It’s Not About AIG, Says Berkshire’s Peter Eastwood June 17, 2013 by Susanne Sclafane

EXECUTIVE SUMMARY When a veteran of CNA joined Berkshire Hathaway Peter Eastwood, the president of Berkshire Specialty Insurance to lead the new venture’s professional Hathaway Specialty Insurance revealed plans liability division last week, the news did not receive the for the newest entrant into the U.S E&S market press that the followed the first four recruits to insurance and its progress to date during a recent Carrier organization. Management interview. At the start of week No. 7, the startup already had business on the But that initial media attention is one factor that has helped books and 40 professionals in five offices, he said, the new unit quietly build out its ranks 10-fold in the framing long-term goals with no mention of any last six weeks, according to Berkshire Hathaway Specialty desire to surpass the company he left behind — Insurance’s President Peter Eastwood, who said the buzz American International Group. fueled outreach from people around the industry interested in joining the team.

Eastwood, who sat down with Carrier Management a day after Dan Fortin joined his team from CNA, said that less than half of the 40 professionals now on board followed him and the first three employees— Sanjay Godhwani, David Bresnahan and David Fields—from American International Group.

“For those of us who left AIG initially, it really was about the opportunity that Berkshire Hathaway presented. It’s really not about AIG,” Eastwood said, responding to a question about the impetus for the move.

He explained the perceived benefits of being part of Berkshire Hathaway in more detail during the interview excerpted below.

He also provided an overview of how the team is coming together, noting that the 40 employees are located in five offices—in Boston, New York, Atlanta, Chicago and Los Angeles:

• Fortin, who worked at CNA for 22 years, and had a stint at Aon Financial Services Group as well, will lead management and professional liability businesses, which Bresnahan will oversee along with other casualty lines.

• Godhwani is overseeing property and program business.

• Fields is the chief underwriting officer, and has oversight of the actuarial, reinsurance and finance functions.

Leadership positions for each of the various businesses, with the exception of program business, as well as positions of functional leadership within the group are filled, Eastwood reported, noting that regional leadership is also in place. “In many instances, we have hired one or two levels below that into the underwriting ranks of the organization,” he said.

“We are in the process, now that we have Dan Fortin, of starting to build out a leadership team within the 40-strong & growing, Berkshire’s new professional and management liability spaces below him. specialty operation has already written Then we’ll start the processes of building out the a fair amount, Eastwood says. underwriting teams below those levels as well.” We are 40 employees right now, but “it moves on a daily basis.” Of the 40, about half are in Boston and the rest are spread throughout the other regional underwriting offices.

While the talent ramp-up may seem quick, Eastwood went on to describe a very deliberate goal of hiring profession- als that fit into culture of collaboration.

“As we continue to write business—and we’ve written a fair amount of business already—we’ll continue to bring additional people onto the platform to ensure that we can continue to service the business in a way that we think is appropriate to meet the customers’ expectations,” he said. Although he was not willing to provide a figure on the dollars written or number of accounts written to date, East- wood did respond to a host of questions that industry participants are curious about during an interview that took place during the Advisen Property Insights Conference.

Q: I recall that your background was in health professional liability and in casualty lines? What brings you to a property conference?

Eastwood: There was a point in time, five years ago, when I assumed the CEO role at Lexington, where I had -re sponsibility for property business. At Berkshire Hathaway, for the new business that we’re creating, property is at the core of what we are going to do, and are doing.

Q: What type of business do you anticipate writing?

Eastwood: Our initial focus will be building out the business in the United States. It will be a broad-based commer- cial property and casualty insurance operation—predominately focused in the E&S (excess and surplus lines) mar- ket.

Having said that, we do have admitted paper.

There will be certain businesses that we’re involved with that really lend themselves to admitted market capabilities. The casualty business will consist of traditional casualty, both primary and excess, as well as management and pro- fessional liability and program business. Management liability, specifically D&O, tends to be more of an admitted market opportunity, as does the program business.

Q: So distribution is not exclusively wholesale.

Eastwood: We’re working with retail and wholesale.

Q: There is speculation suggesting that the team might be contemplating writing some small-account business in order to generate a multi-billion-dollar premium volume figure in the next few years, somewhat similar to the business that Berkshire’s United States Liability Insurance writes today. When you say “E&S,” are you including this small-account business in your definition?

Eastwood: It won’t be small account focused outside of the program business, where we enter into agreements with outside managing general agents and work with them on homogeneous classes of business. The portfolio of compa- nies that fit into those programs tend to be small business opportunities, but not exclusively.

But our focus will be [on] upper middle-market all the way through Fortune 100 accounts. Q: Can you tell us anything about the structure of the business. I read a comparison recently to the early days of ACE and XL, when they were writing excess casualty business.

