In a week that saw American International Group lose one of its senior officials, the carrier defended its controversial payments to retain key executives, warning it could lose valuable employees and even reinsurance contracts if it does not act to keep critical personnel.
The war of words over retention bonuses in the wake of AIG's massive federal bailout intensified as one major defection was announced–with Kevin H. Kelley leaving as chief executive officer of Lexington Insurance and president of AIG Domestic Personal Lines to become CEO of Ironshore Inc. (To replace Mr. Kelley, AIG promoted Peter Eastwood from executive vice president to CEO of Lexington.)
The debate over AIG retention bonuses has raged since shortly after the bailout–now totaling $150 billion–was announced in September. Rep. Elijah Cummings, D-Md., has sharply questioned the practice.
"The limited information that is currently available to the public about this program is insufficient to constitute the level of disclosure that the American taxpayers, who have bailed out this firm repeatedly in recent weeks, have the right to expect," Rep. Cummings said in a Dec. 1 letter to AIG Chairman and CEO Edward Liddy.
Mr. Liddy, in a Dec. 5 letter to Rep. Cummings, said the AIG board's Compensation Committee has approved retention payments for 168 employees, with the base salaries for those involved ranging from $160,000 to $1 million per year, and the retention awards ranging from $92,500 to $4 million.
"These employees are highly specialized and/or are part of businesses that control billions of dollars of revenue and value that will be needed to repay the U.S. taxpayer," according to Mr. Liddy.
Rep. Cummings' said in his letter that the retention program appears to be a "disingenuous 'slight of hand,'" as AIG first announced it will not provide performance bonuses in 2008, but then chose to provide the retention program payments. He questioned why AIG needed to provide payments to keep people when major financial entities are in the midst of massive layoffs, adding that AIG senior executives are "frankly lucky to still have jobs…."
Mr. Liddy responded in his letter that retaining key employees is critical for the company to maintain its standing in the eyes of reinsurers and rating agencies, and is essential if AIG is to repay taxpayers. "We would be doing a disservice to the taxpayer–and would place AIG's asset divestiture plan at risk–if we did not act decisively to ensure that our key employees remain with the company," he said.
In addition, Mr. Liddy noted that some reinsurers have requested provisions that would allow them to cancel reinsurance contracts upon the departure of certain AIG employees. "Having appropriate reinsurance coverage in place is essential to the risk control for AIG's operations," he wrote. "Without appropriate reinsurance cover, the magnitude of losses on catastrophic events would seriously injure the financial strength of the company."
Regarding the challenge by Rep. Cummings as to why AIG is worried about losing employees in today's difficult economy, a company spokesman, Joe Norton, said that "AIG's managers are talented industry leaders. They have deep business relationships and experience in the markets that's not easily duplicated. Competitors have tried to hire AIG managers for years."
Indeed, in hiring Mr. Kelley away from AIG, a statement from Ironshore called him "one of the most talented insurance executives in the last two decades."
Mr. Norton noted that competitors are becoming more and more aggressive about recruiting from his company as AIG managers have seen their assets depleted.
Responding to news reports about the size of some of the retention payments, Mr. Norton said the company has not officially disclosed any numbers beyond what is in Securities and Exchange Commission filings made in September and November, and what is contained in Mr. Liddy's letter to Rep. Cummings.
A September SEC filing noted that AIG executive vice president Jay Wintrob is receiving an award of $3 million under the program.
A November filing stated that executives participating in the program, including Mr. Wintrob and Chief Financial Officer David Herzog, volunteered to delay payments, with the first installment delayed from December 2008 until April 2009, and the second installment delayed from December 2009 until April 2010.
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