AIG Still Solid Despite Loss Of Greenberg, Analysts Say

During Mr. Greenbergs tenure, the company had routinely shrugged off regulators concerns about its operations, but in the past few months AIG has been tattooed with subpoenas as investigators probe transactions suspected of providing a false picture of the finances of AIG and other companies.

Over the years, Mr. Greenberg, now 79, developed a reputation as a tough and daring innovator, but in the current era of heightened corporate scrutiny, questionable moves with finite insurance products and his combative attitude with investigators might have combined to prompt his downfall, industry observers contend.

Just two days before New York Attorney General Eliot Spitzer announced that his investigation of broker fees had found widespread corruption in the insurance industryleading to a bombshell price-fixing lawsuit against Marsh and McLennan Companies that implicated AIG officialsMr. Greenberg during a public appearance took a not-so-veiled swipe at Mr. Spitzer.

Asked about the attorney generals probe of incentive fees insurers paid to brokers to secure business, he said: "We need to continue operating in an environment of financial creativity or more and more businesses will go overseas. There is a clear need to differentiate between a parking violation and a murder charge. This is where our industry can enlighten political figures who seek to advance to higher office." (Mr. Spitzer had announced he was running to become governor of New York.)

Since those remarks to a brokers group on Oct. 12, 2004, AIG and Mr. Greenberg have been served with subpoenas by Mr. Spitzers office and four AIG employees have pled guilty to charges related to price-fixing with commercial insurance brokers brought by Mr. Spitzers office.

Subpoenas, some of which the company has acknowledged, have also arrived from the Securities and Exchange Commission and the U.S. Justice Department related to past deals involving reinsurance and non-traditional insurance transactions suspected of serving to improperly manipulate the earnings picture of AIG and other companies

AIG, in its announcement of the management shift, said its ongoing internal review of that activity, which began after "previously announced regulatory inquiries," would delay the filing of its annual report, which had been due last week.

In addition to the replacement of Mr. Greenberg, the company moved co-COO Donald P. Kanak, 52, to executive vice chairman and COO.

The firm also promoted Steven J. Bensinger, 50, to the chief financial officer posta vacancy that was created when the board, without explanation, removed Howard Smith, 60, from the post and placed him on leave. It was revealed later that Christian M. Milton, a vice president for reinsurance, was also placed on leave with no announced reason.

Mr. Sullivan was generally given a solid rating by analysts, although some worried that he lacks Mr. Greenbergs all-inclusive knowledge of the company. A native of the United Kingdom, he joined the company in 1971 in London, and in 1991 was made COO of AIG Europe.

During his first day in the new post, Mr. Sullivan sought to reassure the market that the company could carry on, saying there were strategies in place to take it "to new heights" and keep its entrepreneurial focus, and that he could rely on the management team to fill in any knowledge gaps he had.

A.M. Best and Standard & Poors rating services put the company on watch with negative implications. Moodys Investors Service lowered its outlook to negative from stable, while Fitch lowered its rating from "AAA" plus to "AA-plus" with a stable outlook.

Best said that AIG had sound fundamentals and good bench strength in its leadershipa view mentioned by others, including Fitch Managing Director Julie Burke, who referred to the companys "deep management team."

Andrew Kligerman, an analyst at UBS Investment research, was high on the company, noting that the property-casualty side of AIGs businessthe sector under investigators scrutinyrepresents less than 40 percent of the corporations earnings. He called AIG an "incredible value. They have a fortress of a balance sheet."

Even reports that the board might ease Mr. Greenberg out entirely by May and leave the new team without the benefit of his vast knowledge and connections, he said, had a possible silver lining because then "this management team would have the opportunity to really thoroughly analyze and clarify any issues."

At Bank of America, analyst Brian Meredith said he expected no long-term impact from Mr. Greenbergs surrender of the CEO spot, noting that the company has "high quality senior management running each of its major units."

Expressing caution was Morgan Stanley Equity Research, which warned that investors should bide their time because the extent of regulatory probes are still not fully understood, and the analysts are not convinced that AIG's prior-year p-c loss reserves are adequate.

Management at AIG said at this point they knew of nothing from ongoing internal reviews or auditing efforts that would materially affect the company, but they said they could not rule anything out.

A.G. Edwards and Sons analysts expressed concern about the 10-K delay, seeing "the potential for more bad news to come from AIGs internal accounting review of certain transactions." The firm also wondered about CFO Smiths unexplained leave.

However, based on Mr. Spitzers prior settlements with firms he has pursued, A.G. Edwards estimated that any settlement would be for an amount below 5 percent of earnings and immaterial to AIGs financial statements.

Key among the deals Mr. Spitzer is apparently examining is a 2001 transaction where AIG provided reinsurance for Berkshire Hathaways General Re. The contract reportedly involved $500 million of premium and $500 million of insurance with a $5 million fee for AIG.

A.G. Edwards said the Berkshire contract has been tied to AIGs $23 billion stock deal to acquire life insurer American General in 200l. At issue, according to the analysts, is whether AIG committed securities fraud by using the Berkshire arrangement to pump up its share price.

Besides the Berkshire transaction, The Wall Street Journal reported that Mr. Spitzer is examining AIG deals with Barbados-based reinsurers. This would not be the first time that AIG has been eyed for its Barbados dealings. In the late 1990s, regulators looked at AIGs strong ties to Coral Re on the island and concluded that AIGs arrangements did not involve a proper transfer of risk.

Their findings at that time resulted in no penalty, but that was before Enron and other accounting scandals drew the attention of regulators and prosecutors.

Reproduced from National Underwriter Edition, March 17, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.