Peter Zaffino

For many years, the most successful insurance company in the world was AIG, and then the Great Recession came and AIG required a one hundred and eighty three billion dollar bailout from the US government. That bailout has now been repaid with interest and AIG is reshaped into a smaller but very successful insurance company being led by Peter Sofino. I had a chance to sit down with Peter and

We ensure businesses small, medium, large commercial businesses for their property insurance or their auto or financial lines, which is directors and officers. And we also have a business that does harder to place business you know, such as like you know, contractors or you know, businesses that may not find its way into the conventional business. And we also have a Lloyd syndicate and we're a big part of Lloyd's as well.

So as I understand the insurance business, they're really two parts to it. One is the part of assessing the risk and charging premiums that hopefully will for the maturest point of view, cover the risk, and the second is taking those premiums and investing it and hopefully getting a good way to return. So let's talk about the first part.

A property and casualty company. It's much more complicated to get the underwriting right than it is the investment side. And you're right, with inflation, the complexity of cyber risk today and other factors such as global warming, catastrophes, you know, the dynamic of what happened after the pandemic with density and peak zone areas such as Florida, California. So understanding your balance sheet and your aggregates with what you're underwriting

If somebody says climate change does not really hear, they haven't talked to a property and casually ensure I gess right.

That's corrected, then that is true. Five out of the last six years, we've had over one hundred billion dollars of natural disaster losses in our industry that's never happened before.

What about artificial intelligence is artificial intelligence is going to enable you and others to say we have enough information to know exactly what something is going to be worth there in terms of ensuring it or not.

Artificial intelligence is finding its way into our business in a variety of different factors. I think the first piece is getting much better insight into data, which allows us to make better decisions on underwriting. It's also a great opportunity to service business better in terms of like call centers and different ways of what's using robotics and other AI will be very helpful. But it is an emerging practice within the industry and one that is evolving very quickly.

Now, the insurance industry has a reputation maybe undeserved. For let's say somebody has a claim their house burned down or something, and the insurance adjuster comes out and says, well, it really wasn't worth as much as you think, or the damage wasn't as great. Is that a big problem anymore? Or is that an unfair image?

I think it's an unfair image. I think it probably perhaps is true you know years ago, but today you know the contracts are you know much more? You know clear, you know paying claims.

That's what we do.

I mean, we underwrite risks, but you know when we have to show up in moments of matters in terms of how we pay our claims, and the amount of disputes are very small as a percentage of our overall portfolio. And I don't think that that's a fair assessment.

So when you make a judgment that you're going to charge somebody a certain premium, you think that you'll probably make a little profit or some profit on the premium, and generally you are you doing that now?

Yes? I mean you know that's not been AIG's passed. From two thousand and nine to twenty nineteen, it lost over thirty billion dollars in underwriting and so coming I arrived in twenty seventeen with a great team that followed me here and we began that underwriting journey, and so now we do make underrunting profits. So for every dollar we underwrite risk, you know, we make around you know, ten to twelve cents of profit without the investment income.

Let's talk about the investment income. So you bring in these premiums and all insurers then invest it and you get great and people do invest it, I assume for you. So what kind of return are you looking for on your investment portfolio.

Seventy five percent of the portfolio tends to be fixed income, and so in this new interest rate environment, actually the investment income is going up, and then the remaining portion will be in some form of alternative investments, such as private equity or commercial real estate. And that's done very conservatively. But we really are not going to win on just the investment income. You really need to make an underwriting profit. So we balance both, you know, very well.

So I should say private equity. My own firm does have a relationship with AIG. So of course you can't put more too much money in private decay, right, Your investment professionals can't put too much money in that area.

Right, Absolutely, they do a great job.

So in terms of the investment return, though generally are all insurers now basically making money both on investment return and on premium underwriting? Is that? But basically the core of the.

Business, generally speaking, the industry is making underrunning profit on it's underwriting, and it's on the investment side as well.

So it's often said that Lloyd's of London, which would ensure almost anything. So are there things that you won't ensure If somebody comes to you and says I'm worried about my wedding being rained out or something like that, is there any kind of insurance that you won't provide.

