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The world’s largest insurance company, the one that always announces spectacular earnings, the company with the forceful views on how the market should function, has fallen off its pedestal. It not only has fallen, but also has tumbled down a very steep slope. Two
questions: Will it climb back up and what does American
International Group’s crash mean for the market?
On February 9, 2005, the day before his troubles started with Attorney General Eliot Spitzer, Hank Greenberg proudly announced revenue of $100 billion with $11 billion in profit, which means the stock increased an incredible 1800 times from the time he became CEO in 1968. A little more than a month later, he was ousted because of Spitzer’s accusations. His colleague Martin Sullivan took
over and did a good job of guiding the company through a regulatory nightmare, ultimately settling with the federal and state governments.
But he did a poor job of managing AIG’s businesses. Over a period of less than 12 months, the company had to take write downs of some $13 billion related to its subprime portfolio. The shakiness of the capital position spurred them to raise $20 billion in fresh capital. The performance in the core insurance business was weak also.
Greenberg, not the typical ousted CEO but one who controls several companies, including Starr International, which owns 12 percent of AIG stock, loudly and persistently protested these developments. But it ultimately took three other large stockholders (none as large as Greenberg) to force the board to remove Sullivan and install its chairman, Bob Willumstad, a former Citibank executive, as chairman and CEO.
What Will New CEO Do?
So what will and can Willumstad do? Not much, I fear, for he is the wrong person for the job and would be even if these were good times. Granted, he is a solid, respected manager but the only insurance experience he has is his one plus years service as AIG chairman and supervising the insurance activities of CitiGroup. Alas, that is not enough for one of the most complex companies anywhere. What is required is either an insider who knows the company well and has insurance skills, or long term, a complete reorganization that would allow a talented outsider to manage a different kind of company.
Willumstad has promised a strategic plan after Labor Day. Who knows what will be involved in that plan? But I doubt it will be that dramatically different. My guess is that it will not involve selling off anything significant. He has already announced he will not sell the aircraft leasing firm, a gem in the AIG family of value. At most, he will choose to sell one or more of the financial businesses. But he will not dispose of any of the core insurance businesses. When all is said and done, AIG, a few months from now, will still look more or less like
it does today. After all, when you have an extraordinary franchise,
why tamper with it?
That means the company will continue to provide the products it always has while trying to make up for its past losses. If we are now entering a down cycle in the classic insurance cycle, hopefully, new management will hang tough as Greenberg always did and not underprice its insurance products. That means no breaks price-wise for clients, although other insurers won’t necessarily follow this dictum. There will still be plenty of opportunities to shop around for cheaper coverages. But if the new management imitates Greenberg, it will look to market heavily solid money winners like directors and
officers insurance and will develop new coverages altogether.
Another Change Required
In short, my prediction is that with AIG, after some minor adjustments, you will see more of the same. The agents and brokers that deal with AIG on a daily basis will not really notice changes. Other than refusing to sell cheap, the company will stick by its aggressive imprimatur and be a leading force in the marketplace. Other companies may offer insurance at less cost or try to market new products. And some will succeed. But AIG will persist with this trademark. It still has the infrastructure and people to do so.
However, the status of the company as a fast growing, stock machine will not follow so easily. Only after one more shakeout, and the putting in place of the kind of CEO I suggest, will AIG begin to return to its shareholders anything like its former earnings. Until then, it will struggle along and do a decent but not spectacular job. One wonders if it will continue to be the industry’s bellwether company.
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Ron Shelp, a former AIG executive, is the author of Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG.
Editor’s note: This commentary appears in the July 21 issue of Insurance Journal