Bloomberg News

AIG Rocks as New CEO Hancock Repaints Risk Picture

August 07, 2014

AIG Rocks

Peter Hancock's AIG Rocks picture. AIG via Bloomberg

When Peter Hancock joined American International Group Inc. (AIG:US) in 2010 as a top aide to Chief Executive Officer Robert Benmosche, one of the newcomer’s first challenges was the blank walls of his office. The insurer’s stockpile of paintings tended toward dogs and ducks. Hancock’s tastes lean abstract. Spurred on by the national disgust for the bailed-out insurer, the ex-J.P. Morgan & Co. executive picked up some spray paint, spread newspapers around the dining room of his home, and set to work.

He sprayed a giant, white “AIG Sucks” on a six-foot by four-foot blue background. Over the first two letters of Sucks, Hancock painted a red “Ro,” spelling out “Rocks” and revealing on canvas the aspirations that would occupy the next years of his life.

The AIG that Hancock takes over as CEO on Sept. 1 has come a long way since its 2008 bailout that swelled to $182.3 billion. The government has been repaid, and the company shrunk through more than $75 billion of asset sales. AIG has refocused on its main global property-casualty and U.S. life insurance units.

Still, the P&C operation has posted an underwriting profit (AIG:US) in just two quarters since Hancock began running it in 2011, with most of the earnings coming from investments. Natural disasters such as superstorm Sandy elevated claims costs, and Hancock increased spending on technology and science in a bet that revamping the unit will pay off in the future.

“The mission is to take what is still, by many measures, the largest insurance company in the world and make it the most valued,” Hancock said in an interview.

Workers’ Compensation

Sitting in a metal-framed, brown leather chair in his office in New York, Hancock recited in his British accent the changes he’s made and opportunities to come. The executive, who was raised in Hong Kong, wants AIG to increase sales of car insurance in China, life policies in Japan, and travel and health coverage worldwide. For business clients, he sees opportunities to expand property-catastrophe sales outside the U.S. He’s scaled back from workers’ compensation, a line in which AIG was once the sales leader in the U.S.

Hancock took this on as a relative newcomer to insurance. When he became CEO of the property-casualty business in early 2011, he had his staff put together a 102-page pocket-sized glossary of industry terms to help get him up to speed. Yet Hancock’s career has always been focused on the right price of risk, stretching back to the two decades he spent at J.P. Morgan, now part of JPMorgan Chase & Co. (JPM:US), where he played a key role in the development of credit derivatives.

“I view a sustainable growth in value of a company as always balancing profitability, growth and risk,” said Hancock, 56. “And companies that lose sight of any one of the three tend to run into trouble.”

Managing Risk

Hancock, who tango dances weekly with his wife and recently began kite surfing with his 22-year-old son, developed a reputation in the corporate world as a student of risk. He advocates the obvious though often elusive principle that companies should make enough profit to justify the challenges (AIG:US) they take on.

At J.P. Morgan, where Hancock rose to chief financial officer before it was acquired by Chase Manhattan Corp., he helped develop credit-default swaps as he pushed the bank to limit the chance of losses from commercial lending. In insurance, Hancock sought to account for the expense of setting aside funds for years to cover losses that may arise, a cost that is higher when interest rates are low. He added that to the math AIG used to assess the policies it sold.

‘Bright Light’

The metric he introduced, called risk-adjusted profitability, or RAP, has affected AIG’s relationships with its clients, how the company designs and sets prices for its products, and which ones it picks to sell. It’s a departure from the traditional measure, which compares premium revenue with claims payments and expenses.

“Him pushing that really gave us the courage to move more quickly and more decisively,” said John Doyle, who as CEO of AIG’s commercial insurance business, reports to Hancock. “It shined a bright light, either in a good way or in a bad way, on certain products and certain geographies (AIG:US).”

AIG is still catching up with rivals like Travelers Cos. (TRV:US) and Chubb Corp. when it comes to using data, said Cliff Gallant, an analyst at Nomura Holdings Inc. Travelers and Chubb trade for more than their book value, while AIG stock sells for about 70 percent of the measure of assets minus liabilities.

Hancock and Benmosche also pushed AIG’s businesses around the globe to work together more closely. While that may cut costs, it also limits the autonomy of some executives, according to current and former managers.

