Willumstad Promises New Plan For AIG, Seeks D?tente With Greenberg

American International Group Chairman Robert B. Willumstad, speaking to analysts after suddenly taking over the additional duties of chief executive officer last week, vowed to reveal a “strong game plan” for the troubled carrier sometime after Labor Day, while also noting that he will reach out to AIG's angry ex-boss and major shareholder, Maurice Greenberg. He succeeds Martin J. Sullivan, who left AIG and its board.

AIG announced the changes on Sunday, June 15, noting that its board of directors had added the CEO designation and handed over control of day-to-day operations to its current chairman, Mr. Willumstad, who will hold both titles simultaneously.

A corporate governance firm–The Corporate Library–estimated that Mr. Sullivan will receive approximately $68 million in severance, although AIG pointed to an 8K filing with the Securities and Exchange Commission, which states: “Compensation arrangements for Mr. Willumstad and transition arrangements for Mr. Sullivan have not yet been determined.”

AIG has seen a steady decline in stock price over the past 52 weeks, going from a high of $72.91 to close at $34.18 on June 13–the last trading day before the senior management change. Much of that drop has been related to the company's involvement in investments impacted by the implosion in the subprime mortgage securities market.

Mr. Willumstad said the company needs to take a hard look at some of its operations that heavily exposed it to real estate market woes. He said he intends to recruit a new chief financial officer as quickly as possible and will embark on a top-to-bottom operational review.

The new CEO said the review of the global insurer's businesses will include making sure the right people are in the right positions. He said he will be visiting key locations to meet employees, customers, shareholders and regulators in major markets. His study, he said, will see him “dig into the numbers” and work to learn AIG's strength and weaknesses “at a real operating level.”

Mr. Willumstad, who joined AIG as its chairman in November 2006, said his intent is to make sure the company's balance sheet is strong and able to withstand volatility.

He said he felt good about the company's recent successful capital-raising effort–which added $20 billion–and did not anticipate any moves to break up any of the company's insurance businesses.

George L. Miles Jr., who chairs the AIG board's Nominating and Corporate Governance Committee, called Mr. Willumstad a strong, decisive leader who could rebuild shareholder values. Regarding Mr. Willumstad being named CEO, Mr. Miles said “this is not…an interim appointment.”

“The board has determined that [Mr. Willumstad's] broad managerial and financial services experience makes him the right person to lead AIG through today's turbulent markets, drive further organizational change and rebuild shareholder value in the years ahead,” Mr. Miles added in a statement.

In response to an analyst's question about ending bad blood and having an “interactive relationship” with Mr. Greenberg, Mr. Willumstad–a former chairman and CEO of Citigroup Global Consumer Group, who arrived at AIG after Mr. Greenberg had left the company–revealed that he had spoken to Mr. Greenberg the night before.

“I would expect we would get together this week,” Mr. Willumstad added. “I'm encouraged by the conversation we had last evening.”

Mr. Greenberg–who, with C.V. Starr (the company Mr. Greenberg now heads, which was formerly associated with AIG), holds a huge chunk of the insurer's shares–is one of several major stockholders who have been pressing for a change in management at the company over the past several months and criticizing its operations.

Mr. Greenberg wrote a letter to the board last month, warning that “AIG is in crisis.” He urged the postponement of AIG's recent annual meeting, calling for shareholders to be given more time to digest the company's plan to raise capital after taking $15.3 billion in write-downs prompted by subprime-related credit market woes.

The write-down alone, according to Mr. Greenberg, resulted in “a complete loss of credibility with the investment community and even further loss of value for shareholders.”

Mr. Sullivan was installed as AIG's CEO in 2005, replacing Mr. Greenberg, who left after the company's accounting practices came under regulatory scrutiny over allegations that bogus finite reinsurance deals had been misused to artificially bolster its balance sheet.

AIG eventually reached a $1.64 billion settlement of civil charges related to its accounting practices brought by then New York Attorney General Eliot Spitzer. Mr. Greenberg has remained a defendant in the case, and in legal action against his former company has accused executives of accounting blunders.

In turn, AIG is suing Mr. Greenberg personally for over $1 billion, and is suing Starr International Company Inc. for over $15 billion.

Listed on an AIG proxy statement as holding 13.6 percent of the company's shares are Mr. Greenberg; C.V. Starr & Company Inc.; the Maurice R. and Corinne P. Greenberg Family Foundation Inc.; Maurice R. and Corinne P. Greenberg Joint Tenancy Company LLC.; Edward E. Matthews; Starr International Company Inc.; Universal Foundation Inc.; and C.V. Starr & Company Inc. Trust (collectively the Starr Group).

Both Mr. Miles and Mr. Willumstad praised Mr. Sullivan for bringing stability to AIG after Mr. Greenberg left. “On behalf of the board and the entire organization, I want to thank Martin Sullivan for his extraordinary dedication and service to AIG for over 35 years. We all wish him well in his future endeavors,” said Mr. Miles.

