The Wall Street Journal had a great piece that is one of my favorites of the newspaper, a human interest story targeting a specific individual that tells a bigger story about the company he/she works for. This particular story is about a subject that I follow closely – that of AIG, now rebranded Chartis. Mr. Eastwood seems to be doing a good job but is still “deep in the woods”. Follow the link at the end of the piece to find the original wsj.com page.

In January, Peter Eastwood, the leader of one of the largest insurers in the U.S., walked into a broker’s office with a plea. “We want our partners to stick with us,” he said.

Mr. Eastwood had just been promoted to run Lexington Insurance Co., one of American International Group Inc.’s most profitable units, and he wanted to prevent jittery clients from bolting after last September’s government bailout.

“It’s been a humbling process,” says Mr. Eastwood, 42 years old. Although he had nothing to do with causing the mess that forced the government to swoop in, paying back the roughly $80 billion that AIG owes the Federal Reserve Bank of New York and the Treasury Department hinges largely on executives such as Mr. Eastwood who run the company’s many insurance units.

Those businesses need to thrive so the company can sell them or steer profits to the government — and still have something left over.

Before AIG nearly collapsed under the weight of its credit-default swaps, the insurer was widely seen as an indomitable force. The swagger is largely gone, with executives and employees now having to reassure clients about the New York company’s financial strength, fend off poaching and scramble for new business.

On Monday, the Government Accountability Office said in a report that AIG’s operations “have begun to show signs of stabilizing” but that the “ultimate success of AIG’s restructuring and repayment efforts remains uncertain.”

AIG has tried to hold and attract desired commercial-insurance customers. But business has suffered, with premiums declining at a double-digit percentage rate in the second quarter from a year earlier in the massive property-and-casualty division that includes Lexington. Income has tumbled in the division by more than 40% to $1 billion, after factoring out capital gains and losses.

New AIG chief Robert Benmosche is weighing whether he wants to keep the global property-and-casualty business, which has been rebranded Chartis, or sell a stake in the unit to investors.

Mr. Eastwood and other executives who toil mostly outside the glare directed at the outspoken Mr. Benmosche and his predecessors face the relentless challenge of essentially trying to run their businesses amid the turmoil. Some customers say the distractions have been obvious.

Last month, Stanford University Medical Center decided to drop two AIG policies, including one from Lexington for medical-malpractice claims. AIG was “really concentrated on their problems, rather than our problems,” says Jeff Driver, the medical center’s chief risk officer, who dealt with different AIG executives, not Mr. Eastwood. “It seemed to be more about them than about us.”
[lexington and churchhill downs] Getty Images

Lexington Insurance, a major AIG subsidiary, sells coverage to many high-profile clients, including Churchill Downs, where the Kentucky Derby is run.

A Chartis spokeswoman says many insurance clients “have appreciated our open and customer-focused approach” during the past year, adding that it “has become an even greater advantage for us in the marketplace.”

On its own, Lexington would be one of the nation’s largest insurers. It has logged tidy profits, including $1.5 billion in 2007, or 27% of the total for AIG’s commercial-insurance operations. Lexington takes on big and unusual risks shunned by many rivals, from onshore oil rigs to sports facilities. Lexington customers include some of the largest U.S. companies, such as General Electric Co., and the insurer is willing to commit millions of dollars on a single policy.

At the time of the AIG bailout, Mr. Eastwood handled health-care accounts at Lexington as a deputy to Kevin Kelley, who had turned the unit into a crown jewel for its parent. Last December, Mr. Eastwood was showering at a Houston hotel when an AIG executive called with word that Mr. Kelley was leaving with his top aide to join a rival. Mr. Eastwood was asked to take over.

Mr. Eastwood caught a flight back to Boston, where Lexington is based, alert to the danger that Mr. Kelley’s departure might spark an exodus. “By the time I get back to 100 Summer St., will I be the only one left in the building?” he recalls thinking.

The Rhode Island native launched a campaign to persuade people to stay. One pivotal moment came in an employee Webcast, where Mr. Eastwood spoke and then asked other top Lexington executives to talk, too. “To me, it was about securing the top and working my way down,” he says.

After the bailout, AIG established retention programs that called for giving thousands of employees bonuses ranging from $92,500 to $4 million. AIG hasn’t disclosed how much specific individuals at Lexington or elsewhere in the company were promised. “They went up to Boston with a bag of money,” says one person familiar with the matter. Mr. Eastwood says compensation hasn’t been “a central theme of the conversations.” The bonuses were distinct from the controversial payments that went to employees of the financial-products unit whose problems largely sparked the bailout.

There were tense moments. Shortly after taking over, Mr. Eastwood called Geof McKernan, the head of NSM Insurance Group, an agency in Conshohocken, Pa. “Are you calling to tell me everything is OK?” Mr. McKernan asked, according to both men. “What are you going to do when the top 10 people in your organization walk out in one week?”

