Directly after the Lehman Brothers bank collapse, AIG, one of the largest insurers in the world, had to be rescued with a $182 billion (€163 billion) bailout by the U.S. government. Peter Hancock, who became chief executive in 2014, explains how AIG has reduced its risk and focused its plans for growth.
AIG had to be rescued by the U.S. government but has now paid back all the aid and is profitable again. Is the crisis behind you?
I think the crisis was in many ways a catalyst for the company to focus on its historical strength. By necessity we had to sell a number of companies and reduce the risk in the balance sheet. The only thing remaining from the crisis is a modest holding in an aircraft leasing business.
What did the crisis do to your image and how did you manage to rebuild customer confidence so fast?
I was very pleased when I joined the company and met with many customers and asked them why they stayed with AIG; 92 percent of our customers stayed with us. Most said it was because of the trusted relationships they had with the people they did business with at AIG. The image was clearly not helpful in certain consumer markets but the main commercial markets we operate in were not seriously damaged for very long.
There are still some lawsuits from the past, for example the investment-management firm Pimco is suing you. How far does this hamper your company?
The vast majority of the law suits from the crisis have been settled, I would say close to 98 percent, and the remaining lawsuits we face are frankly smaller than most large companies have at any given time. At this point it’s at nuisance value level rather than anything significant.
Pimco wants $2 billion – isn’t that significant?
People ask for a lot and usually get very little. That’s the holdout of a bigger suit that was settled recently, so without wanting to comment specifically on this, we don’t want to view it as a material item.
Your predecessor and major shareholder Hank Greenberg is suing the U.S. government because of his losses during the crisis. Do you support this?
That is entirely between him and the U.S. government.
Now you have reduced your portfolio, how does your growth strategy look?
I would characterize it as a focusing exercise, the shrinking stopped 2 and a half years ago and we made a handful of acquisitions in the last year and we continue to invest in organic growth in the countries and business lines we see as core source of future profitable growth. One area is property casualty or what’s also described as general insurance. We are investing in the technology and risk expertise and we have recruited over 500 engineers in the last two years to complement our financial strength with real expertise around how to construct industrial infrastructure in a safer way. We are also investing in the prevention of cyberattack. We’re the world’s largest provider of insurance against cyber intrusion. Most companies as a matter of course would insure their property risk; very few would insure their digital assets. More and more companies have more value in their data than they have in their buildings. We see there is a great deal of innovation to be had including the better understanding of data on what causes accidents.
As an American company, are you more advanced in digital world than your competitors in Europe?
I view AIG as a global company not an American company. We found our roots in China 95 years ago, we operate in 90 countries. We are learning a lot from all these countries, for example about data from South Korea, which is very advanced in that area.
You are more successful than Allianz has been with its overseas business. Why is that?
We have great respect for our competitors. There is one major difference between us: They have a sizable investment in third party asset management and we sold this area as we don’t see it as core to our business.
You have sold a lot in Asia, what is your strategy for China?
We have a number of elements to our business in China and 6,000 employees there. That is growing and especially since the government relaxed the regulations a year and a half ago to allow broader participation in different products. We have a major stake in Chinese insurance demand already and we continue to invest in that as Chinese companies are expanding internationally and we can help them. In terms of other parts of Asia we have a substantial role in Japan and have a rapidly growing life insurance business there. We had sold the life insurance business in Asia but we are building it up anew in some Asian markets.
Where do you see the best chances for insurers?
I think we see a tremendous opportunity for developing economies to use more insurance, in most developed markets general insurance represents between 5 and 8 percent of GDP while in most developing economies it’s less than 1 percent so helping developing economies realize the benefits of insurance is a challenge and also an opportunity. The challenge is to demonstrate to individuals, companies and policy makers the critical role insurance can play in reducing the fear of the future that individuals and businesses have, If people are afraid of outliving their savings they won’t invest in the education of their children, if companies are afraid of export market risks, they won’t expand their business so helping them understand that is a way we can remove some of the obstacles to growth.
