Other key changes announced at the time were the appointment of Nicholas C Walsh, previously President and Chief Executive Officer of Chartis International, to lead global distribution, reporting to Mr Hancock. The global distribution organisation supports both the commercial and consumer groups and works with underwriting and claims to deliver global and local insurance solutions to customers.

The newly focused Chartis included four principal regions. These were US/Canada, led by Peter J Eastwood, former President of Lexington Insurance Company; Europe, led by Alexander [Lex] R Baugh; Far East, led by Jose A Hernandez; and Growth Economies, led by Julio A Portalatin. These regional heads report to Mr Hancock, and focus on the execution of commercial, consumer, and distribution strategies within their territories, as well as the management of day-to-day operations, including regulatory, financial and general business issues.

“Our top priorities for our property casualty businesses are to strengthen all aspects of our underwriting, claims management, reserving and risk management so that we consistently earn the right risk-adjusted returns,” said Robert H Benmosche, President and Chief Executive Officer of AIG at the time.

Mr Hancock joined AIG in February of 2010. He has spent his entire career in financial services, including 20 years at JP Morgan, where he established the Global Derivatives Group, ran the Global Fixed Income Business and Global Credit Portfolio, and served as the firm’s chief financial officer and chairman of its Risk Management Committee.

Mr Hancock, known as the ‘father’ of the derivatives market by some, later co-founded Integrated Finance Limited, an advisory firm specialising in strategic risk management, asset management and pension solutions. Just before joining AIG he was vice chairman of banking group Keycorp.

Mr Hancock played a ‘pivotal’ role at AIG in the 14 months before he took up the new role at Chartis, said the group. He was the principal designer of AIG’s recapitalisation plan announced in January of this year. He also oversaw the reorganisation of the company’s enterprise risk management function, as well as the completion of the de-risking of the AIGFP portfolios and the integration of the legacy AIGFP portfolios into AIG Investments.

Mr Hancock told Commercial Risk Europe that the reorganisation of the Chartis business was not just a cosmetic reshuffle but a significant change for the new operation that would enable it to make better use of resources, the group more attractive to private investors again and, at the same time, the group easier to understand and use for customers.

“We have a very geographically diverse company based in 90 countries that operates all over the world. The business was managed historically in two divisions: international and domestic [US]. But these divisions were also split into many, many different brands and individual legal entities such as American Home and AIU,” he explained.

“The creation of Chartis was done partly to stitch together under one brand the two divisions and their multiple brands and entities. But this didn’t eliminate the fact that customers were still dealing with many different areas within Chartis. The reorganisation was therefore part of an attempt to rationalise underwriting decisions and simplify decisions for customers,” said Mr Hancock.

Mr Hancock pointed out that the two main divisions—global commercial and global consumer led by John Doyle and Jeffrey Hayman—are very different and have very different risk profiles and so naturally sit in different camps. “Commercial tends to focus on long-term, large severity and lower frequency risks. The consumer business is all about using technology efficiently to take advantage of scale. Therefore, separating the divisions was appropriate as one business is about finding better technical and underwriting tools, and the other, scalable technology,” he explained.

Mr Hancock said that the commercial and consumer divisions each has a reporting structure that supports it with one person in charge of each of the main lines, such as global property, to help deliver a ‘consistent’ underwriting approach the world over.

“This global approach makes sense because it enables us to use our capacity more effectively. We have traditionally had much bigger property capacity in the US than elsewhere, for example, but with the new structure this capacity can be used more effectively worldwide. This enables us to take advantage of our balance sheet, provides greater diversification and increases capacity made available for local clients,” he explained.

The sense lying behind this restructure does invite the question of why this had not been done before. Mr Hancock replied that it is all about ‘balance’.

“Customers really understand their risks and want to communicate face to face with our people who enjoy delegated decision-making on the ground. This represents big value for the customer and so it was an important matter for us to weigh up this balance, giving our local people the authority to make decisions without damaging the aggregate portfolio,” he explained.

“Therefore, it is a delicate balancing act. In addition to the commercial and consumer business heads, we also have four regional heads who can provide back-up for the national country heads and also ensure that the national view is balanced by the global view. And finally, we have a head of distribution—Nic Walsh. Global product, geography and distribution are three ways to look at our business,” continued Mr Hancock.

