AIG’s Troubles = Industry Troubles?

Willumstad is the wrong person for the job and would be even if these were good times.

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 it 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 Feb. 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 1,800 times from the time Greenberg became AIG CEO in 1968. A little more than a month later, he was ousted because of Spitzer’s accusations.

Greenberg’s colleague, Martin Sullivan, took over and did a good job guiding the company through a regulatory nightmare, ultimately settling with the federal and state governments. But Sullivan did a poor job of managing AIG’s businesses. In less than 12 months, the company took write downs of some $13 billion related to its subprime portfolio. The shakiness of the capital position spurred the AIG to raise $20 billion in fresh capital. 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 the developments. But it took three other large stockholders to force the board to remove Sullivan and install Bob Willumstad, a former Citibank executive, as chairman and CEO.

What Will the 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 of 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. Willumstad has already announced he will not sell the aircraft leasing firm, a gem in the AIG family of value. At most, he will sell one or more of the financial businesses. But he will not dispose of any of the core insurance businesses.

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 that 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

My prediction is that AIG, after some minor adjustments, will see more of the same. 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. Some will succeed. But AIG will persist with its trademark. It 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 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, the company will struggle along and do a decent, but not spectacular, job. One wonders if AIG will continue to be the industry’s bellwether company.

Ron Shelp, a former AIG executive, is the author of “Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG.”

Topics AIG