Yeah, we are very specific in terms of what we want to underwrite. I mean it has to be where we have skill, where we can deploy capital and get a fair return. So we don't really reflect the way Lloyd's can ensure almost anything. It's much more, you know, a traditional specialty company that would have real strong expertise in scale in the areas that we underwrite.

So housing insurance is a big part of your business, I assume, So what is the biggest risk for you in providing insurance of people's homes.

Well, the complexity has been the density built up in areas that have significant exposure if you think about the southeast of the United States, for wind or wildfire in California, what happened as a effect of the pandemic is that you know, people were moving into those areas, and you know, I'll make it up, but you know, a two and a half million dollar house costs five million during the pandemic,

And property and casualty that is separate than automobile insurance. An auto would go into you do auto and bill insurance? Yes, And is that a risky business to be in these days? Or drivers getting better? Or what about people that supposedly don't have cars that don't have drivers. Are you worried about that?

I am worried about that. I mean, you know, driverless vehicles are a big exposure, but but I think that you know, with AI quality of vehicles it's more predictable than perhaps it was in the past.

So for your own home, who provides home insurance for you? Ai g oh? And if you have a claim, do you have any problem getting it paid?

Or I haven't had a claim, but I rather claim I think I don't think I would.

Let's talk about how you got into the insurance business. So your father was in the business, and did he say, Peter, when you grow up, you should go in the insurance business. Is that what happened?

No, you didn't. I mean the myth of him, you know reading the insurance and reinsurance books at night is not true. He always encouraged me to do and pursue

Now, some people might say that insurance is a boring business. It doesn't attract people the way private equity does. But is that not the case or you found that to be interesting even right out of college.

Now I find it very interesting. I mean you're not doing the same thing all the time when you start in the industry. I mean you're learning to build relationships, You're understand the quantitative nature of how to underwrite and also the qualitative nature. So I liked it because I had a balance of doing different things at once.

So what did you do after your first job in Boston?

Well, that's ironically I never made it back to Boston, and so that's I stayed in New York. And early on in my career I didn't think I could really work in New York City, which has been, you know, the predominant portion of my career. So I've always been in big companies. Worked at ITT and then I worked at General Electric and Marsh mcclennan after that.

All right, So you were working at Marsh mcclennan on September eleventh of two thousand and one, and where were you on that morning?

That morning? So was my sixth day of work at Marsh McLennan, and I was on the fifty third floor of Tower two that day to work and so what happened. The first plane went into Tower one. I had seen it, and so colleagues and I started to evacuate, nothing urgent, but into the stairwell to make our way down and made it to about the fortieth floor when the second plane went into the building, which I didn't know what

Of getting was there a mass rushed down the stairways.

There was, I mean it was orderly, but it was started to get panicky of trying to get out of the building and rush our way down the stairwell.

So you got out of the building how much before the building collapsed.

I was probably twenty minutes, you know, north of the building when it collapsed. I was never in danger of you know, having soot or or other things on me once the building collapsed.

But as soon as you got out of the building, you didn't look up there and say, oh, I see what it's going to survive you You ran somewhere.

Yeah, No, I'm actually met a friend and we happened to you know, we walked north to one hundred and twenty fifth Street over the course of the day to get out of the city.

And how many of your colleagues died Almost three hundred that day, three hundred colleagues died from Marsh mcclennanth. Yes, okay, So you didn't get out of that and say I've had enough of Wall Street, I've had enough of insurance. I'm going to go into something else. Now.

It's a unique part about our business is that, you know, in you know, major disasters or you know, things that happened like that, you know, our clients need us, and you know, so it was immediately you know, calibrating, focusing on helping you know, I was in the reinsurance business at that time, so helping insurance companies, you know, get back into business and helping raise capital and you know, helping them assess what they needed to do going forward.

So today, AIG over the years has been a gigantic company, one of the largest, maybe the larger at one time market cap insurance in the world. But then during the Great Recession it had some problems and ultimately the government had to come in with a bailout. You could call it. One hundred and eighty billion dollar guaranteed loan or bailout. Have you paid that back yet?

Yes, that's been paid back. You know, well before I arrived at the company.