However, Mr. Willumstad said that after record earnings in 2006 and part of 2007, the company experienced a gap between expectations and results that was “simply not satisfactory.”

A.M. Best Company dropped the financial strength ratings of American International Group's domestic life and retirement services subsidiaries a notch last week, citing “uncertainty” caused by the insurer's abrupt management change.

Best, which made no change for other AIG subsidiaries, reduced its “Superior” financial strength ratings for AIG's life retirement subsidiaries to “A-plus” from “A-double-plus,” and issuer credit ratings to “double-A” from “double-A-plus.” Concurrently, Best said it downgraded AIG's issuer credit rating to “A-plus” from “double-A-minus.” Best said its outlook for these ratings is “negative.”

Best said its downgrades reflected a belief that AIG's sudden decision to alter its top management, as well as uncertainty over the outcome of such a change, “highlight a deeper level of systemic challenges facing AIG, surpassing A.M. Best's expectations.”

Best said it believes that AIG's need to embark on a companywide strategic and operational review of all its businesses is not representative of the agency's highest-rating categories. “The uncertainty caused by such a review, coupled with the decision to upgrade management talent, may have a negative effect on AIG's franchises,” Best said.

Best noted that regardless of the management change, the AIG board headed by Mr. Willumstad “was in a corporate governance and oversight position during a crucial time with the responsibility to review AIG's risk appetite, exposure accumulations and capital management.”

Best said the insurer “is at a critical juncture now, and will require future economic and business vision to allow a return of confidence from the company's numerous constituents.”

Best was not optimistic that the change at the top will rapidly reverse AIG's fortunes, stating that under new leadership, “a quick economic turnaround, absent capital market improvements, is not expected.”

Reacting to Mr. Willumstad's comments in his analyst call, Standard & Poor's said it is maintaining a “hold” recommendation for AIG stock. S&P said it expects AIG “to de-lever its balance sheet through asset sales, with a focus on preserving and strengthening its core insurance franchise.” It also noted his comments about “a more interactive relationship” with Mr. Greenberg.

The change at the top for AIG “does not come as a large surprise, given the extremely disappointing results in recent quarters…,” noted Alain Karaoglan, an analyst for Bank of America, in a note to investors issued prior to the analyst call.

“As new CEO, Mr. Willumstad will likely face a number of initial challenges as he stabilizes the business and takes steps to mitigate risk,” he added. “Beyond the financials, it is going to take a long time to change the culture built over the past 40 years.”

However, Mr. Karaoglan said the new CEO is “well qualified,” given his “significant experience managing a large financial services organization as former president and [chief operating officer] of Citigroup,” as well as his familiarity with AIG given his recent tenure as the company's chairman.

However, that doesn't mean the job confronting Mr. Willumstad will be easy, he hastened to add.

“A meaningful array of issues faces the company,” he said in his note. “The new CEO will have to take stock of the various operations that comprise AIG and make possibly difficult decisions. Since Mr. Willumstad is almost an outsider, he may be willing to take a fresh look at operations…”

However, concluded Mr. Karaoglan, “the reality is that AIG's problems existed well before Mr. Sullivan became CEO. The consequences of the leverage and risk-taking were only felt now.”

He said Bank of America would maintain AIG's “neutral” rating. “We expect the company to de-lever its operations and dial down the risks, resulting in lower…[return on equity],” he said. “There could be uncertainty in the near term as the company is cleaned up, with the potential for additional capital-raising and write-downs.”

Andrew Kligerman, managing director at UBS Investment Research, said prior to the analyst call that “before AIG rebounds, we think investors will need to see more than a new CEO–such as solid execution.” He cited a number of challenges, including the following:

o An investigation by the U.S. Securities and Exchange Commission into AIG's “fair value valuation”–particularly its “multisector [collateralized debt obligation] exposures–an area of 'material weakness' in internal controls.”

o “Credit performance at AIG Capital Markets and in insurance investment portfolios.”

o “The outlook for general insurance premium and loss ratio trends, which were weaker than we anticipated in the past three quarters…”

In a statement, Mr. Willumstad said he is “honored by the opportunity to lead AIG at this important time.” He said that “although conditions in the credit markets continue to create significant challenges in several areas of the business, AIG has great people throughout the organization and an unrivaled global franchise with tremendous long-term growth potential.”

He added that “in the coming months, we will conduct a thorough strategic and operational review of AIG's businesses and their performance. The board and I recognize that results over the past two quarters have been unacceptable, but we are confident in AIG's future. We are determined to get the organization back on track as quickly as possible and ensure it is well positioned for future success.”

The AIG board also named Stephen F. Bollenbach as its lead independent director.

“AIG is fortunate to have a world-class financial services executive on its board who can immediately step into the CEO role and successfully lead AIG at this critical juncture,” Mr. Bollenbach said in a statement. “The board has great confidence in Bob Willumstad's leadership and his ability to restore AIG to its historic levels of performance.”