Peter Zaffino

0:28Every business starts with an idea. For many years, the most successful insurance company in the world was AIG. And then the Great Recession came, and AIG required a$183 billion bailout from the U.S. 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 in his offices in New York to talk about the new AIG. So for those who aren't familiar with property and casualty insurers, what do they really do? Well, we insure businesses, small, medium, large commercial businesses for their property insurance or their auto or financial lines, which is directors and officers.

1:09And 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's syndicate and we're a big part of Lloyd's as well. So as I understand the insurance business, there are really two parts to it. One is the part of assessing the risk and charging premiums that hopefully will, from the insurer's point of view, cover the risk. And the second is taking those premiums and investing it and hopefully getting a good rate of return. So let's talk about the first part.

1:41So in the first part of assessing risks, is it harder today because inflation is so high to assess the risk that you might have in insuring somebody's home or property? In 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, 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 is complicated.

2:21You need people with a lot of experience and a lot of good judgment in terms of making underwriting choices. If somebody says climate change does not really here, they haven't talked to a property and casualty insurer, I guess, right? That's correct. Then that is true. Five out of the last six years, we've had over$100 billion of natural disaster losses in our industry. That's never happened before. What about artificial intelligence? Is artificial intelligence going to enable you and others to say, we have enough information to know exactly what something is going to be worth in terms of insuring it or not?

2:51Artificial 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. So it's also going to present risks that other companies, how they use it and how they use large language models and making sure the decision making is very sound.

3:26So it's complicated, but it definitely is benefiting the business today. 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 years ago. But today, the contracts are much more clear. Paying claims, that's what we do. I mean, we underwrite risks, but when we have to show up in moments that matters in terms of how we pay our claims and the amount of disputes are very small as a percentage of our overall portfolio.

4:07And I don't think that that's a fair assessment. So when you make a judgment that you're gonna charge somebody a certain premium, you think that you'll probably make a little profit or some profit on the premium. and generally, are you doing that now? Yes, I mean, that's not been AIG's past. From 2009 to 2019, it lost over$30 billion in underwriting. And so coming in, I arrived in 2017 with a great team that followed me here, and we began that underwriting journey. And so now we do make underwriting profits. So for every dollar we underwrite risk, we make around$0.10 to$0.12 of profit without the investment income.

4:43Let's talk about the investment income. So you bring in these premiums and all insurers then invest it and you get great people to invest it, I assume, for you. So what kind of return are you looking for on your investment portfolio? 75 % 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.

5:16You really need to make an underwriting profit. So we balance both very well. So I should say private equity. My own firm does have a relationship with AIG. So, of course, you can't put too much money in private equity, 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 basically the core of the business? Yeah, I think generally speaking, the industry is making underwriting profit on its underwriting and it's on the investment side as well.

5:50So it's often said that Lloyd's of London, which would insure almost anything, so are there things that you won't insure 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 insure almost anything. It's much more, you know, a traditional specialty company that would have real strong expertise and scale in the areas that we underwrite.

6:25So housing insurance is a big part of your business, I assume. What is the biggest risk for you in providing insurance to 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 cost five million during the pandemic and people knocked it down and put up a 10. And so all of a sudden you had all this density in areas that were already challenged to have enough insurance to be able to respond to the individual homeowners.

7:06So I think it's just become more complex, add in more frequency of hurricanes and wildfire, and you just have a market that is under a little bit of stress. And property and casualty, that is separate than automobile insurance. Auto would go into— You do automobile insurance? Yes. And is that a risky business to be in these days? Are 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, driverless vehicles are a big exposure, but I think that with AI, quality of vehicles, it's more predictable than perhaps it was in the past.

7:43So for your own home, who provides home insurance for you? AIG. Oh, and if you have a claim, do you have any problem getting it paid? I haven't had a claim, but I don't think I would. Join Bloomberg in Houston or via live stream on November 4th for the future investor, finding the opportunities. This 2025 event series will examine how companies are investing in their businesses to create efficiencies, innovating their products and services, and improving the customer experience. This series is presented by Invesco QQQ. Register at bloomberglive.com slash futureinvestorhouston. That's bloomberglive.com slash futureinvestorhouston.

