By Charles E. Boyle
The events of Sept. 11 shook the foundations of the American financial community, and industry giant American International Group is one of many shaken by the tragedies.
AIG has issued a preliminary estimate of its total expected losses resulting from last Tuesday’s terrorist attacks. Based on information available at this time, AIG’s net pretax losses are expected to approximate $500 million.
AIG Chairman Maurice “Hank” Greenberg said, “We remain intensely focused on providing immediate assistance and relief to those who have suffered losses relating to this enormous national tragedy. Our crisis teams are in place, functioning on a twenty-four hour basis, and they are prepared to process claims.
“It is impossible for any company to precisely estimate total losses at this time. Although AIG’s property insurance coverages on the World Trade Center complex are minor, as the world’s largest commercial insurer, we expect to receive claims from many insureds across a wide range of coverages. These losses will not impact the solid financial condition of AIG, the strongest insurance and financial services company in world.”
Ironically, AIG had already had a very busy month. In Korea, it looked set to conclude its takeover of three troubled Hyundai financial units, when new opposition surfaced, leaving the deal still in doubt. It is also embroiled in a debate with the EU and the WTO over its wholly owned Chinese subsidiaries, and it closed its deal to acquire Houston-based American General Corp. (AGC) just before Labor Day when the Texas Insurance Department approved it.
All of this has been pushed into the background by the terrible events in New York and Washington. AIG’s offices at 70 Pine Street are not far from the site of the World Trade Center, and were evacuated and closed immediately after the attack.
Many analysts expect that the claims from life policies, including “key man” insurance, workers’ compensation and business interruption will exceed claims for property damage. The aviation losses and the cost of paying, defending or settling the inevitable lawsuits will also significantly increase the loss figures.
The disaster puts more pressure on AIG’s employees in general and the 78-year-old Greenberg in particular. Right after Labor Day, AIG announced that he would assume control at AGC, and that the newly combined companies planned to cut 1,500 jobs. However, no one seems better equipped than Greenberg to handle the challenge. In his 30-plus years at AIG, he’s built a reputation for decisive, some would say brutal, business decisions, but he now stands to be tested as never before. Still, no one can argue over the results he’s achieved. AIG is the world’s largest insurance company in terms of equity capital, and one of the unquestioned leaders in the industry.
Taking over AGC from its former head, Robert Devlin, is nonetheless a 180-degree turnaround from Greenberg’s original proposal last April. At the time, Devlin had already committed his company to merge with Prudential (U.K.), but Greenberg’s letter, which began “Dear Bob,” topped Pru’s offer, assured Devlin he’d still be in charge of the company, and gave him a seat on AIG’s board. He eventually supported AIG’s bid and helped land AGC in AIG’s net.
The reasons for Devlin’s departure weren’t disclosed or even mentioned in AIG’s press release on Sept. 4. It simply said, “AIG Chairman M.R. Greenberg will serve as Chairman of American General, replacing Robert M. Devlin who has decided to resign. Mr. Devlin will serve as a consultant to AIG.” Ultimately whether Devlin jumped or was pushed is beside the point, which was made loud and clear-“Hank” Greenberg’s in charge.
The underlying reason for Devlin’s decision became clearer the next day when AIG announced several sweeping moves to integrate AGC’s units into its own structure, making key appointments and shifting operations into its companies. In addition to Greenberg’s appointment as CEO, AIG announced that Rodney O. Martin, Jr., who previously served as Sr. VP, Financial Services for AGC, would become the new CEO of a combined AIG/AGC domestic life insurance company, reporting directly to Greenberg, and working “closely” with AIG Sr. VP-Life Insurance, Edmund Tse.
AGC’s general retirement services will be combined with AIG subsidiary SunAmerica Inc. John Graf, former Sr. VP in charge of AGC’s Asset Accumulation division will become vice-chairman, reporting to Jay Wintrop, SunAmerica’s CEO. American General Finance will become part of AIG’s Financial Services Group with current head Frederick W. Geissinger continuing to head consumer lending under William N. Dooley, AIG Sr. VP of financial services. AGC’s Investment Management business will become part of AIG Global Investment Group, Inc., headed by Sr. VP and Chief Investment Officer Win J. Neuger.
