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Can This Man Return AIG to Glory?

Brian Duperreault, the new CEO of the giant insurer, often prays for guidance from God. Shareholders are hoping He’s listening.

  • Jonathan Kandell

Brian Duperreault, the new chief executive officer of American International Group, prays for guidance and occasionally hears back.

Like the time a decade ago when he was driving to a New Jersey golf tournament and God — communicating in English — told him to come out of retirement. Duperreault was about to be selected as chief executive of then-struggling insurance brokerage Marsh & McLennan Companies, God said. No sooner did Duperreault step into the clubhouse than an MMC executive approached with news of the impending offer.

"It would be nice if He was that clear all the time," Duperreault tells Institutional Investor in an interview at AIG headquarters near Wall Street. Tall and fit, with ruddy cheeks and a thick mustache, Duperreault looks a decade younger than his 70 years and sounds eager to lead the storied insurer out of its woes.

But there was no heavenly dictum — not even a hint — before he became AIG's chief executive in May. Divine reticence was understandable in AIG's case, however. It takes a leap of faith to believe the insurer's problems can be resolved as smoothly as previous assignments Duperreault has tackled.

AIG has yet to recover from near demise during the 2008 global financial crisis. Topping its list of ongoing troubles is the need to recreate an underwriting culture: No major insurer has a sorrier record of underwriting losses over the last decade. "I'm not going to apologize for those results," says Duperreault, who nonetheless sounds confident he can engineer a turnaround at AIG. "I've done it. And I know we'll do it again."

His broad strategy, announced a few days after he became CEO, is to increase investment, apply new technology, and improve underwriting results. He rejects calls by activist shareholders, led by Carl Icahn, to sell off AIG's unprofitable parts and focus on the moneymaking businesses. "I didn't come here to break the company up," he pledged at his first meeting with investors in May. "I came here to grow it."

Duperreault, who is returning to AIG after a 23-year absence, comes to the task with huge advantages and handicaps. On the plus side, even after fire sales slashed its trillion-dollar balance sheet by more than half following the financial crisis, AIG remains a planet-straddling behemoth, with $498 billion in assets and a presence in more than 80 countries. It has few rivals in terms of worldwide infrastructure and licenses, or in its ability to provide coverage for a multitude of risks and expertly deploy capital on the investment side.

Another big plus: Thanks to deep cost-cutting, pruning of bad business lines, and setting aside massive reserves to cover claims, the bottom may be in sight at AIG. The first-half financial results for 2017 showed year-over-year improvements in net income and underwriting discipline.

Also on the plus side is an improving macro environment, with a gradual rise in interest rates essential for the bond holdings that dominate insurers' investment portfolios.

And of course there is Duperreault's track record, including most notably his leadership roles in restoring the reputation and fortunes of MMC and helping to set ACE, now Chubb, on a trajectory toward becoming an insurance dynamo. "People love to work for him," says Daniel Glaser, who followed Duperreault as CEO at MMC. "They don't want to disappoint him."

Evan Greenberg, who succeeded Duperreault as head of ACE and went on to build Chubb into the world's biggest publicly listed property and casualty insurer, is also confident his former boss can turn AIG around. "He knows all facets of the insurance business," says Greenberg. "He will bring his experience and skills to AIG at a time when it needs clear direction, focus, and talent."

But the minus side of the ledger is weighty. AIG continues to rack up some of the least impressive underwriting performances in the industry. Its combined ratio — which measures costs and claims as a proportion of premiums — lags that of every other major insurer. And AIG still faces a tough balancing act in trying to shed unprofitable business lines without alienating large corporate clients that demand those lines.

Moreover, to keep its stock attractive, AIG has engaged in the biggest buybacks in the insurance industry, leaving little capital for investments. Duperreault will have a limited honeymoon period to convince Icahn and other disgruntled investors that more money should be set aside for acquisitions and organic growth.

Also in the minus column is the technology issue. Like all other major insurers, AIG confronts technological disruptions that will pose unprecedented challenges for the industry. The most traumatic will be the advent of self-driven motor vehicles, which will sharply reduce accidents and the number of cars — and thus demand for insurance coverage. But even before then, AIG and other traditional heavyweights will have to aggressively adopt algorithms, artificial intelligence, and machine learning to improve risk analysis. "The application of technology in underwriting is still in its infancy," says Greg Locraft, Baltimore-based insurance analyst at T. Rowe Price, which includes AIG shares among its $904 billion in assets under management.



Long odds have never daunted Duperreault. No actuarial table would have given him a ghost of a chance to rise to the top of the insurance world. His parents separated before he was born. The birth took place in Bermuda, where his mother had moved to be near her closest friend. A working single mother, she then took 5-month-old Brian to Trenton, New Jersey, where she had a sister and raised him.