Eastwood: It’s not an opportunity similar to what ACE and XL did in the 1980s. I think we’ve got an opportunity to be a primary player, [not just] a high excess player. You’ll see us in all lines of business, participating on programs where it makes sense for us to be in a customer market.

There are a number of reasons why the E&S space is intriguing to us, offering benefits from a customer perspective. [One is] the freedom that you’re afforded from a forms perspective in terms of your ability to tailor coverages—to be innovative, to be creative and responsive to what customer needs are. The E&S marketplace provides that substantially.

What people should expect from us is that level of creativity, that level of innovation—really trying to work with customers and brokers to put creative structures, creative products in to the marketplace, but ultimately to satisfy the customers’ needs.

Q: Why did it make sense to set this operation up now? And why at Berkshire? Why not at AIG?

Eastwood: Berkshire Hathaway is an organization that both knows and values the insurance business. The team and I were attracted to that.

Second, our business is a risk-taking business, and Berkshire has a balance sheet that allows us to take risk. Collectively, for Berkshire’s flagship company, National Indemnity and its affiliates, policyholders surplus is approximately $100 billion.

From my perspective, as I have watched this business over the last 20 years, I think risk is getting bigger. It’s getting more pronounced. The frequency of the natural catastrophe events that are happening is greater than it’s been.

A company with a big balance sheet and strong financial ratings will ensure customers that when a loss takes place, they’ll be around to pay it and continue to write the “Berkshire Hathaway is an business. organization that both knows and values the insurance The other thing that’s appealing about Berkshire Hathaway business.” is its brand. Its reputation broadly in corporate America is one of integrity, of smart business, of doing the right thing.

Q: Despite the past problems at AIG, we could say that some of these things apply. AIG now has a strong balance sheet and a reputation for innovation, for knowing the business. Why not AIG? Why look elsewhere?

Eastwood: I try not to get into AIG. For me, and I’ll speak for the rest of the team, those of us who left AIG initially, it really was about the opportunity that Berkshire Hathaway presented and the things I just mentioned. It’s really not about AIG.

I’m sure they’ll continue to be successful. I have a lot of friends there—a lot of people that I have a tremendous amount of respect for.

Outside of that, I’ll leave AIG to AIG. Q: In a television interview (which aired on Bloomberg TV on the day before Berkshire’s annual meeting), Warren Buffett said “They came to us. They’ve called us.” How did the events actually play out to bring you and the other three AIG leaders on the initial team to Berkshire?

Eastwood: I have had a relationship with Ajit Jain [the head of Berkshire Hathaway Reinsurance] for a number of years. I have “Risk is getting bigger. known Ajit really from my days as CEO of Lexington Insurance It’s getting more pronounced.” when we were a buyer of reinsurance. That relationship developed at that time. It’s a relationship that’s been maintained.

There’s nothing more to what took place seven weeks ago than a business relationship resulting in an opportunity.

Q: You said you wanted to leave AIG to AIG, but I do want to give you a chance to react to something that Robert Benmosche, CEO of AIG, said when asked about your April 29 departure with the three other executives. He said, “This group doesn’t agree with the one AIG strategy we have—to make this company more integrated and working more as a team.”

Eastwood: I don’t have any interest in responding.

What I will tell you is that when I look at the business, I look at it in very simple terms. No matter how complex a company is, I believe you can boil it down to two things: the balance sheet, or the financial capital that’s on the balance sheet and the quality of that capital, [and] people or human capital.

So the team’s objective is essentially to find very talented people to attach to the Berkshire Hathaway balance sheet— essentially to operationalize that balance sheet.

At the core of what we do will be culture—and that culture will be one of collaboration, of teamwork, a culture where people who get up in the morning and come into work for Berkshire Hathaway Specialty Insurance feel that they’re treated respectfully, civilly, with dignity.

“Berkshire Hathaway’s reputation broadly in corporate America is one of integrity, of smart business, of doing the right thing.”

And it will be a culture of meritocracy where those who make the greatest contribution to the success of the organization will be given the greatest opportunities in terms of access, exposure, additional responsibility, compensation—all the things that are important to individuals.

Teamwork will be essential to what we accomplish. We have no interest in having any one individual on the team stand out as being larger or greater than the totality of the organization.

Q: You mentioned that less than half the Berkshire Hathaway Specialty team is from AIG, and that the level of media attention is helping to attract good people. Is that how the hires are generally happening, or are you seeking out certain individuals?

Eastwood: It’s a combination. It has really been fascinating for me, and for the team, and frankly very exciting to see the level of interest that our new venture has created.

