AIG Investors, N.Y. Regulator Mull Former CEO Greenberg’s Words

By | May 19, 2008

Maurice “Hank” Greenberg’s withering criticism of American International Group Inc. has yet to win widespread support for a revolt against the current management of the giant insurer he used to run.

There is no question that AIG’s $13 billion in subprime mortgage-related losses over the last two quarters has shareholders worried and Greenberg, who controls about 12 percent of AIG shares, has given voice to many of those concerns.

“Surely (Greenberg) points out many of the major faults with current management,” said Robert Youngman, who once worked for AIG and is now president of Griffin Asset Management in New York. “I would not say I agree with him on every single (issue), but many of them I do.”

Youngman holds about 350,000 AIG shares through family stakes and on behalf of clients.

AIG Chief Executive Martin Sullivan’s reputation has become tarnished as write-downs escalated from an estimated $600 million in December to roughly $20 billion in the months since, driving two consecutive quarters of losses.

Still, most investors are willing to give him a bit more time to turn things around, recognizing the bad bets were made before he took over as CEO. But time could be short. Youngman said he would expect the board to replace Sullivan if another quarter of severe losses materializes.

But the chances of an insurrection led by Greenberg, who was ousted as chairman and CEO in 2005 amid an investigation into alleged financial misconduct, is complicated by the fact he could be at risk of a run-in with New York’s insurance regulator.

Greenberg, in an interview with Reuters, said he has lost confidence in AIG’s board because it failed to make sure management met shareholder expectations.

But apart from an unsuccessful petition last week to convince AIG’s board to delay its annual meeting, which could have given shareholders the chance to rethink how to vote their proxies, Greenberg’s rhetoric has been short on demands.

A laundry list of where he takes issue with AIG’s management include concern its life insurance operations in Asia are slipping and he sees costs and hiring rising at an alarming rate.

The question for New York’s insurance superintendent Eric Dinallo is whether Greenberg’s comments are meant to influence events at the insurer, which could violate the state’s insurance code.

Under the law, someone holding more than 10 percent of a public insurer needs to be approved as an authorized control person, if planning to agitate for change. Greenberg said in January he had no intention of trying to direct, or influence AIG.

If Dinallo finds Greenberg crossed that line, he could be charged. Penalties can include a cease-and-desist order, monetary penalties and means by which a shareholder could lose his or her stock.

Greenberg, 83, said he does not see himself ever resuming an official role at the insurer, but he does have several candidates in mind for the top job. And he does not, as some others do, think it is necessary to break AIG up to fix it.

“That is a negative way of fixing it,” Greenberg said of the company he spent four decades building into the world’s largest insurer, spanning 130 countries.

“Hank maybe is too emotional. That is the pyramid he built and he doesn’t want to see it dismantled,” said one insurance executive who has worked with both Greenberg and Sullivan.

What is clear is that the patience of investors is running out, even if they do not see Greenberg as the ideal leader for a rebellion. AIG shares have fallen by almost half over the last year.

Compounding concerns are escalating costs and lackluster returns from AIG’s insurance operations. From 2006 to 2007, total expenses rose about 10 percent, while revenue fell 3 percent. Staffing grew about 19,000 between 2005 and 2007, a situation Sullivan said was largely driven by shortages in such areas as compliance and accounting.

“What is critical is the growing perception that the underlying insurance businesses are suffering and that maybe management has taken its eye off the ball,” said Cliff Gallant, an analyst with Keefe, Bruyette & Woods, who rates the stock “market perform” and owns shares.

Some believe AIG’s problems are temporary. The write-downs were unrealized, meaning they may not become actual losses, and could, if markets improve, lead to future gains, giving some investors hope.

“It looks to us to be fairly cheap,” said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion and started buying AIG shares “more aggressively” earlier this month. The firm now holds about 1.4 million shares. And Microsoft Corpfounder Bill Gates’ charitable foundation said in a regulatory filing last week that it doubled its holding to 1 million shares.

“We think this is a company that is poised to benefit from improving conditions for financial stocks and it may be uniquely positioned for some write-ups that will be a tail wind in 2009 and 2010,” Wirtz said.

And at least for now, Sullivan has Fifth Third’s support.

“He is doing all the actions that you would want as a holder of these shares: cleaning house, raising capital,” Wirtz added. “We are not beating the drum for him to be pushed out.”

(Editing by Andre Grenon)

Was this article valuable?

Here are more articles you may enjoy.