He received a Jesuit education at Saint Joseph's University in Philadelphia and graduated with a degree in mathematics. He considered a career as a math scholar, but chose insurance instead because it seemed a more practical option for his wife, Nancy, and him to raise a family, which eventually included three sons.

In 1973 he began a 21-year career at AIG, rising from actuary to chair and chief executive of non-U.S. commercial business. Back then, AIG was held in the same esteem as the New York Yankees of yore: It was the greatest insurer with the best underwriters in the world. Founded in Shanghai in 1919, it was forced to decamp from China 30 years later when the communists seized power. But from its New York headquarters, AIG continued to build its competitive advantage in Asia and other emerging markets. In the U.S. it pioneered new business lines, such as directors and officers (D&O) insurance and environmental liability coverage.

Duperreault's mentor was Maurice (Hank) Greenberg, the mercurial chair and chief executive who oversaw AIG's decades-long growth. "Hank was the toughest boss you could imagine," says Duperreault. "And we're all the better for that."

But by 1994, Duperreault realized he had reached his apex at AIG. Greenberg showed no signs of retiring, so Duperreault moved to Bermuda and took the helm of ACE, a midsize firm known mainly as a reinsurer for excess liability and D&O coverage. He embarked on an ambitious strategy to expand ACE's business lines and geographic footprint, highlighted by the $3.45 billion acquisition in 1999 of the property and casualty lines of Connecticut-based Cigna Corp., an insurer with 50 offices abroad.

Meanwhile, AIG was edging toward the abyss. Not content with traditional underwriting and conservative investment returns, AIG decided to make money the new-fashioned way — gambling recklessly on subprime mortgages and other toxic products. Behaving more like a hedge fund than an insurer, AIG overweighted its investment side and underweighted the underwriting side. "There was an ever-bigger mentality that all underwriting flow was good," says Locraft, the T. Rowe Price analyst. "The investment operation would then deploy more capital to make money on its side of the ledger."

Shoddy accounting practices led to the departure of Hank Greenberg in 2005. Three years later, AIG emerged as a major villain in the financial crisis. It had credit-default swaps on its books covering $440 billion in mostly toxic mortgage-backed securities. Dubbed by media reports as "the most hated company in America," AIG was saved from extinction by a $182 billion government bailout.

By 2014, AIG had repaid that massive debt and disbursed another $23 billion in profits to taxpayers. But it was forced to sell its best businesses at bargain prices.

 

While AIG teetered, Duperreault was leading ACE to ever-loftier heights. In 2001 he enticed Evan Greenberg — Hank's talented son, who also quit AIG because he had hit a ceiling there — to join ACE as his No. 2. In the aftermath of the 9/11 terror attacks, there was a massive withdrawal of global insurance that allowed cash-rich firms like ACE to snap up clients. With ACE on its way to becoming a major P&C player, Duperreault turned over management to Evan Greenberg and retired in 2004.

It didn't last. Four years later, Duperreault came out of retirement. Another Greenberg, Evan's older brother, Jeffrey, was forced to resign in 2004 as CEO of MMC after the insurance broker became embroiled in a rigging and kickback scheme with various insurers. Scarred by the scandal, MMC saw its earnings decline, and — shades of AIG a decade later — activist shareholders called for its breakup. By 2007 the board was looking for an outsider to lead the company.

Then God stepped in. Duperreault was on his way to a golf club for a college fundraiser. "And I was told [by God], 'You're going to be the CEO of Marsh & McLennan,' and that I should speak to Gerri Losquadro." An executive at an MMC subsidiary, Losquadro met him in the club's breakfast area just before tee-off and informed him he would be asked to take over the parent company. Duperreault waited several months before the MMC board finally called. "In that period of time, I wondered if I had made all that up," says Duperreault. "But there was this Gerri thing. So I thought it was His way of saying, 'Trust Me on this one.' And I got the call and became the CEO."

In January 2008, Duperreault was appointed president and chief executive. Over the next four years, he led MMC back to profitability, quelling shareholder discontent. "He has the ability to grasp all the complexities and boil them down," says MMC chief executive Glaser. "He drew a line under the past, motivated people, and gave them hope for the future." In 2012, Duperreault retired a second time.

But only a year later, he was back in the game. In December 2013 he founded Hamilton Insurance Group, based in Bermuda. It partnered with a technology company, Two Sigma Insurance Quantified, and AIG to create an algorithm-driven platform, Attune, that customizes and distributes insurance products to small and medium-size companies.

