AIG Taking On Global Issues; Ups Dividend

By Susanne Sclafane

NU Online News Service, May 14, 2003, 4:41 p.m.EST?The chairman of American International Group and otherexecutives spent nearly an hour-and-a-half this morning laying outlast year's results, in an effort to convince the company'sshareholders of the firm's global leadership in the insuranceindustry.

It wasn't a hard sell for at least one shareholder who was soconvinced of AIG Chairman Maurice Greenberg's standing as a globalleader that she sought his expertise on solving the nation'sunemployment problem.

"Why can't [President] Bush find the money" for a federalprogram to solve the problem? she asked, drawing laughter from thecrowd.

Gracefully sidestepping the question, Mr. Greenberg said, "Ihave trouble enough running AIG."

But with the company's financial strength unscathed by a reservecharge, by low interest rates, or by an accounting rule that hebelieves forced AIG to report a larger investment loss thannecessary last year, Mr. Greenberg and his team have their sightson battles beyond AIG, their remarks revealed.

Repeating some familiar themes he's taken to a circuit ofanalyst meetings in recent months, Mr. Greenberg talked about AIG'sfight for tort reform and his company's tough stance againstreinsurers. AIG CFO Howard Smith also revealed a new AIG crusadeagainst a rule being put forth by the International AccountingStandards Board.

On the tort reform front, Mr. Greenberg said: "There's a goodchance that class action reform will pass through Congress thisyear."

"Asbestos legislation is likely. Whether or not we ever get adeal done?it's too soon to tell," he said, noting that there are"too many moving parts" and constituencies involved with asbestosreform efforts.

Referring to AIG's efforts to rank every state's tort system, hesaid, "Why would insurance companies want to buy municipal bonds"from states that rank very low? Attacking states in this way, asthey confront budget deficits, "will have an impact," heasserted.

During his discussion of the "state of the insurance industry,"which he characterized as having been "badly mauled" by a bearstock market, terrorism losses and tort costs, Mr. Greenberg toldshareholders how AIG has taken the upper hand over the reinsuranceindustry as well.

Noting that reinsurers "got hit even harder than the rest of theindustry" and that reinsurer "downgrades have been fast andfurious," he said reinsurers have to meet "certain standards" setby a "very strict" AIG credit department.

"As they've gotten downgraded, they've been taken off our creditlist. They can only stay on there if they post collateral?adequateto meet what we believe are the exposures we may have today," hesaid, noting that the collateral requirement was in place fordomestic and foreign reinsurers alike.

"If that list shrinks, so be it. And if we [have to] keep morebusiness for ourselves, we'll do that," he added.

Mr. Greenberg also repeated his often-reported prediction that"rates will stay firm," pointing to the fact that capital that'scome into the global insurance industry in the past year or so is"modest" relative to the amount bled out by the various problemsassaulting insurers.

With all the challenges, he said, AIG has stood its groundnavigating through tough times. At one point, he noted that whilesome insurers are seeing declines in property rates, AIG continuesto get increases averaging 15 percent.

Mr. Greenberg also waived off a stock sell-off in reaction toAIG's $1.8 billion after-tax reserve increase for fourth-quarter2002 as an "overreaction" that was "rather puzzling."

"It is insignificant in relation to AIG's balance sheet" and"not a major event from our point of view," he said.

Mr. Greenberg began his remarks going through some of the recordfinancial results AIG achieved last year.

He noted that the company had record shareholders equity of $59billion at year-end 2002. "No insurance company in the world comesremotely close to that," he said.

AIG's 2002 net income of $5.52 billion is more than any otherinsurance company in the world?and more than the top 18property-casualty companies in the United States combined, headded.

As for recent investor concerns about the impact of SARS on lifeinsurers, while he conceded that there would be some impact on"first-year sales," he also said that AIG had developed specialproducts to deal with SARS.

"Long-term, the SARS scare, in Asia, will be the biggest boon tothe sale of life insurance and related products that I can thinkof," he asserted, although "that's not the way you'd like to see ithappen."

Making an editorial comment about some different implications,he said, "It's certainly going to clean up a lot of countries.Restaurants will be a lot cleaner in many parts of Asia."

Turning to address another key concern investors have had inrecent years--corporate governance--Chairman Greenberg said, "Eventhough we believe we were doing things properly, nonetheless, wemade a number of corporate governance changes."

He noted, for instance, that with elections made at today'smeeting, six of 10 board members are now outside directors?"a muchdifferent number than it was historically."

Referring to the expansion of AIG's financial reporting inrecent quarters, he said, "If you try to carry our 10K andshareholders report, you're taking weight training."

Mr. Smith reported further on "issues in the corporategovernance and financial reporting world," noting that he and Mr.Greenberg are not the only ones signing financial certifications atAIG. With their certifications required by the Sarbanes-Oxley Act,he and Mr. Greenberg are, in turn, requiring individual operatingofficers of AIG's major units, as well as investment and actuarialofficers, to sign off on their unit's performance.

Turning his attention to the efforts of the InternationalAccounting Standards Board to create a set of global accountingstandards, Mr. Smith said, "obviously, we think that makes sense inthe long run."

However, AIG opposes one proposed standard--an early principleof the project that would have every asset and every liability onthe balance sheet stated at fair (market) value every quarter.Calling this "troublesome," he said, "what the ultimate resultwould be is that the income statement would be nothing more than achange in the two balance sheets."

"You can imagine the volatility that can be caused on an incomestatement" by this, he said. "We think that it is going to make theincome statement almost useless in a number of industries,"including the property-casualty insurance industry.

Calling it a "poor first step" and reporting that AIG "has beenvery vocal with the IASB," he went on to say that AIG had joinedwith 11 European insurers in opposition. In addition, he said, AIGalso convened a meeting with a coalition of U.S. insurers just lastnight on the issue.

AIG, he said, is not recommending that the IASB scrap the issue,but that that they provide the new information as supplementaldata, instead of making the "dramatic step of changing the incomestatement overnight."

While U.S. insurers have been quiet on this issue, he said:"This is almost like a freight train that coming down the tracks.If we don't react as an industry in the United States, we're goingto have a severe problem on our hands."

Ending the meeting on a high note, Mr. Greenberg reported thatthe executive committee had voted to approve a 5.2 cents per sharedividend, beginning with the September payment. The new dividendrate represents a 10.6 percent increased over the presentlevel.