“I don’t think that’s going to happen,” Mr. Eastwood replied.

Mr. Eastwood got credit for keeping the top Lexington staff largely intact, though the threat isn’t gone. According to people familiar with the matter, a rival insurer tried last month to hire a Lexington executive who had been Mr. Eastwood’s peer before he got the top job at the unit. AIG responded to the attempted raid by promoting the executive to a position outside Lexington, and he stayed.

Since taking over at Lexington, Mr. Eastwood also has hit the road, traveling to more than 20 cities from San Diego to London to meet with customers and brokers, some of whom already were nervous because of the bailout.

In January, Mr. Eastwood went to Charlotte, N.C., and met with Steve DeCarlo, who heads an insurance brokerage, AmWINS Group Inc., which does more than $150 million of business with Lexington. “He understands the challenge ahead of him,” Mr. DeCarlo says. “He’s nobody’s dummy.”

It helps that AIG still is a huge player in commercial insurance, so finding alternatives at a competitive price can be hard, says Jim Rubel, an executive vice president at Lockton Inc., a Kansas City, Mo., brokerage.

Many customers also are comforted by the billions of dollars that AIG’s insurance units have for paying claims and oversight of AIG’s claims-paying strength by state insurance regulators. In May, Wyndham Worldwide Corp. renewed a policy with Lexington that provides $25 million of coverage for property damage at hundreds of the Parsippany, N.J., company’s hotels.

Mr. Driver, the Stanford risk manager, hasn’t ruled out a return to AIG. “We just want to step back and see how they develop,” he says.

Mr. Eastwood says the situation “feels a lot more stable.” This month, he spoke again to Mr. McKernan and asked the Pennsylvania insurance executive how things were going. “AIG’s not having any negative effect on my business. You’ve been able to keep your team together,” Mr. McKernan said. “So I’m happy.”

You can find the original HERE at wsj.com.

Modern insurance is a financial product that was developed overseas rather than in the United States. Many insurance contract legal principals were also first developed by English Courts.

So, why do you buy an insurance policy? Sometimes, it is required by a mortgage or a loan. Often, you buy insurances because you view the risk of devastation by a catastrophe to be far worse than “hedging” against this situation by paying a small premium. I think most of us buy insurance for the peace of mind in knowing we will be able to recover should a catastrophe occur. In my own experience, I switched insurance companies because I was very unsatisfied with the approach taken by my previous insurance company in paying out a claim. At the end of the day, I don’t think that my current insurance company, Allied, would have paid more than my previous company, Phoenix Indemnity. The problem was that I had to fight Phoenix Indemnity for every penny paid whereas Allied feels like a partner that is working to help me, not hose me.

Emotional distress damages and consequential damages beyond the insurance policy are often granted to policyholders because the insurance industry contemplates the consequences of wrongfully performing its obligations. Every insurance adjuster knows that the purpose of buying the insurance is defeated if the underwriter wrongfully underpays a claim or fails to pay at all.

Peace of mind is one of the most basic attributes of an insurance product, even though it is never mentioned in the policy. Policyholders intuitively know that this peace of mind is a large part of the bargained-for-exchange. The emotional toll caused by an insurer’s unjust claim delay and denial is lost peace of mind.

Malcolm Clarke, a professor of Commercial Contract Law at Cambridge has written a worthy read for an insurance law book, Policies and Perceptions of Insurance Law in the Twenty-First Century (Oxford Univ. Press 2007). His explanations of insurance are very helpful to consumers of insurance.

Professor Clarke addressed the reason why consumers purchase insurance in the context of risk, risk aversion, stress aversion, and peace of mind:

“To ordinary policyholders, who may well not be models of behavior or rationality, something is risky if loss is relatively likely to happen, or, although it is not likely to happen, if the effect will be disastrous if it does….Policyholders are less concerned with the precise probability than with whether the risk seems probable or bad enough to justify paying (premium) to soften its effect; that depends on their view of things, i.e., what psychologists call risk aversion.

Risk Aversion

In the words of The Economist, risk aversion is the feature of human nature that explains why, ‘when given a choice between, say, losing 1 dollar and a 10 per cent chance of losing 10 dollars, most people would prefer a certain outcome (losing 1 dollar) to a risky one (losing 10 dollars or nothing)’. ‘Prospect theory tells us that people making decisions in uncertain conditions weigh prospective loss twice as heavily as prospective gains. If people know that there is a 1 per cent chance of total loss of their £100,000 house, they may be willing to pay more than £1,000 for insurance, and one of the main reasons is that they are willing to pay to offload anxiety. Such people are ‘risk averse’. The Association of British Insurers (ABI), the organization that speaks for the insurance industry, projects insurance as something that enables people who are insured to organize their household budgets, or plan their business activities, with greater certainty…This raises the question: What is it that makes a risk so unacceptable that people decide to do something about it and, in particular, to buy insurance cover?