When the integration is completed, AGC will have a prominent role only in the U.S. domestic life sector. Its remaining divisions will be integrated into existing divisions of AIG. This is in contrast to other acquisitions AIG has made, such as Hartford Steam Boiler, which have maintained independent structures. If Devlin had assumed Martin’s position, he’d have ended up running a division of AIG under Greenberg’s direction.
Financial considerations undoubtedly played a key role in the decision to integrate AGC’s operations into AIG’s. Avoiding job duplication, and streamlining the corporate structure is intended to create more efficient operations. It also usually means job cuts; in this case 1,500 of them, although AIG may now want to keep those people to help deal with the disaster.
The day after the announcements were made on the restructuring, AIG revealed that “net job reductions spread over the next 12 to 18 months resulting from the acquisition of American General Corporation (AGC) will total approximately 1,500 in several AIG and AGC locations in the United States. These reductions result primarily from operating efficiencies to be derived through the combination of various AIG and AGC units, as well as attrition.” AGC’s Houston operations are slated to lose about 350 jobs, a bit less than 10 percent of the current workforce.
AIG employs over 85,000 people worldwide, and AGC has 16,700 employees, so cutting 1,500 from over 100,000 doesn’t appear too drastic; it’s nonetheless perhaps a sign of the times. As the economy slows down, companies are squeezed to cut costs and reduce the number of workers they employ. Business investments have fallen, and so has the number of employed workers. The August figures showed that U.S. unemployment had risen to 4.9 percent, the highest in six years.
In all probability, the terrorist attacks will have further adverse effects on the U.S. and the global economy, as well as the financial markets.
AIG’s proposed cuts pale in comparison to those announced by manufacturers and tech firms such as Dell, Cisco and Intel, as well as telecom operators. But the fact remains that insurance companies too are feeling the economic pinch. In July, Seattle-based SAFECO announced planned reductions of 10 percent of its workforce, about 1,200 people. The move was part of a series of cost-cutting measures designed to return the company to profitability by ultimately saving $100 million annually.
While AIG certainly remains profitable-it reported that its income excluding net realized capital gains (losses) increased 15.5 percent to $3.23 billion for the first six months of 2001-it will undoubtedly suffer losses from the disasters, as it has acknowledged. It’s also more vulnerable to a global recession than most U.S. insurers, as it earns more from its international operations than it does from its U.S. activities.
The worldwide outlook wasn’t very reassuring even before the attacks on the U.S. where at least the economy is still expanding, albeit at greatly reduced levels. More and more countries are feeling the effects. For all practical purposes, Japan is already in a recession. Its gross domestic product (GDP) declined 3.2 percent in the second quarter. Growth in Europe fell to zero in the same period, and even the modest forecasts that the EU would post 2 percent growth in GDP this year now look too optimistic.
Many economists and financial analysts have expressed fears that one consequence of the attacks will be a lessening in consumer confidence and spending, which could lead eventually to a full-blown global, recession. They point to the downturn that followed the Gulf War in 1991, as evidence that global turmoil, especially armed conflict, has a definite negative effect on the world’s economy.
A glance at the stock markets is all the evidence anyone needs to determine that times are tough and getting tougher. On Sept. 7, the Dow Jones Industrial Average closed at 9605.85, its lowest level in three years. It’s expected to fall further when it finally reopens. Most analysts forecast that unemployment figures will continue to rise. This would also lead to less consumer spending and further declines in growth rates, or even declining rates, as in Japan. A global downturn has become a very distinct possibility.
Still, tyrants and terrorists have underestimated the determination of the American people before, to their regret-most recently, Iraq’s Saddam Hussein. The sheer viciousness of this attack on American soil, causing the deaths of thousands of innocent people and the destruction of buildings which symbolized American financial and military power, could well unite Americans as the attack on Pearl Harbor did 60 years ago. If that happens, whatever near term negative impact the attacks of Sept. 11 might have caused will be far outweighed by the positive forces unleashed by a united America.
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