Source: Barron's Chinese Author: Nicholas Jaskinski Evan Greenberg, CEO of Chubb Ltd, has a highly influential fan - Warren Buffet, CEO of Berkshire Hathaway. Berkshire Hathaway disclosed last month that it held 6% of the shares in Chubb, one of the world's largest insurance companies, by the end of 2023. Berkshire itself is a major participant in the insurance industry, but it is not the only buyer. In the past year, Chubb's stock return, including dividends, was about 40%, surpassing the S&P 500 index's total return of 25%, and making the company's market capitalization reach $110 billion. This increase in market capitalization reflects Chubb's outstanding performance, which is attributed to its prudent underwriting practices and conservative management of its investment portfolio of about $140 billion. The company's earnings per share increased by 48% in 2023 and its book value per share increased by 21%. Greenberg is the son of Maurice "Hank" Greenberg, the former CEO of American International Group (AIG). Greenberg worked at AIG for 25 years, rising through the ranks. He left the insurance company in 2000 and took over Ace Limited in 2004. The company merged with Chubb in 2016, the largest M&A in the property and casualty insurance industry at the time. Today, Chubb is the largest commercial insurance provider in the United States, and the company is also known for its high-end homeowner insurance for the wealthy. However, about half of the company's premiums last year came from outside the United States. Asia has always been a growth area where the company is bullish: Although Asia accounts for 40% of global GDP, the insurance industry accounts for only 26% of the global insurance market share. This gap is expected to narrow over time. Greenberg sits on the board of several nonprofits that focus on international and Asian affairs. Barron's recently interviewed Greenberg about his underwriting philosophy, the challenges of dealing with increasingly frequent climate disasters, and US-China relations. Following are the edited excerpts of the conversation.
What is the meaning of Berkshire Hathaway's investment in Chubb? Evan Greenberg: I appreciate and admire the achievements of Buffett, whose performance as an investor and operator is self-evident. We are pleased and honored to have Berkshire as a long-term investor in our company.

What is the current state of the insurance industry? Is pricing adequate to cover risk? Evan Greenberg: The underwriting situation is generally good. It varies by region, business type, and customer base, so our market doesn't operate in the same way at the same time. But overall, the situation is favorable, and we have opportunities globally and good underwriting returns. It means we're growing. We don't allow underwriting business to destroy book value. When we can get reasonable risk-adjusted underwriting earnings, we'll act. When we can't, we retreat - we're ready to shrink.

Compared with its competitors, what has Chubb done differently to achieve higher underwriting returns? Evan Greenberg: We exchange market share for underwriting profits. Everyone in the industry says that, but few put it into practice. Our senior management has a background in underwriting and a close relationship with the business. We reward correct behavior: if the business you are responsible for cannot earn underwriting profit, we encourage you to reduce the business. If the business you are engaged in can earn good risk-adjusted returns, we hope you will continue to develop it. Most importantly, our product portfolio has been carefully crafted globally over the years, reflecting our views on opportunities, volatility, and outcomes. Other than that, you have to join the company to find the answer.

Can pricing and underwriting returns continue to be attractive? Evan Greenberg: I am relatively optimistic that pricing will remain relatively favorable. We have just emerged from a long period of low inflation and low interest rates globally. We are now in a period of intensifying inflation, and I don't think we will return to the era of zero or negative-cost money.

What does Berkshire Hathaway's investment mean for Chubb Ltd, according to Barron's?

In addition, factors such as climate change, changing social attitudes, and excessive litigation environments have also increased volatility and loss costs, which are a burden for the economy and innovation. Overall, litigation costs are estimated to account for about 2.1% of US GDP. Think of all the billboards and television ads you see, and lawyers are using the Robin Hood pretext to find litigation business.

In summary, the result is a malignant liability expansion and a risk environment. The management team is under greater pressure and needs to maintain stricter underwriting discipline. Therefore, pricing in many areas has also increased.

Generally, when the insurance industry has good returns, many naive capital will come in and say, "I also want a piece of the pie." The pressure to lower prices in order to compete for market share always exists, and this is the turn of the cycle.

