underwriting strategies remain unchanged. We obviously change our strategies from time to time and our underwriting strategies from time to time, but those changes or any changes like that are unrelated to our parent company’s issues.
Does government involvement in the parent company trickle down? Does that have any effect on the AIG insurance operations, in terms of underwriting and pricing and claims and all the things you do?
Doyle: No, the agreement with the Fed was drafted with the intention of letting the insurance companies operate as usual.
Mr. Liddy also said AIG will emerge as a smaller and more nimble company. I’m taking it that you think that Commercial Insurance should remain fairly intact — that that doesn’t necessarily apply to Commercial Insurance — that you will still be big and broad. Is that right?
Doyle: Yeah, we have kind of talked about that a few times inside. While we will be a smaller company, we will certainly not be a small company, but a large commercial property casualty insurer in the world. The units that remain had about $40 billion in revenue last year. That would make it rank as the 59th company on the Fortune 500 list all alone. Again, while it’s not as large and as diverse as AIG has been recently, it will still be a very large commercial property casualty company that’s very well positioned to serve clients’ global needs.
Have you been surprised by some of your competitors’ attempts to take advantage of the situation?
Doyle: No, not at all, but I think at the end of the day if the dialog moves from an inspection of AIG insurance companies and their balance sheets to a similar level of review of our competitors’ balance sheets, then we will fare very well in the long run.
Are you in a position to be actually gaining business?
Doyle: Well, we are writing lots of new business. We wrote quite a bit of new business in September. …. So we’re out there, as I said, we’re out competing for business just like we did before September 15th. We are out trying to earn brokers’ and customers’ or prospects’ business as much business as we can.
What do you tell customers or brokers with claims in the system? Can they be reassured that everything will be paid as promised?
Doyle: Again we emphasize the financial strength of our insurance company balance sheet and talk to them about the fact that the liquidity problems were challenges at the parent company and that there is significant liquidity within the insurance companies. In fact, we pay $73 million worth of claims every single day, every business day, in our operations. I’m sure that’s the largest of any commercial insurance operation based here in the US.
That’s $73 million a day? Is that what you said?
Doyle: Yes, you are right.
I’d like that one to change, that one could go down. But we have done that and continue to do that. We’ve in fact advanced millions in claims payments related to Hurricane Ike losses already. And so we are out handling claims, helping our clients as best we can.
Aside from having to communicate more with people you have done business with, is it essentially business as usual, in terms of pricing, underwriting, claims and all the insurance operations?
Doyle: Yeah, again we have the same core strategies. But, given the challenges surrounding our parent, we can’t take anything for granted. So, what is different is we are being much more aggressive about getting in front of the broker, getting in front of the client and making sure that they understand that these issues were not about the insurance operations at AIG, but they are isolated within another part of the company and that our competitive strengths remain…
How have you gotten in front of the brokers? Do you have meetings, teleconferences or how?
Doyle: Yeah, it’s everything. Rob and I and again, I don’t mean to make it sound like it’s just the two of us, but Rob and I have been on many conference calls with all the large brokers and their staffs and their clients. In fact, one of the calls at least had more than 10,000 people on it alone, but we’ve done countless face-to-face sessions, countless webinars and conference calls.
In fact, Rob and I spoke to a group of customers and brokers this morning in Midtown and we’ve done a couple of other calls with clients. We’ve done a face to face with a client today and it’s kind of the the average day right now …
Some Insurance Journal readers, agents and brokers say they are being asked by some clients to move their accounts from AIG. What do you tell agents or brokers who have to navigate their commitment to their clients but also to AIG which has been, in many cases, a long time business partner?
Doyle: Well, obviously their commitment first is to their client and what we try to articulate to the broker is how that fiduciary responsibility is best served by placing their business with AIG. And you know again, when you examine our insurance company financial statements, they are very, very competitive.
Schimek: One of the key messages that we are consistently delivering is that the policyholder surplus in these companies, which is the amount by which the assets exceed the liabilities, was $26.7 billion at the end of our last reporting date, which was June 30th. That amount of policyholder surplus is greater than the policyholder surplus of any of our competitors. So therefore, having your business with AIG is placing your business with the institution that has the single greatest amount of policyholder surplus of anyone in that marketplace.
Is that the commercial insurance lines, the $26.7 billion surplus, or is that everything?
Schimek: Just the commercial insurance lines and that’s just the domestic commercial insurance lines. So today, it gives you an idea of the power and the strength. As a matter of fact that $26.7 billion is a 51 percent increase from the level it was at just two and one-half years ago; at the end of 2005 it was $17.7 billion.
There was one agreement that turned out not to be necessary to shift $20 billion from some of the insurance companies to the parent. If the commissioners still felt it wasn’t going to jeopardize any policyholders to do that, there must be some pretty good numbers there.
Doyle: Yeah, without a doubt, the job of the insurance commissioners and the insurance departments is to play a role in the regulation of the day-to-day interaction between what happens at the insurance companies and what happens at the parent companies. I think one message you can absolutely walk away with is that each one of these key insurance departments has issued a press release really reaffirming their view of the financial strength of the AIG Commercial Insurance company…
Does that help you in talking with agents, brokers and customers?