Underwriting Standards

Among those who departed was Peter Eastwood, former head of AIG’s property-casualty operation in the Americas, who left with other executives for Warren Buffett’s Berkshire Hathaway Inc. (A:US) last year, prompting AIG’s stock to fall 3.3 percent in one day. Eastwood declined to comment.

As part of Hancock’s focus on risk, the University of Oxford graduate built a science group to use data the insurer has collected to improve underwriting standards and claims handling. He hired Murli Buluswar, who has a background in statistics and economics, in late 2011 to lead the unit, which now has 130 people, mainly new hires.

Still Hancock will face challenges amid low interest rates and slower increases industrywide for commercial insurance prices. The AIG built by ex-CEO Maurice “Hank” Greenberg included a plane-leasing operation and Asian life insurers, which helped cushion the company against the cycles of the property-casualty business. The sale of so many units makes the company more reliant (AIG:US) on the business that Hancock led.

‘Under Pressure’

“AIG will be under more pressure to cut prices to maintain its share,” said Josh Stirling, an analyst at Sanford C. Bernstein & Co. “The P&C story is still a work in progress.”

Hancock is surrounded by career AIG managers who can help him navigate the firm and connect his conceptual framework, RAP, with the realities of insurance agents, brokers and customers. Doyle, who’s 50, joined AIG in 1986. Kevin Hogan started in 1984, stayed until 2008 and returned to AIG as CEO of the global consumer business last year after a stint at Zurich Insurance Group AG. Jay Wintrob, who Hancock beat for the top job, joined AIG as part of its 1999 purchase of SunAmerica and runs the U.S. life unit.

While Hancock is willing to listen to ideas that contradict his conclusions, he’s deeply focused on data and doesn’t want to let emotions guide him, current and former colleagues said.

‘Brutally Analytical’

“Peter is brutally analytical, and that absolutely put some people off,” said Bill Winters, who worked with Hancock and rose to co-CEO of JPMorgan’s investment bank before starting asset manager Renshaw Bay LLP. “If you engage with Peter intellectually, you can have a really interesting, engaged discussion, but if you don’t engage with him intellectually, it’s hard.”

Months after leaving J.P. Morgan, Hancock joined with Roberto Mendoza, a former colleague at the bank, in a deal to buy a stake in Berkshire’s General Re Securities Holdings. Mendoza and Hancock “are the kind of people I want to be in business with,” Buffett said when he announced the derivatives venture. In 2002, Gen Re said it would wind down the securities business after ending the sales agreement.

Hancock and Mendoza, with the economist Robert Merton, who shared a Nobel Prize for work on derivatives pricing, then started a consulting and investments firm, Integrated Finance Ltd. The venture failed. Hancock then worked for about a year at KeyCorp where he lessened the bank’s reliance on real estate lending.

‘Real Risk’

“His particular skill is one-on-one, sleeves rolled up, digging into strategy,” said Chris Gorman, president of Key Corporate Bank. “He can take a complex set of circumstances and figure out where’s the real risk here.”

Hancock arrived at AIG when the insurer was overseen by the Federal Reserve, which had helped fund the bailout. The company’s designation last year as a potential risk to the financial system brought AIG back under the central bank’s watch, and Hancock has said he welcomes the supervision.

People who’ve worked with him say Hancock has taken a professorial approach to management, tossing around ideas -- and not always the most practical ones -- with colleagues and subordinates.

“A lot of stuff we built at Morgan was just brainstorming on different new things,” said Bill Demchak, who’s now CEO of PNC Financial Services Group Inc. “He just throws out ideas and encourages conversation and then, through the course of conversation, you sort of iterate in on things that make sense.”

Parting Gift

Hancock said he’s shifted his approach at AIG.

“There’s a time and a place for ideas, and a time and a place for focus and execution,” he said. “Certainly as I have matured as a leader I’ve become better at choosing between those two. I’ve also become much better at self-editing.”

Hancock will also join AIG’s board on Sept. 1, while Benmosche is slated to step down as a director, the company said June 10. AIG rose 0.6 percent to $52.82 at 9:48 a.m. in New York, more than double the price when Benmosche took over.

The outgoing CEO will advise Hancock and mentor company managers. And he leaves with a parting gift. Hancock gave Benmosche the AIG Rocks painting for his 70th birthday.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net Dan Reichl


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  • AIG
    (American International Group Inc)
    • $56.42 USD
    • 0.14
    • 0.25%
  • JPM
    (JPMorgan Chase & Co)
    • $62.55 USD
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