Q&A: AIG's New AIU Tries to Rebrand In Challenging Market

Last month, shortly after American International Group, Inc. CEO Edward Liddy announced that AIG would be spinning off its global insurance operations into a new entity to be known as AIU Holdings, Inc., Insurance Journal's Andrew Simpson spoke with John Doyle, president of CEO of AIG Commercial Insurance, for more details on the rebranding plan. Doyle is slated to assume additional responsibility for the domestic Personal Lines division for the new AIU. This interview took place before AIG announced a deal to sell its Personal Auto Group including 21st Century to Zurich's Farmers Insurance unit. What follows is an edited version of the interview.

Insurance Journal: Explain why you are creating AIU?

Doyle: It's a step for us to operate more independently of AIG, an initial step, I should say, to operate more independently of AIG, to do some re-branding and management appointments, create an independent board, and then potentially attract some third party investors.
And we think it's important for us to provide our marketplace the ability to distinguish the well-capitalized property casualty companies from the challenges that AIG has. So, that's the intention.

IJ: The insurance operations have always been walled off, right? They've always been protected yet that doesn't seem to be the perception. Why is that the case? Why can't that message hold, especially with sophisticated insurance buyers?

Doyle: I don't know, you tell me … I have been talking about it for six months. … I think many of our customers are sophisticated and some less so, but many of them have to, maybe, answer to folks that aren't familiar with the distinction between our insurance operations and the challenges that AIG has. So again, we are trying to provide our marketplaces a way to see through the problems at AIG and distinguish the property/casualty companies from those challenges.

IJ: In terms of the operations for an independent AIU, your ratings would be totally separate from AIG, right?

Doyle: Well, we have financial strength ratings currently but we don't have credit ratings. One of the positive aspects of the change is to have the ability down the road to access capital markets directly. Right now we need to access those markets through AIG. And we think it's important within our property/ casualty companies to have the flexibility to approach those markets ourselves. And so, at some point down the road, we will have a credit rating, our own credit rating as well.

IJ: How will this work. Will the entire global insurance operations be spun off; will it be done in increments?

Doyle: What we announced was that we could seek third party investment initially up to 19.9%, a 19.9% interest in AIU Holdings. It's not just commercial insurance… it's our global property casualty companies… So the sale would be up to, initially, the sale of up to 19.9% of our global property casualty companies, again in the AIU Holdings.

IJ: Do you wish this had been done sooner?

Doyle: Oh, I don't know if that's for me to say, but as I said I think it's a positive step for us. The market reaction has been terrific and, so we got a tremendous amount of support from clients and workers and you know since the middle of September and so, I think it's right step for us.

IJ: You have been meeting with brokers and their buyers to answer questions and explain things. What concerns have they raised?

Doyle: They want more details… They want to know when. And what we've said is, we are moving very aggressively and we will announce milestones along the way, so the marketplace again can continue to see the separation of our companies from the challenges that AIG had.

IJ: Do you envision of an actual physical relocation?

Doyle: No, our commercial insurance companies, here, actually own the building that we are in. So, at some point I think the name on the building will change, but the building won't. We own it now.

IJ: It's always a challenge to retain business and get new business. But in your particular case, do you feel increasing pressure to do that by lowering prices?

Doyle: I do not. We've been very clear right from the outset that we've continued to be disciplined about the way we price our business. And as you can see from our results in the fourth quarter, we did not grow market share in the fourth quarter, in fact we let a lot of business go. Other markets were aggressively quoting our renewals at prices well below, in some cases well below our expiring prices. We let that business move on.We know that while we're confronted with some challenges relating to AIG, we don't want to compound those challenges by causing profitability problems for us within our insurance operations. We made absolutely clear we are to continue to maintain the underwriting discipline that's made us such a strong company, historically.

IJ: Let's talk about the investment portfolio or strategy of the insurance operations; that is, versus some of the concerns over what the parent got involved in.

Doyle: Sure. Within our property casualty companies we take risk on the liability side of the balance sheet in the underwriting risk that we assume. We think we have the best underwriters in the business. So we are very conservative on the asset side of the balance sheet.Our investment portfolio is conservative and it serves us well. Our surplus has been very stable over what is clearly a very volatile time for global financial markets. About three-fourths of our portfolio is in munis and those munis have held up very well. They have high credit quality.The NAIC [National Association of Insurance Commissioners] takes a look at the asset risk that insurance companies take. We're positioned very well relative to our competitors, in terms of how conservative our investment portfolio is. That's according to the NAIC.

IJ: Do you think that's one of the subjects that buyers haven't fully understood? How much your investments are scrutinized by the regulators?

Doyle: Yeah, you know Andy I think that's a good point. We've spent a lot of time talking to our customers about that. So I think that they're surprised. That, maybe, is an element of surprise when we go through that with them. But I think the good news is that our customers have been very willing to give us the opportunity to talk to them about it. And when we get in front of a customer and talk about the strength of our balance sheet, we're usually very, very successful. In fact, I would tell you that our client retention is at normal historical levels. Some clients have moderated their exposure to us a bit, but client retention remains very, very strong.

IJ: How about new business, is that a challenge?

Doyle: It's a bit of a challenge. It's, I think, in part AIG related. But also directly due to the economy as well. We're major writers of transactional business. For example, construction, environmental, IPO related opportunities for us and obviously those markets have all slowed down considerably.We price based on exposure and whether it's payroll or sales or the number of units or the units in a fleet or whatever it may be, are all under significant pressure. So the economy has created some challenges for us there as well. And some AIG related challenges too.

IJ: Back to your investments. Do the P/C operations own any stock in AIG?

Doyle: No.

IJ: So it would be enough of a challenge just dealing with the economy without having to deal with some troubles with perception related to the parent?

Doyle: Yeah. Look, I think there are lots of challenges in the insurance market. Prices have been under pressure for a number of years. Net investment income is at greater risk than at other points in our history. Those are normal insurance company management challenges, and we expect, with the formation of AIU Holdings, we will be able to continue to focus on those challenges and, again, distance ourselves from the edge and related challenges.

IJ: Will becoming independent help keep some people who maybe were thinking about leaving. Do you think that has that effect?

Doyle: Absolutely. We think it was an important and exciting development for our customers and our brokers, but also for our employees. They are very excited about, as I mentioned, the possibility of having an ownership stake in the company is very exciting to them, but also to position ourselves to operate more independently from AIG. They are very, very proud of our global property casualty franchise, and with good reason. It is a great business. It was a very, very positive step for the staff. And I should say, on top of that, I have been inundated with resumes from people who want to be a part of the creation of this business. It is an exciting time from an employer and an employee point of view too.

IJ: What is the realistic timetable for going independent?

Doyle: AIU Holdings has been formed, we are in the process of contributing the various insurance companies to that company, so it will take a bit of time. But over time we will be making announcements about branding and management appointments, board level appointments and looking to attract third party investments.Private investment could happen sooner than the possibility of going public. Again, two days after we do go public... I have to be careful about what I say on that because of the security clause, that is why I am couching as an option. So again, if we go public it is likely to be a 2010 event. I will just leave it at that; it will start in the year 2010.

IJ: Could Hank Greenberg [former AIG CEO] be an investor?

Doyle: Yeah, obviously, the shares are traded publicly. Any investor could buy.