We feel very fortunate to be in a position where there’s a high level of interest from people across the industry, and even outside of it—very senior level people and junior, across the various businesses and across the functions. Q: You mentioned that the new operation is “up and running and writing business” already. Can you share how much you’ve written and what type? Is it mostly property?

Eastwood: It’s both property and casualty business. I can’t tell you the exact number or number of accounts we’ve written, but it’s fairly balanced between catastrophe-property business and traditional casualty business, primarily excess casualty, in the early days as we continue to work through the process of building out products.

Q: What would you say is your competitive advantage right now? Why is the business coming to you? There is speculation out in the market that suggests that because Berkshire has such clout, that you’re going to charge lower prices and move the market down.

Eastwood: I don’t think it’s any more complex than the things I mentioned to you earlier—the size and quality of the balance sheet, positive business reputation that Berkshire Hathaway enjoys in the business community, and the quality of the people. Putting myself aside, I think about the three individuals that I left AIG with, and I believe they are terrific professionals. I believe they are people that customers and brokers want to do business with. I believe they’re all individuals that potential colleagues want to work with and want to work for.

That’s my basic premise—that if you have a quality balance sheet, a positive business reputation and the people that you ask to operationalize the organization come to the organization with a requisite amount of knowledge about the business, make smart decisions to create the appropriate strategies and then effectively execute on them in a way that’s not only satisfactory to Berkshire Hathaway, but also satisfactory to customers and brokers, then by and large, it’s a winning proposition.

Q: Did the four of you work closely together before at AIG?

Eastwood: My relationships with the other individuals are all deep relationships, but they vary in length of time they’ve existed. My longest-standing relationship is actually with Dave Fields, dating back to the late 1990s [when we] partnered together in running a business called AIG Risk Finance in the alternative risk transfer space for approximately a three-year period.

I have known Sanjay Godhwani and Dave Bresnahan since the early 2000s. I joined Lexington, a part of AIG, in October 2003. At the time, Dave Bresnahan was running Lexington’s professional liability business; Sanjay was a casualty manager in Chicago and ultimately came to Boston and ran Lexington’s program business.

When I assumed responsibility for Lexington in December 2008, when [former CEO] Kevin Kelley left the organization, they became part of Lexington’s leadership team.

In my most recent assignment at AIG as the president and CEO of AIG’s property/casualty businesses in the Americas, both Sanjay and Dave had reporting relationships. Sanjay, for a three-month period of time, was overseeing AIG’s property and casualty businesses in Latin America reporting to me, and Dave replaced me as president of Lexington.

Q: You mentioned Dave Field’s expertise in alternative risk transfer, what we used to call finite business. Do you expect that to be a part of the Berkshire picture going forward?

Eastwood: I don’t know whether we’ll be in the alternative risk space.

We absolutely intend to be creative, innovative in our approach—doing our best to tailor coverage to the needs of the individual insured.

Having Dave on the team brings us a tremendous amount of value in so many ways. His creative mind, creative thinking just happens to be one of them. I am absolutely certain that his skill set from years ago will be brought to bear on our operation.

Q: We talked a little bit about why the business is moving to Berkshire. One question people are wondering about is whether that business is moving from AIG.

Eastwood: I can’t really tell you whether it is coming from AIG or not. I would tell you that we’re being placed on programs, and I’m sure, in some instances, we’re winning business from others in the marketplace. In other instances, customers are buying additional capacity and putting us on their programs.

“At the core of what we do will be culture—and that culture will be one of collaboration, of teamwork, a culture where people who get up in the morning and come into work for Berkshire Hathaway Specialty Insurance feel that they’re treated respectfully, civilly, with dignity.”

Q: There is speculation about how big the company is going to, with some commentators indicating a possible goal of $5 billion in near-term timeframe. Do you have a number in mind? Do you have aspirations of being bigger than Lexington or growing faster than Ironshore?

Eastwood: I do have a number in mind. It’s not one I’m going to share publicly. “At the core of what we do will be culture—and that culture will be Having said that, our aspiration is to build as big of a one of collaboration, of teamwork, business as we can, assuming that we can generate acceptable a culture where people who get up margins. And that is predicated on us being relevant in the in the morning and come into work marketplace—on customers and brokers saying that they for Berkshire Hathaway Specialty believe in the value proposition that I have already described. Insurance feel that they’re treated If so, then I fully anticipate that we’re going to be a very large respectfully, civilly, with dignity.” presence in the commercial property and casualty insurance space. It’s as simple as that.

Q: You talked about innovation and some of the creative minds on your team. Beyond that, from day 1, with a blank slate, how do you build a culture of innovation?

Eastwood: It really does start with the individual people that you have on the team.