Commercial and industrial insurance buyers in particular are worried that the rising catastrophe losses, difficult investment conditions and continued tight capital markets, emerging new capital adequacy rules such as Solvency II and stubbornly soft underwriting conditions will all combine to make this business less attractive to major providers such as Chartis than other less capital-intensive lines such as those written by the group’s consumer business.

The fact that AIG has the added commitment of having to pay back the government and make itself attractive to private investors in the longer run surely adds to this pressure.

Mr Hancock said that Chartis is naturally ‘particularly focused’ on capital allocation. He pointed out that in May, the group communicated a goal to return $25-30bn of capital from now until 2015 to shareholders and this includes contributions from Chartis. This contribution will be delivered partly as a result of being so much more efficient, he said. What this means for underwriting capacity for higher risk lines, such as industrial insurance, will depend upon the returns on offer, he added.

“In terms of the volume of capital allocated to various lines, in some areas it will reduce and in others it will increase. We will have less capital at work where it is not being paid a sufficient return and more where we are implementing measures to ensure that there is a good return on capital. An adequate risk adjusted return on capital in a line of business allows for better relationships with customers,” said Mr Hancock.

And, from an industrial insurance buyers’ perspective, one has to assume that, despite what competitors may claim, Chartis cannot be at the vanguard of those insurers determined to prevent the apparently inevitable and long-awaited hardening of the market by engaging in cash-flow underwriting.

The ability of AIG to announce the first part of its recapitalisation plan to repay all its obligations to US taxpayers, including repayment of the FRBNY Credit Facility and conversion of the US Treasury Department’s holdings into AIG common stock, was a significant statement about progress made to date and chances for the group to continue down the road to rehabilitation and eventual sale back to private investors.

Mr Hancock said that the rehabilitation process is not complete yet but well underway and warmed to the medical analogy stating that the group is really now in ‘physiotherapy’.

“If you think of the rehabilitation in terms of a personal injury, what stage are we at? We are certainly not critical, that was a long time ago. We took the plaster off the leg in January when AIG repaid the credit facility extended by the Federal Reserve and exchanged the Treasury’s holdings for AIG common stock .Therefore, after the repayment, we had one very large shareholder with 92% ownership, which is now 77% after the equity sale,” he explained.

“The other thing that AIG has done over the last two and a half years is sell over 30 companies and simplify its corporate structure. So we are now at the final stage and undergoing physiotherapy. The returns on equity (ROE) are below target and so the aim is to raise the ROE from 6.5% up to 10-12% by 2015. We are being pragmatic and over time becoming more efficient. We are achieving more capital efficiency and reducing operating costs. It is nothing abrupt but more of a gradual process back to full health,” continued Mr Hancock.

In the eyes of some market observers the physio treatment may have taken something of a step backwards when in in February AIG announced it would post a $4.2bn fourth-quarter charge to strengthen loss reserves for Chartis’ long-tail property/casualty business.

AIG still managed to post a fourth-quarter net profit of $11.2bn, up from a loss of $8.9bn for the same period the year before, and this included the $4.2bn reserve addition. So overall it was still good news.

But insurance market analysts and observers do tend to become twitchy when they see big fat reserve additions and for some this possibly signaled a worrying return to an unwelcome trend, not seen since the turn of the century, when leading US and international insurers saw their profits mauled by massive reserve hikes after years of underwriting liability business at low rates.

When asked whether this big charge represented a worrying portent of a wider trend or whether it was simply an example of good housekeeping carried out at a time when the balance sheet was being sorted out anyway, Mr Hancock was, perhaps understandably, not too keen to commit either way. But he did say that he has personally focused very much on this critical area to make sure that it is carried out as well as possible to help avoid future nasty shocks that obviously would not be well received by potential future investors.

“You have to be very precise about how you manage your reserves and need to phrase this conservatively. Under US GAAP you cannot be overly conservative and you have to give it your best shot every quarter. We have looked at the reserves more closely than ever before and employed fresh eyes. We have a new chief actuary who joined us from Allianz and we created a new role of chief actuary at the AIG level,” he explained.

“We stepped up the frequency of analysis and the use of external actuaries. We have $68bn of reserves, and some of this business, as you know, has very long tails. We increased reserves by $4.2bn at year-end 2010 primarily for business that was transacted in the long distant past. We are estimating what will be the most likely position and so there may always be positive or adverse development, as with any insurer, so we don’t expect it to be zero. But we are putting a lot of effort into our reserving methods, we are improving and we hope this averages to zero over time,” continued Mr Hancock.