And did the government make a profit on that?

They did, Yes, they made a profit. There was interest and a profit.

So what caused that was basically too much insurance on I guess it was high risk mortgages.

Yeah, it was a financial products product that had you know, credit related and so that you know, created a you know, impact on liquidity.

So, Peter, when you took over as the CEO of this company, it wasn't as as good as shape as it appears to be now. So what did you do to turn it around? And what are you most proud of having achieved in your time as CEO so far?

Well, the the thing I'm proud of the most is just the number of people that you know, came to AIG and actually people that stayed to come together as a organization to actually try and improve our underwriting, our

As we've talked about this here now and pretty much in the P and C business, property and casualty, you're getting out of the life insurance business over time. But explain to me why the life insurance business wouldn't be a better business because you know, people are going to die, very predictable actual aries continue when they're going to die. Is why is that business not as good as the property and casualty business.

Well, it's a very good business. The property and casualty businesses is totally different. I think the complexity in life insurance business is just you know, they have so much investment assets. It's a spread business and one that has really different, you know, dynamics that drive its outcomes.

Now I see lots of ads on television for insurance, sometime home insurance, so forth. But I don't see a lot of AIG ads here you appealing to people like me who are watching television or you're going to institutional market.

We have, you know, a distribution of agents and brokers that we're really a business to business and so we source our business through that distribution channel. So us advertising to you know, the end consumer has limited value in the products that we actually underwrite.

So today, the insurance business, generally in the United States, would you say it's a reasonably healthy business today?

I would. I think balance sheets are strong, I think the returns are are very good, and I think there's positive momentum.

So you see a lot about what's going on the economy because you underwrite a lot of active is what is your biggest worry about the economy today or you think we're going to go into recession? Are you worried about inflation? High interest rates?

I worry about it all. I mean, but you know, for insurance, I mean certainly inflation is one because of you know, we carry reserves for many years on our balance sheet, and you know what the effect is of inflation as we pay claims over the long term. You know, the investment rates, as I said, with fixed income, that's really strong for us in terms of reinvestment rates and so allows us to do very well on the investment side. And I do worry about the you know, global economy.

What percentage of your businesses or insurance overseas and what percentages in the United States.

It's about fifty to fifty overseas and the United States.

What are the number of employees you have now we.

Have a little over thirty thousand employees at AIG and probably twenty thousand of you know, employee equivalents in terms of what we outsource through you know, a back office or through technology.

And today your market capitalization is roughly forty five billion something like that. And today do you spend any time in Washington, d C. Saying to regulators you're not doing a good job regulating us, or you members of Congress do a better job and taking care of the debt repayment. Do you do you spend any time in Washington?

I do spend time in Washington and spend time with lawmakers. I mean the complexity of insurance is that we're state regulated and so you know, spending time with various state regulators and you know FCA and FSA in the UK and Japan respectively, is where I spend more of my time.

And do you find when you meet with members of Congress it's an uplifting experience.

You know, getting compromise and talking through specific issues is more challenging than it's been in the past, but you know, we're trying to make progress now.

You go to a lot of CEO gatherings, I assume your members of business, things like the business round Table, business counsel and things like that. When you talk to other CEOs, not just in your industry, what are they most worried about today? They political divisiveness in Washington, inflation, high interest rates. What do you think people are most worried about?

I think those three always come up. And the geopolitical environment. I also think state sponsored you know, cyber attacks and what does that do to you know, a company all of that is getting a lot of attention, and I think it's doesn't matter what industry you're in, it has its impact. I think also global expansion, the resistance for you know, acquisitions and support you know for companies to be able to acquire you know, big businesses outside of the United States gets challenging as well.

So as the CEO of this company, your biggest concern is always increasing the share price or providing good service to your customers. What do you worry about the most in terms of the job of being CEO.

Well, it's a great privilege to be a CEO of a company like this, and we've been in a massive turnaround and so fortunate to have so many good people

So if the President of the United States called you and said, you know, you really know a lot about insurance, you know a lot about risk, why don't you come into the US government and help assess risk we have?

You would say, what I'm better suited for a public company is what?

Ever? So you're not probably going to go into the public sector anytimes.