At present, I am optimistic that the current situation of rising loss costs will keep underwriting discipline unchanged and pricing will remain reasonable.

"Barron's" Chinese version: How does climate change affect the insurance industry?

Evan Greenberg: Climate change is a reality and changes the risk exposure and risk environment. Society must respond to it and adapt to it. In this regard, economics is a powerful force.

When people choose where to live and do business, the insurance industry is starting to send price signals to reflect its costs. They may increase or decrease risks related to climate change. If we can understand these risks, build them and price them, we are willing to take the risk.

We are increasingly aware of the risks associated with climate change. We understand the risks of hurricanes and floods, and we have a better framework for understanding the impact of storms with higher humidity due to climate change. Wildfires are another risk that is increasing due to climate change. Risk modeling is more complex, but science has always been advancing.

"Barron's": What is the impact on underwriting decisions?

Evan Greenberg: This is not just a pricing issue, but also an issue of underwriting terms and conditions. As long as we can understand, build and price the range of risks we can take risks within our limited balance sheet assets. Insurance companies can allocate a certain amount from their own capital to lend to other capital in the form of reinsurance. I hope the capital we allocate can achieve a return rate of 15%.

If we can better construct risks, then this is not just a pricing issue. This may mean that we can do more underwriting business in more federal states or regions to better reflect risks. Or, if we take out insurance for wealthier individuals, we can share risks with them because they have more capital to bear some risks. This not only allows us to delay price increases, but also allows us to take on greater risks because they are not so concentrated.

"Barron's": Some federal states have provided final killer insurance plans for homeowners in coastal or wildfire-prone areas that private insurers have withdrawn from. What is your opinion?

Evan Greenberg: There is no free lunch in the world. If these plans underestimate risks, then the people will ultimately pay the bill, either by paying taxes or paying insurance premiums. If the market fails and the insurance industry cannot provide corresponding insurance, or someone needs low-cost insurance but cannot afford to move, then there may be sufficient reasons to do so. However, we need to be clear: this is a social decision made by the citizens of the state who provide support for this purpose.

"Barron's": How do you manage the investment portfolio of Chubb Insurance in the environment of rising interest rates in recent years?

Evan Greenberg: We have a $140 billion investment portfolio, mainly invested in fixed income assets. After experiencing fifteen years of low interest rates, we have finally returned to normal. This is the first time that Chubb Insurance has achieved half of its income from underwriting and half from investment returns in the long term.

Investment income will continue to grow. We have kept asset duration at an extremely short level because we have not received enough returns to take more risks. We also realize that the huge federal budget deficit and high outstanding debt are one of the biggest risks facing this country, which has prevented us from extending asset duration too long.

"Barron's": You and your family have been actively contacting Chinese leaders and policymakers for many years. What is the purpose?

Evan Greenberg: I am an American and I am very concerned about the interests of our country. Prosperity and peace are our top priorities. The goal of U.S.-China relations must be to find a way of coexistence - we can pursue our own visions of the nation and prosperity without conflict. Otherwise, the world will become very small, and every one of us is capable of destroying this planet.

The only way to achieve coexistence is through communication. Communication does not mean surrender, nor does it mean that we must agree with each other. At the same time, communication does not mean that we have to compromise on things that are critical to our security and prosperity, but communication is the key to mutual understanding and ensuring that each other is understood.

I have been doing business in China for more than 30 years, and I have a strong respect and admiration for Chinese culture and the Chinese people. Obviously, the United States and China are different. Our cultures, histories, and values are different and in some ways incompatible. This creates friction, and the leaders of the two countries must find diplomatic ways to solve problems that are critical to our security and prosperity.

"Barron's": What are the business opportunities for Chubb Ltd in China and throughout Asia?

Evan G. Greenberg: Our opportunities in Asia include commercial insurance, non-life consumer insurance, and life insurance. Social security systems in Asia are less developed, and family savings culture is more prevalent. The fast-growing middle class in the region lacks insurance protection and needs traditional life insurance as well as additional health, accident, and other insurance.

"Barron's": Thank you, Evan.

Editor/Jeffy