Stress Aversion and the Purchase of Peace of Mind

Risk aversion grows from stress aversion. One of the causes of stress in human Beings–in the motor car, the work place, or anywhere else–is a sense of not being in control of their situation, or of themselves. For many of those who avoid flying, the reason is not only fear of an air crash but also fear of losing control of themselves, as a result of stress. Research also shows that, in a given risk situation on the roads, the anxiety levels among passengers are higher than among drivers. Drivers feel in control; passengers do not…

One of the ways in which people seek to regain control of their lives, to reduce stress and to move towards some kind of peace of mind, is by taking out insurance. That is why some insurers send their sales staff on courses to learn about the ‘emotional needs’ of the customer. That is also why some insurers advertise life insurance for ‘life-long peace of mind’ and travel cover ‘to give you peace of mind when travelling’ . A major bank has offered ‘a free home insurance review to ensure peace of mind’. Insurers also point to peace of mind when underlining that the cheapest insurance is not always the best insurance. Advertising of this kind has an enduring appeal, and even the courts have recognized this–in other countries.

Associated with the wish for peace and certainty is a desire for security. Sociologists tell us that on a descending scale of priorities, just after people’s basic needs for food, clothing, and shelter, comes the need for security. Insurers know this too, and security is another prominent feature of the image that insurers project of their products to the insured.

…An important feature of insurance contracts is that a significant part of what policyholders are paying for is peace of mind.”

Just this morning Citigroup was replaced by Travelers Insurance in the Dow Jones Industrial Average 30-stock index. The beautiful irony of this morning’s switch was just too good to not blog about. The Motley Fool brothers produced a well-written piece that I just had to share with you. For the full piece go here, for highlights, read below:

Could have seen this one coming: Citigroup (NYSE: C) was booted from the Dow Jones Industrial Average this morning, along with Motown failure General Motors (NYSE: GM).

In what might be the irony that ends all ironies, former Citigroup subsidiary Travelers (NYSE: TRV) will replace Citigroup in the 30-stock index.

Citigroup spun off Travelers — a diversified insurance company — in 2002 because it was too old, slow, and boring. As Citigroup’s 2001 annual report states, the spinoff was meant to “enable our company to focus its resources more fully on higher growth areas of financial services.”

And so it did. By shedding blue-chip businesses like Travelers, Citi went on a mission to exploit “high growth” areas like mortgage-backed securities, propriety trading, and subprime lending. These were all indeed highly profitable areas … until they became highly toxic. Today, Citigroup is a ward of the state, hemorrhaging money, and for all intents and purposes a colossal failure. Travelers, on the other hand, reported nearly $3 billion of net income in 2008, and hasn’t posted a quarterly loss throughout the financial crisis.

Many investors were shocked that Travelers — a relatively small and unknown company — was selected to replace Citigroup in the Dow 30. GM was replaced with tech ruler Cisco (Nasdaq: CSCO), while others suggested iconic names like Apple (Nasdaq: AAPL) or Pepsi (NYSE: PEP) would have been worthier replacements.

But maybe Citigroup’s surprise replacement was intentional. Perhaps the history between Citigroup and Travelers is symbolic of where the financial services industry is going. The adventurous Citigroup creation is being replaced by its tried-and-true, conservative, slow-growing, remnants. That’s how finance is supposed to be. Trillion-dollar banks that strive for innovation and explosive growth are extraordinarily dangerous. With Travelers replacing Citigroup on the list of America’s iconic companies, maybe we’re all starting to come to terms with that reality.

Regan Guth, a new producer from our office, was invited last week to the FM Global Research and Testing Facility. He came back talking about just how cool all of the things were that he saw. He saw ball bearings and wood 2x4s shot out of canons aimed at building structures. He saw extreme wind tests, hail simulations – all kinds of cool stuff – all in the name of science;-)

Most Insurance companies rely almost exclusively on actuarial data to determine risk premiums. FM Global is different and performs very high-level testing to determine what wind speed is required to blow shingles off of a roof or what is the impact of a seemingly minor obstruction to a fire sprinkler system.

“ The FM Global engineering and research approach is based on the philosophy that the majority of property loss is preventable ”

–Clive Goodwin, assistant vice president, flood engineering and underwriting

The FM Global Research Facility does some amazing things

Researchers can now replicate even the toughest weather phenomena, and recreate hurricane-force winds of 160-mph (258 km/h). Winds this strong truly test the strength of glass and the endurance of building materials, particularly roof systems. Inside the laboratory, a hail gun launches ice balls of varying sizes, to simulate moderate and severe hail storms, and a debris cannon shoots simulated windblown wood projectiles at speeds matching those of a real hurricane to determine impact resistance of doors, windows and siding. The laboratory also is equipped with a powerful xenon arc ultraviolet (UV) accelerated weatherometer to measure the effects of the sun’s UV radiation on building materials that have been exposed for long periods. And, testing includes accelerating the weathering of all types of building materials to determine more precisely how to design and install them for long-term performance.