That probably is not in the cards for me.

Well, as we talked today, there are lots of problems around the world. One of them is what's going on in Israel. Another one is what's going on in Ukraine. How do you assess those risks? For example, did you ever provide insurance to people in Ukraine?

We did provide. We had a business in Russia, you know, prior to the Russia Ukraine conflict, we did not have a big business in Ukraine. But through you know, Lloyd's we did have exposure to some classes of business, you know, through the war. And so you know, assessing that is very complicated and one that you need to manage. You know, how much you're going to underwrite a specific class that could have, you know, political violence or a war or terrorism.

So let's suppose I own a big factory, a semiconductor chip factory in Taiwan, and I come to you and say, you know, I just want to get some insurance against it possibility that China might invade and destroy or take over my plant. Is that the kind of thing you would do or that's too risky?

That would be too risky. Yeah, I think that there's there's some portions of what we call violence you know coverage. But you know, in areas where we know that there's an exposure, it gets very hard to underwrite that, and so we would have very limited capacity to be able to do something like that.

But you don't provide war insurance, then pretty much do you provide flood insurance. I have a home in Nantucket that's right on the water there, and I'm always worried when the flood's going to come. So can I get flood insurance or is that hard to get these days?

It's hard to get. But we do provide flood insurance, as does the government.

And what's the fastest growing area of insurance that people are for property and casual what are people most interested in? Just home insurance?

Home insurance has been one of the more complicated ones, you know, across the United States. But I think, you know, one of the biggest growing areas is what we call access and surplus lines. It's a market that sits alongside the regulated market and that has been growing significantly across the industry as well as fraig.

And what's been the biggest challenge for the insurance industry over the last five or ten.

Years, I think it's understanding you know, these unpredictable risks of whether it was the pandemic, understanding what could happen, you know, with potential war breakout, but also you know, the climate change. As I said before, having that type of hurricane activity. We've had a hundred natural disasters reported through nine months of this year that that just hasn't happened in the past.

So, if I am trying to learn the insurance business, what's the most important thing as an outsider wants to assess whether the industry is a good industry to invest in. What are the inndition that people like me should look at.

I always think depending on how sophisticated the individuals looking at at companies, always the strength of the balance sheet, the consistency of performance is really important because if you end up getting a lot of surprises from catastrophes or you know, other variables, it's very hard to predict what's going to happen with that insurance company in the future.

Now, the insurance business has been historically a very strong one of the United States. Are we still the leader in global insurance? Are there companies outside the United States that are even more significant now?

Very big companies in China, very big companies in Japan market. And there's very big companies market cap wise in Europe. And so I think that those are the four areas including the United States, that have very large market cap multinational insurance companies.

And today and AIG, what is the biggest challenge you face as the CEO of AIG. What are you most worried about? Well, all of.

The you know what's happening, you know, geopolitically, we've just come out of a pandemic. I mean, the complexities across the world and the fragility of you know, what might happen in the future is is what I worry about, you know the most, because there's things, you know, if you told me five years ago you're going to come in be the CEO, You're going to deal with the global pandemic, two wars, you know, potential, you know, political you know, tension across the world, and also dealing with

So for young professionals who might be watching, who say, while I'm looking for a job, maybe I should get in the insurance business. Why should want somebody want to come in the insurance business? What makes it so exciting?

I think our purpose and what we do for a living is is very you know, meaningful, Like we keep businesses, societies, uh you know, cities moving after you know, natural disasters or you know, moving claims and allowing companies to build. And you know, a lot of times in order to lend, you need to have insurance. And so I think it's a uh, you know, industry that really doesn't get its

Well, listen, you've done a very good job of dealing with a complicated situation because AIG has been in a turnaround ever since the government bailout. I guess I would call it bailout and today you would say it's financial shape is pretty good.

I think it's very good. The progress that we've made, again with having so many tremendous people here that had a single purpose of putting AIG back to being an industry leader, that we've strengthened sort of every component of the company. The balance sheet, underwriting capabilities, our investment portfolio is much simpler, the company simpler, operations are streamlined. So I think we've really made enormous progress and feel like we have a lot to do still.

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