Schimek: Absolutely. We refer them directly to that press release and say, “Take a look at that because I think it is a real strong positive statement that is made by the departments. You don’t have to just listen to it from John and myself, you can listen to it from others.”
One other quick observation just for you on this shifting of assets discussion is there has been a whole lot of miscommunication, unfortunately, about that. Initially it was characterized as the idea of a loan between the insurance companies and the parent company.
There was not a discussion of a loan between the insurance companies and the parent company. Instead, the simple way to describe this is that the insurance companies have a lot of highly liquid investment securities and the parent company has many assets that are less liquid. And the transaction would have effectively used some of those highly liquid investments down at the insurance companies to purchase some of the assets from the parent company.
It is like a swap in a way?
Schimek: Think of it like an asset swap, that’s right. And I think there were two really key considerations that you have to walk away with really understanding and the insurance departments sort of really monitor these two considerations.
The first consideration is absolutely no transaction between the parent company and the insurance companies would, should or could leave the policyholders disadvantaged. So any assets that were given up by the insurance companies would have transferred assets of equal or greater value from the parent company down to the insurance company. So the policy of a surplus would not have been adversely affected.
And secondly, the regulators were keenly interested in making sure that there was no adverse effect on the liquidity inside of the insurance companies. And again and obviously they were satisfied, there would not have been an adverse affect on liquidity in the insurance companies.
That’s why they would have permitted us to do so, but as you appropriately pointed out, that transaction which has been misunderstood dearly, if not ever consummated, because once the Fed facility was put in place, there was no need to execute the transaction.
One of the challenges in a time like this is that there may have to be layoffs or employees may use this as the time to leave. What are you facing in this regard? What steps are you taking to try to keep them?
Doyle: Our staffing levels are unrelated to our parent company’s challenges. Again, our business and our operations are fundamentally sound. We continue to apply historical staffing models for our business. And employee retention is obviously critical. Our business is about balance sheet and people. As Rob said, we think we have the best balance sheet in the business and we also think we have the best people in the business.
We are working hard to make sure that we retain our staff by creating an environment for them, a new incentive compensation structure that will challenge them and motivate them and retain them. Staffing levels at this point or turnover I guess I should say, turnover levels at this point remain kind of set at historical norms.
Does knowing that it is unlikely for instance that the Commercial Insurance division will be sold, does that give some certainty to these employees that they have got a place?
Doyle: Yeah, it provides a measure of stability not only to the staff but to our customers and brokers and so that has been an important stabilizing force over the last couple of weeks.
On September 15th your Lexington unit arranged some property reinsurance with Berkshire. Could you describe that and explain why it was undertaken?
Doyle: Certain property risks that we write require double-A or better ratings from the financial credit ratings from S&P. We had a double-A rating, but the recent downgrade changed that. So we sought some support from Berkshire Hathaway, essentially what is a credit wrap around certain property risks, to essentially meet the commitment that we had made, to continue to honor the commitment that we had made to those policyholders when we entered into those contracts.
Would similar deals be anticipated going forward?
Doyle: No, I wouldn’t anticipate any other deals; it is again some unique characteristics surrounding our property portfolio that led us to the deal with Berkshire Hathaway.
Is there any silver lining in the current crisis for Commercial Insurance? Do you see any opportunities in the market today in spite of the situation?
Doyle: We are excited about the future of AIG being focused on our global commercial property casualty business. To us, it is a return to the core strengths and fundamentals of the company and what this company has been about for many years. So we see a lot of opportunity in the market to leverage our global footprint and the competitive strength that we have. So we are very excited about it.
Do you see the overall financial and credit crisis affecting your commercial lines customers and brokers? I am thinking of the D&O market in particular?
Doyle: Well you know sure, the financial markets and credit markets and the economy generally have an effect on a number of different lines and it can affect us in a lot of different ways. It can affect exposure units and, as a result, production, obviously — there is less construction going on, transportation has been under pressure. But it can also affect very much the risks that we take in financial lines or employment practices or workers compensation for instance. So those are important components and factors you have to take.
Do you have any new programs or products in the works?
Doyle: We have over 400 products and services within AIG Commercial Insurance. We have probably introduced two dozen or so new products to date [this year] and we have a number of them in the works that are about to be released in the next couple of weeks.
So brokers should continue to expect you to come up with products?
Doyle: We are going to continue to be innovative developers of products and solutions that our customers need any help with.
You have had three CEOs in the past six months. What’s the mood like in AIG offices there in New York and around the country? How do you keep employees focused on their day-to-day responsibilities?
Doyle: We have a remarkable staff. The company has been through a lot over the last three years and I was very impressed with how our staff managed to maintain its focus through the challenges of 2005 and I continue to be impressed, although not surprised, at our ability to remain focused through the challenges of today. We have a lot of fighters and very competitive people who really like to win on our team. I can’t say enough about how proud I am of how they have handled themselves.
Does this in anyway bring people together more?
Doyle: It does, both figuratively and literally. I haven’t left Rob’s side.
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