Yet over the next three years, Duperreault followed AIG's sinking performance and constantly thought about returning to fix the insurer. "It's my alma mater, it's where I graduated — it defined me," he says. "I couldn't leave it the way it was, if I could help."



After staggering through the initial year of the financial crisis, AIG found an early savior in former MetLife chair and chief executive Robert Benmosche, whose asset-selling strategy kept the company from drowning in red ink. But Benmosche died from cancer in 2015 and was succeeded as CEO by Peter Hancock, a former derivatives specialist at J.P. Morgan & Co. with no insurance experience before joining AIG. The insurer plunged from a $7.5 billion net profit in 2014 (admittedly inflated by all those asset sales under Benmosche) to an $849 million loss last year. A whopping $3 billion loss in the fourth quarter of 2016 forced Hancock to announce his resignation, pending the appointment of his successor by the board.

The search for a new CEO was largely pro forma. It was an open secret for months that AIG was courting Duperreault. "I knew the possibility was there that I would be contacted," he says. "I would go to an event and five AIG people would come up to me and say, 'You have to come back.'"

The only count against Duperreault was his age, which means he will likely step down within five years. "The board probably wanted somebody who had credibility among investors, distributors, and employees as well as experience in turning around a company that was underperforming," says Jamminder Singh Bhullar, an insurance analyst at J.P. Morgan Securities. "Brian brings all of those attributes. That was more important than hiring a younger person who could be there for another 15 years."

Duperreault lists a number of priorities. He wants AIG to expand its client base from large multinationals to small and medium enterprises. "We are sort of one-dimensional," he says of AIG's bias in favor of Fortune 500 companies.

Despite AIG's footprint in so many countries, Duperreault believes the insurer must diversify its business lines almost everywhere. For example, he wants to beef up commercial P&C operations in the U.S. and to strengthen personal lines and life insurance abroad.

These goals will require a new commitment to quality underwriting. Duperreault is hoping the existing core of underwriters can create a momentum of profitability and growth that will attract star performers from other insurers. "We have some good underwriters here," he says. "But I think a company is on the rise if you're a magnet for talent, because you're constantly trying to bring better people in." And as an example, he points to his first big hire: Peter Zaffino, the ex-CEO of Marsh LLC, the insurance brokerage and risk management subsidiary of MMC. In August, Zaffino became AIG's chief operating officer, making him an early favorite to succeed Duperreault.

Besides beginning to recruit his own executive management team, Duperreault is taking a different approach than his predecessor did to disclosures to analysts and investors. Facing intense pressure from activist shareholders, Hancock set overly optimistic targets for return on equity, combined ratios, and net income. Under Duperreault, AIG will no longer provide such guidance.

The root of AIG's underwriting problems lies in the massive asset disposals in the aftermath of the financial crisis. AIG was forced to sell its best businesses to repay the government. Topping the list was AIG's lucrative Asian life insurance subsidiary, AIA, which had to be spun off in 2009. Three years later AIG sold its remaining 13.7 percent stake in AIA for $6.45 billion, meaning that its former subsidiary was valued at $47.1 billion. Today, with the Asian life insurance market still surging, AIA has a market capitalization of $93 billion, substantially more than AIG's $60 billion.

Meanwhile, many of AIG's remaining business lines would test the talents of the best underwriter. The most problematic ones are grouped under U.S. property and casualty. Last year that division racked up a dreadful 126.4 combined ratio, compared to an industrywide U.S. P&C combined ratio of 100.8, according to A.M. Best, the leading insurance credit rating agency. A ratio above 100 means an insurer is unprofitable, paying out more money in claims than it is receiving from premiums.

The biggest money-losers in AIG's U.S. P&C division were workers' compensation and other liabilities. "AIG would lose less money if they paid their underwriters in those lines to do nothing," says Meyer Shields, a Baltimore-based analyst at Keefe, Bruyette & Woods.

But a hasty exit from these operations might provoke AIG's largest multiline corporate clients to take their business elsewhere. For example, a big corporate client that is buying AIG P&C and life policies around the world expects the insurer to continue servicing its workers' comp line — no matter how unprofitable.

But with losses mounting, little wonder that workers' comp comprises a substantial portion of the reserves ceded by AIG to Berkshire Hathaway in January in the largest risk-transfer deal in insurance history. Berkshire will receive $10 billion to cover 80 percent of AIG's long-term commercial exposures prior to 2016.



Beyond the problems posed by unprofitable business lines, AIG needs to diversify away from large corporates to small and midsize firms. AIG serves more than 87 percent of companies on the Fortune Global 500. The large corporate market often involves complex, time-consuming claims. And big companies are staffed by platoons of expert professional risk managers who can squeeze the lowest prices for insurance products from any underwriter. "It's hard to make a lot of money off those guys," says Peter Deutsch, Boston-based fund manager at Fidelity Select Insurance Portfolio, whose $489 million in assets under management include AIG shares.