But sorting out the balance sheet and assuring investors about the likely health of the ongoing profits is only one side of the equation. The business will only continue the recovery if the customers continue to retain their faith in the business. Mr Hancock was therefore asked the blunt question of why a corporate insurance manager in Europe, the US or elsewhere would choose Chartis to lead their programme, rather than one of its global rivals.

Mr Hancock said that this question had already effectively been answered. “At the height of the crisis, when there was the greatest uncertainty, 92% of our customers stuck with us. That was our retention rate. We have customer relationships with the largest corporations worldwide that have complex risk transfer and management requirements and need products that cover multiple risks across many territories and we can deliver that. Also, consider the people we have retained. We kept 97% of our top 2,000 employees over the last 12 months and these people have really long standing relationships, they understand customer needs and they are all working harder than they were three years ago!” he said.

But, given the natural turnover of customers in any commercial insurance business, an insurer also has to attract new business. This cannot be easy in such a stubbornly soft market, with persistently high competition when you have made a clear commitment to only writing business that offers an adequate return.

Mr Hancock did not claim to hold a secret weapon or cunning plan up his sleeve when asked how Chartis plans to win new business from the competition which one may have expected from such a highly regarded financial expert. But his common sense approach will no doubt be well received by analysts of the commercial insurance market and more importantly customers and Chartis staff.

“Word of mouth,” he said is the key sales message. “When disaster events happen you build your reputation. Terrible catastrophes have happened this year in New Zealand, Australia, Japan and the US Midwest. How you handle such claims is a great test of the long-term promise that is the essence of insurance, and we received very good marks from the market. Beyond that you have to offer the complete service and offer the ability to contribute to the complexity of relationships with true commitment and ability,” he continued.

To deliver top notch service a company needs to nurture and retain the best staff and Mr Hancock said that Chartis already has a great track record in this respect. He said that he really enjoys travelling to Chartis operations worldwide to meet such staff in the flesh.

He said that he had recently visited Dubai to meet the management of the EMEA region and the average length of their service with Chartis was 15 years. These managers had, on average, worked in five different countries, he explained. “This is really important for clients because it means our people are on the ground, not just visiting, but living and working on the ground. This is particularly important when it comes to co-ordinating global programmes for example,” said Mr Hancock.

The longer term strategy for client management and the delivery of a truly global service that works is clearly critical for the larger corporate insurance market in particular. But, for the time being, as Chartis continues its rehabilitation programme and heads towards ultimate return to the private market, a turn in market conditions across the board would clearly help with such poor investment market conditions currently.

Mr Hancock does not possess the crystal ball that everyone in this market would like to have to enable them to predict the timing and velocity of the market turn. But he agreed with many others in this market who have been around a lot longer than he, that, whichever way you look at it, insurers have to sharpen their underwriting pencils sooner rather than later.

“I have little insight into the timing of the cycle but my observation is that there is no longer a single cycle. Perhaps we are seeing the development of micro cycles, by product and business line. The European aviation market hardened last year and then softened again. So it is perhaps more localised and when capital constraints emerge, prices harden and then capital flows towards those opportunities faster than in the past,” he said.

“The adjustment to lower interest rates is a big deal and this means that the level of combined ratio needed is different. It needs to be lower. Credit spreads are tight but liquidity is not a risk and of course we hold the policyholders’ money for a longer time so the liquidity premium is not bad. Credit is not so good and investment returns are lower than 10 years ago. So, at the end of the day, there has to be a greater focus on technical underwriting and improved underwriting. You have to work very hard when the market is soft,” concluded Mr Hancock.

So, at the end of the day, the return of AIG and, by that Chartis, to full health and the private market is all about hard work, commitment and sensible management of the available resources. Given the damage caused to the group in the past by efforts to maximise returns through the use of exotic new techniques and tools in new markets this is of course the most logical strategy.

The true test for Mr Hancock and his team will be to rigorously follow through the strategy at ground level right down to the local underwriting level. The success of that will, as ever, depend not only the company’s ability to maintain discipline among the underwriters without losing masses of business and, at the same time of course, upon the vagaries of the wider underwriting cycle and strength and strategy of competitors, over which even Mr Hancock has no control of course.

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