The end of AIG’s Greenberg era

Mar 16th 2005
From The Economist Global Agenda

AIG’s legendary boss, Hank Greenberg, has been forced to step down amid regulatory probes into a range of company transactions. His successor, Martin Sullivan, inherits an insurance group with an enviable set of global businesses but a tarnished reputation

SUCH was the length of Maurice “Hank” Greenberg’s tenure as chairman and chief executive of the world’s biggest insurance company, AIG, that his departure had been pondered in the press and on Wall Street more as an abstract concept than a firm future possibility. The autocratic Mr Greenberg kept himself fit enough to run the giant corporation with a punishing regime of exercise and healthy fish luncheons. Many observers no doubt felt that would allow him to defy the cold logic of actuarial probability and remain in charge forever. AIG without Hank? Unthinkable, surely.

Not any more. On Monday March 14th, the company’s board announced that Mr Greenberg—79 years old and in charge for almost four decades—was stepping down as chief executive. “The board has concluded it is now in the best interest of AIG’s shareholders, customers and employees to turn to a new generation of leadership,” said its late-night statement. The new boss is AIG’s British-born co-chief operating officer, Martin Sullivan, who is almost 30 years younger than Mr Greenberg and has been at the company since his teens.

The board was forced to act because Mr Greenberg, a valuable asset for so many years, was in danger of turning into a liability. The past year has been a troubled one for insurers in general, and for AIG in particular, with regulators mounting a number of probes into the industry’s business practices. As part of an ongoing investigation by Eliot Spitzer, New York’s crusading attorney-general, two top managers at AIG pleaded guilty in October to charges relating to the sale of insurance policies through brokers; two more employees pleaded guilty to similar charges last month. The accusation was that brokers and underwriters had colluded to rig bids for insurance cover, with the brokers pushing unsuspecting clients towards those underwriters that paid them “contingent commissions” for the business. News of the charges sent AIG’s shares reeling.

Then, last November, AIG paid $126m to settle charges brought by federal prosecutors and the Securities and Exchange Commission (SEC) that the insurance firm had helped customers—among them PNC, a bank, and Brightpoint, a mobile-phone distributor—manipulate their earnings. In addition, regulators are looking into efforts by Mr Greenberg to pressure specialists on the floor of the New York Stock Exchange to support AIG’s share price while it was completing its acquisition of American General in 2001, paid for with shares.

Worse, Mr Spitzer, the SEC and federal prosecutors suspect that AIG might have done deals with third parties to boost its own reserves and profits. Their probe centres on a transaction in 2000-01 between AIG and a subsidiary of General Re, a unit of Warren Buffett’s Berkshire Hathaway. AIG’s shares fell again on news that the firm had received subpoenas relating to the deal. Whether or not Mr Greenberg had a role in setting up the transaction, his pugnacious attitude towards regulators was widely seen as counter-productive.

Though Mr Greenberg leaves AIG’s helm under a cloud, he will be remembered by many as one of the greatest corporate leaders of recent decades. When he took over in 1967, AIG was a minor American property-and-casualty insurer with a life-insurance business based in Asia. Two years later he took the firm public, and he went on to forge a global business employing 92,000 people in 130 countries. AIG is now worth $166 billion, making it the world’s third most valuable financial firm behind only Citigroup and Bank of America. In 2004, the company made a net profit of $11.1 billion, up by more than 19% on the year before.

But the news of Mr Greenberg's departure has put pressure on AIG’s top-notch (AAA) credit rating, much vaunted in company advertising to distinguish it from competitors. On Tuesday, Fitch downgraded the parent company's debt and both Standard & Poor’s and Moody’s gave warning of possible downgrades. AIG says this will have no financial impact but the moves will chip away at the insurer's air of impregnability.

The transfer of power at AIG was always likely to be tricky. Neither Mr Greenberg nor the company spelled out a succession plan, to the annoyance of shareholders. His refusal to name a successor suggested that he trusted no one else to run the business with his vigour or measure of success. Both his sons seemed to think so. They quit senior roles at AIG for other leading posts in the insurance industry after Mr Greenberg seemed to play off one against the other without choosing either to take over from him. The elder of the two, Jeffrey, stepped down from his job running Marsh & McLennan, a big insurance broker, last year, after the company was caught up in Mr Spitzer’s investigations. Marsh went on to settle civil charges of bid-rigging and other alleged misdeeds for $850m in January.

It now falls to Mr Sullivan to disentangle AIG from its legal problems and restore some shine to the company’s share price. At least he will not have to do this alone. AIG has appointed a non-executive chairman, who will be expected to offer sage advice on the best way to deal with Mr Spitzer and those others intent on restraining the insurance industry. Who might this wise fellow be? Step forward the sprightly Hank Greenberg.

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.