When you have a group, starting with the initial four of us that created the business—all of whom have been in the business on the low end 20 years and on the high end 31 years—having worked in environments where creativity and innovation is valued, and all having been in situations where we have brought products to businesses, or just individual creative policy solutions to customers, it really just starts there.

And then the leadership team has the responsibility to drive that across and down into the organization to ensure that the hiring decisions that are made, the people that are brought onto the platform, are people that are like- minded. [The leaders also] have to continue to challenge the organization to be thinking about new and different ways of doing business, new and different ways of solving problems. Q: We talked about competitive advantages earlier—what sets your new operation apart from the industry. But I’m wondering how you’re distinguished from some of the other Berkshire specialty operations. We talked about USLI already, but what about General Star and any of the others? Is there any overlap or any areas of synergy?

Eastwood: It is early days. I am sure there’s some overlap.

Our charge right now is to create a multiline property and casualty insurance business. I am sure at some point in time, as we go through that process we’ll find opportunities where we can work more closely with other parts of the Berkshire Hathaway organization.

Already, we have been partnering with our colleagues in London in providing punitive damage wrap solutions in some of our casualty lines. They’re able to satisfy that need for the customer.

Q: What are your biggest challenges so far, or going forward?

Eastwood: The biggest challenge is making sure we hire the right people.

Culture is something that is really important to us. We want to make sure the people we bring into the organization really fit. We want to work collaboratively. We want to work effectively as a team. [That requires] people who are putting the larger interests of the group and the Berkshire Hathaway organization first and foremost in their minds when they make decisions, and thinking secondarily about themselves.

Getting that right will ensure that we’ve got the right culture to move the organization forward, and importantly, that we create the right value proposition for customers–the reasons they want to do business with us…

The next challenge, as we start expanding into the marketplace, is to start having the conversation about what is Berkshire Hathaway Specialty Insurance, what is it that we’re doing, what are our interests—and in a competitive marketplace, going out and competing to win business.

Q: How do you know when you’re interviewing someone—is it just talking to them that helps you know that they fit the culture, that they have that collaborative team spirit?

Eastwood: That’s a big part of it.

After being in the business for 22 years, [and] some of my colleagues [have been in the business] for 31 years, we have spent a lot of time with a lot of people. In many cases, in a relatively short period of time, you can get a pretty good sense of whether someone is going to fit with you, going to fit with the rest of the team.

We have been very careful to be checking references as well, [with] our business partners, who are people that we’re going to do business through. It is important for us to understand what their thoughts are about individuals we bring on the platform as well. They will be quite helpful to us in vetting people.

Also, as we’re interviewing people, we have a number of people on our team speaking to candidates. So it’s not just one individual’s perspective as to whether somebody is going to fit. Q: I know there’s a talent war out there. Is it expensive to acquire talent? Other than working for Berkshire Hathaway, what is attracting people to work for the new specialty operation?

Eastwood: I think being part of Berkshire Hathaway is a very appealing part of the value proposition for all the reasons that I mentioned. [Also], Dave, Dave and Sanjay [are] people that I believe others want to work with and work for.

Talent attracts talent at the end of the day. Good people want to work with good people.

And if you create an environment where they believe that their contribution to the organization is valued, if they have that seat at the table and voice in the organization, then I think very talented people will want to work in the organization. They know their contribution matters. They’re given an opportunity to express their views and opinions [and] their opinions are actually taken into consideration in key decisions in the organization.

Q: We haven’t talked about market conditions. Are you able to get adequate prices on the business you write? Are prices coming down?

Eastwood: At this point, we’ve got a small portfolio of business. So given the amount of risk and the opportunities that are in the marketplace, we are finding risks that are a fit for us, where we think that the pricing is appropriate, where the terms associated with the program are appropriate, and where there’s a like-mindedness in terms of longevity, long-term perspective for us and the customer.

In these early days, we’re finding that there’s a lot of opportunity, and the marketplace is such that it’s appealing to be in the business.

Q: At the end of the year, when you look back and you measure the success, will it be in terms of a profit margin, volume of people that you’ve hired, or volume to business that you put on the books?

Eastwood: I think it’s all of the above. How quickly we have grown the business is one measure of our success. It’s certainly not a measure that we would look at in isolation, but in relation to the combined ratio that is generated. That will tell us whether we actually made the right decisions in terms of the business we selected to be part of the portfolio and whether we have made the right decisions in terms of the pace at which we’ve ramped up the platform, the number of people we’ve hired in the group and other decisions we’ve made that will ultimately affect the expense ratio.

I’ll also look at other intangible things. I’ll look at the quality of the comments that are coming to me from the external environment, whether it be brokers and customers or the trade press—whether they’re characterizing who we are, what it is we’re doing and the way that we’re doing it in a way that I find to be satisfactory. And we’ll adjust from there. ##

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