8:25Let'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 into the insurance business. Is that what happened? No, he didn't. I mean, the myth of him reading me insurance and reinsurance books at night is not true. He always encouraged me to do and pursue what I wanted. And quite frankly, I went to Boston College, graduated. And the reason why I wanted to enter the insurance industry was I wanted to stay in Boston. And a company called The Hartford that was owned by ITT at the time did offer me a job if I would do training elsewhere to come back to Boston.

9:00And so that was the reason I took the job. 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 it to be interesting even right out of college? No, 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 understanding the quantitative nature of how to underwrite and also the qualitative nature. So I liked it because it had a balance of doing different things at once. So what did you do after your first job in Boston?

9:29Well, 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 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 McLennan after that. All right. So you were working at Marsh McLennan on September 11th of 2001. And where were you on that morning? That morning, so it was my sixth day of work at Marsh McLennan, and I was on the 53rd floor of Tower 2 that day to work. And so what happened?

10:11The first plane went into Tower 1. 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 40th floor when the second plane went into the building, which I didn't know what it was at the time. I had figured either Tower 1 had tipped over or something else had come into the building, and, you know, we had a sense of urgency of getting out. Was there a mass rush down the stairways then? 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.

10:45So you got out of the building. How much before the building collapsed? I was probably 20 minutes, you know, north of the building when it collapsed. So I was never in danger of, you know, having soot 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'll see what's going to survive. You ran somewhere? Yeah. No, I actually met a friend, and we happened to, you know, we walked north to 125th Street over the course of the day to get out of the city. And how many of your colleagues died? Almost 300 that day. 300 colleagues died from Marsh McLennan.

11:22Yes. 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? No, it's the unique part about our business is that, you know, in, you know, major disasters or, you know, things that happen 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.

11:51So today, AIG over the years has been a gigantic company, one of the largest, maybe the largest at one time market cap insurers 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, a$180 billion guaranteed loan or bailout. Have you paid that back yet? Yes, that's been paid back 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?

12:28Yeah, it was a financial products product that had credit-related, and so that created an impact on liquidity. So Peter, when you took over as the CEO of this company, it wasn't in as good a 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 thing I'm proud of the most is just the number of people that came to AIG and actually people that stayed to come together as an organization to actually try and improve our underwriting, our operational capabilities in there and our financial performance.

13:03And we had to shed relative to our balance sheet$1.4 trillion of exposure since we started. And so that was a dramatic change. We had to do 10 operational programs at once to get the foundation stability for the company for the future. And I actually think that part of the pandemic benefited us because we compressed that transformation, did it very fast, and made dramatic improvements for the company. And then the financial performance started to really manifest itself from the efforts that we made on the underwriting side and the operations side. So it's just been a tremendous effort. As we've talked about this, you're now pretty much in the P &C business, property and casualty.

13:42You'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. Actuaries can tell you when they're going to die. Why is that business not as good as the property and casualty business? Well, it's a very good business. The property and casualty business is totally different. I think the complexity in life insurance business is just, you know, they have so much investable assets. It's a spread business and one that has really different dynamics that drive its outcomes.

14:14Now, I see lots of ads on television for insurance, home insurance, so forth. But I don't see a lot of AIG ads. Are 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 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?

14:47I would. I think balance sheets are strong. I think the returns are very good. And I think there's positive momentum. So you see a lot about what's going on in the economy because you underwrite a lot of activities. 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.

15:19You 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 global economy. GDP has been holding up. But certainly like in the United States, a big part of the GDP is health care and tech. And so seeing consumer spending and driving sales through retail is something that we watch frequently. What percentage of your businesses are insurance overseas and what percentage is in the United States? It's about 50-50 overseas in the United States. What are the number of employees you have now?