What is a specific example of that?
In China for instance we’ve invested very heavily in road safety and providing a lot of education around road safety because China is the fastest growing auto market in the world and yet road accidents are a major cause of death. Insurance can be an incentive for safer driving, there are tools the insurance industry can use to reward safer driving. So demonstrating in developing countries the benefits of a public private partnership to solve problems, we can help improve safety standards at hospitals and factories together with governments.
Do you think it’s possible for insurance to prevent a catastrophe like at the Rana Plaza textile plant in Bangladesh that burned down and killed about 1,000 people?
I’m not familiar with the details of why it burned but I suspect much have good have been done to improve safety. There was a very famous fire in a garment factory in New York City, the Triangle Shirtwaist Factory in Manhattan in 1911 which fundamentally changed the regulations around worker safety. I think every economy has pivotal moments in its history where the realization that workplace standards need to be modernized and the insurance industry has been working in a way that has led to changes in regulation that has been very positive in terms of workplace safety, the lack of availability of insurance is a powerful incentive to change behavior beyond regulations.
In the developed world there are plans to increase regulation. How do you deal with that?
The insurance industry is a heavily regulated industry. The Fed is our systemic regulator and we have found their engagement with us to be very constructive, they have worked in a way that is highly aligned with management to de-risk the company. I think AIG has done more than any company since the financial crisis to reduce the risk of our balance sheet and reduce our operational risk.
What did you do specifically?
At the peak before the financial crisis we had over $2.6 trillion of derivatives today that is less than 100 billion. By comparison, large banks have $20 to $60 trillion remaining on their balance sheet. Beyond derivatives our leverage measured by equity to assets is five to one. By contrast most banks have 12 to 15 to one – so much less leverage. On liquidity we have very long dated liabilities and highly liquid assets.
In Germany, there’s a debate about too much regulation in comparison to the United States.
I don’t view rules as heavy or not heavy, I view rules as addressing specific issues, such as the use of leverage or illiquid assets versus short term liabilities. We feel that we have addressed those fundamental issues in de-risking this company’s balance sheet. As long as those regulations are designed to improve the resiliency, the sustainability of large financial institutions, we welcome them because we think that’s good for the companies and good for society so we see nothing about the regulations that would make us not embrace them.
You have life insurance in other markets where the interest rates are not high in the U.S. either – is that a danger for your business?
I think it’s something that is a factor that needs to be included in any kind of strategic decisions on what’s the appropriate balance between growth and profitability and risk.
In Germany insurance companies are asking for a better legal environment in their home market, because of the low interest rates.
We feel that efficiency should come from any investment in technology and how we can continually innovate as a company to provide services to our clients more and more effectively and efficiently.
I was told you are also interested in the trans-Atlantic trade partnership negotiations. Why is that an issue for you?
For the German Mittelstand, [the mid-sized companies that are the backbone of the economy], TTIP will be a great help to expand into the United States. We can help companies which have enormous legal difficulties in the U.S. market. As someone who grew up in Hong Kong, studied in the United Kingdom and lives in the United States, I am someone who believes working together internationally is a good thing.
Do you see your role as helping European firms in the United States or helping companies from the U.S. in the European market?
That too, of course, it's a win-win situation.
When you became chief executive of AIG, people were skeptical because you came from Wall Street. As an investment banker, you had been involved in creating the credit swaps which brought AIG into difficulties. Some people working at Allianz see Oliver Baete, the new chief executive, through critical eyes because of his McKinsey background. What advice would you have for him?
The only advice I can give is focus on your customers' needs and involve your employees in that too.
Looking back, was it a mistake to focus too much on derivatives and credit default swaps before the crisis?
Many major companies in big markets made the mistake of moving too far away from their core businesses. I think the crisis was a reminder not to become arrogant and self-satisfied. The lesson from the crisis is focus on your customers and your core competencies!
Donata Riedel covers economic policy for Handelsblatt. To contact the author: [email protected]