It would be far better if AIG could increase its share of small and midsize clients, who tend to be less sophisticated insurance buyers and thus account for most of the margin in the commercial lines market. But the SME segment is a very small part of AIG's business, and in trying to expand into this market, it faces well-entrenched rivals like Chubb and Travelers Cos.

While the U.S. P&C division and other parts of commercial insurance operations look bleak, AIG is performing well in personal insurance, life insurance, and individual and group retirement lines. These segments — grouped under consumer insurance — accounted for close to half of AIG's operating revenues last year. Their $3.8 billion in pretax operating income was in stark contrast to the $2.7 billion loss recorded by commercial insurance operations, which reeled from a 133.1 combined ratio.

AIG continued to achieve good results in its investment portfolio. Total net investment income last year remained steady at $14 billion, despite the low-interest-rate environment.

The first-half financial results for 2017 also were hopeful. Net income was $2.4 billion, compared to $1.7 billion for the same period in 2016.

These positive indicators lead some analysts to suggest that criticism of AIG is becoming overdone. "I think people are throwing out the baby with the bathwater," says Locraft, the T. Rowe Price analyst.

Maybe so, but the impatience of activist shareholders like Icahn is understandable. AIG's return on equity last year was minus 1 percent. And its one-year trailing price-earnings ratio is an astronomical 505.8, compared to Chubb's 12.3 and the industry average of 20.8. Icahn and his allies have argued that the road back to financial health can only be achieved if AIG shrinks itself to profitability.

The Trump administration has helped AIG resist calls for its breakup by taking the insurer off the systemically important financial institution, or SIFI, list. The designation -- aimed at financial services firms whose failure might trigger another global crisis -- imposed stricter capital requirements and more regulatory oversight on AIG than on other insurers. But on September 29, federal regulators decided AIG no longer deserved its "too-big-to-fail" classification.

While AIG grapples with underperforming business lines, it has enticed its shareholders with generous buybacks. Under Hancock, AIG committed itself in January 2016 to return $25 billion in share repurchases and dividends over the next two years. Duperreault, however, is determined to reduce future buybacks. "My preference is to use the capital to grow the company," he says. "And I'm going to work very hard to see that happen."

That growth could happen both organically and through acquisitions, he adds. And he doesn't intend to favor any AIG business segment over another. "I'll give everybody an equal opportunity to get the capital they need to grow and let the best person win in terms of getting that capital to increase," he says.

He is especially excited about moving ahead of rival insurers in the use of technology. A late convert to the digital revolution, Duperreault was already 69 when, as CEO of Hamilton, he helped launch Attune, the data-enabled technology platform. Now he hopes to use the same technology to service AIG's large corporate clients.

As an example, Duperreault cites an unnamed chemical company. Using algorithms that scan all available data in scientific journals and court documents, AIG underwriters can determine if a chemical produced by the company is too toxic to be covered by an insurance policy. "That's one way of taking modern data analysis and applying it to a very, very difficult problem, which is, 'Should I underwrite this chemical company or not?'" says Duperreault. "It's one of the most dangerous risks you can write."

Underscoring his commitment to this approach, Duperreault in July named Seraina Macia as CEO of a planned technology-focused subsidiary to use more algorithms in data research and risk selection for underwriting. She previously worked with Duperreault as head of Hamilton USA, the Hamilton Insurance subsidiary that AIG announced in May it will acquire for an undisclosed sum.

But for the insurance industry, technology poses more threats than rewards in the long run. The biggest danger is the spread of self-driven vehicles, which will cut down individual ownership in favor of group transportation. The resulting dramatic fall in accidents and shrinkage of motor vehicle fleets will cut deeply into the personal auto insurance market, which currently accounts for some 40 percent of total insurance industry revenues. "There will be unbelievable disruption in the P&C industry over the next 15 to 20 years because of new technologies," predicts Fidelity's Deutsch.

That's beyond Duperreault's time horizon at AIG. In five years, he hopes to have built a company with a better balance between its P&C and life businesses, with a deeper footprint across the globe, and one that will no longer elicit annoying questions about its underwriting culture. "We should be known for having great talent, the best in the business," he says.

But even if AIG reaches these goals and Duperreault turns AIG's reins over to a successor, he isn't promising to stay retired. He might hear heaven's voice again on his way to a New Jersey golf club or while sailing off Bermuda.

"I don't think there is going to be some call again to take some company over," Duperreault says. "But who knows?"