15:54We have a little over 30 ,000 employees at AIG and probably another 20 ,000 of employee equivalents in terms of what we outsource through a back office or through technology. And today, your market capitalization is roughly$45 billion, something like that? Yes. And today, do you spend any time in Washington, D.C., saying to regulators, you're not doing a good job regulating us or members of Congress do a better job in taking care of the debt repayment? 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.

16:28And 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 you're members of business, things like the Business Roundtable or the Business Council and things like that. When you talk to other CEOs, not just in your industry, what are they most worried about today?

17:04The 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 cyber attacks and what does that do to a company. all of that is getting a lot of attention. And I think it doesn't matter what industry you're in, it has its impact. I think also global expansion, the resistance for acquisitions and support for companies to be able to acquire 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.

17:47What do you worry about the most in terms of the job of being a CEO? Well, it's a great privilege to be a CEO of a company like this, and we've been in a massive turnaround. I'm so fortunate to have so many good people with me at AIG. I think I had the longest tenure of six years of all of my executives, and I think over 60 % of our top 100 are new to the company. And so bringing that together to actually drive the outcomes that we have has been incredibly rewarding. And taking, as you said, there's short term, you know, demands on CEOs, but taking a long term view of a business and building foundational, you know, capabilities that are gonna enable us to do much more for our clients over the long term, adapting to AI and adapting to, you know, a rapidly changing world is a high priority for me.

18:36So 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 U.S. government and help assess risk we have? You would say what? I'm better suited for a public company, is what I would say. So you're not probably going to go into the public sector anytime soon? That probably is not in the cards for me. As we talk 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?

19:09We 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 in a specific class that could have, 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 the possibility that China might invade and destroy or take over my plant.

19:50Is that the kind of thing you would do or that's too risky? That would be too risky. Yeah, I think that there's some portions of what we call political violence 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. So you don't provide war insurance then, pretty much? You provide flood insurance. I have a home in Nantucket. It'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?

20:21It's hard to get, but we do provide flood insurance, as does the government. And what's the fastest growing area of insurance for property casualty? What are people most interested in, just home insurance? Home insurance has been one of the more complicated ones across the United States. But I think one of the biggest growing areas is what we call excess 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 for AIG. And what's been the biggest challenge for the insurance industry over the last five or ten years?

20:56I think it's understanding, you know, these unpredictable risks of whether it was the pandemic, understanding what could happen, you know, with potential war break out, but also, you know, climate change. As I said before, having that type of hurricane activity, we've had 100 natural disasters reported through nine months of this year. 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 who wants to assess whether the industry is a good industry to invest in? What are the indicia that people like me should look at?

21:29I always think, depending on how sophisticated the individuals are looking 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 other variables, it's very hard to predict what's going to happen with that insurance company in the future. And then I'd look at the leadership in terms of their track record in developing business that have sustainable long-term profitability. Now, the insurance business has been historically a very strong one in the United States. Are we still the leader in global insurance or are there companies outside the United States that are even more significant now?

22:05Very 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 in 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 what I worry about, you know, the most.

22:42because there's things, if you told me five years ago, you're going to come in, be the CEO, you're going to deal with a global pandemic, two wars, potential political tension across the world, and also dealing with financial challenges, that's a lot. And so making sure that we focus and deliver on what we can do as an insurance company and adapt to all the changes that are going on around us. So for young professionals who might be watching, who say, well, I'm looking for a job, maybe I should get in the insurance business. Why should somebody want to come in the insurance business? What makes it so exciting?

23:18I think our purpose and what we do for a living is very meaningful. We keep businesses, societies, cities moving after natural disasters or moving claims and allowing companies to build. And a lot of times in order to lend, you need to have insurance. And so I think it's a, you know, industry that really doesn't get its full credit for, you know, all that it does. And I think our purpose is incredibly meaningful. And we show up in moments that are really critical for, you know, our customers and clients. 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.

23:59I guess I would call it bailout. And today you would say its 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's simpler. Operations are streamlined. So I think we've really made enormous progress and feel like we have a lot to do still. Thanks for listening. To hear more of my interviews, you can subscribe and download my podcast on Spotify, Apple, or wherever you listen.