An SOS from AIG?

A new chief exec might not signal the end of troubles for the insurance giant. Some analysts see many more problems ahead

By Amey Stone

When American International Group (AIG ) burst into the headlines on Mar. 13, the rumors were about succession. As AIG confirmed in a Mar. 14 release, long-time Chief Executive Maurice "Hank" Greenberg had finally been kicked upstairs to the chairman's job at the ripe old age of 79.

Sure, the ongoing regulatory scrutiny that has been focused on Corporate America since the implosion of Enron in 2001 likely played a role in Greenberg's expedited transition from running the company he has presided over the past 38 years. But at first blush, his new, nonexecutive role seemed little more than another case of corporate housecleaning by a stronger, more independent board of directors.

It may not be that simple, however. By Mar. 15, investors were connecting the dots between Greenberg's succession and New York Attorney General Eliot Spitzer's ongoing investigation into insurance-industry practices -- and it was starting to seem like there was at least some risk that the bad news could snowball from here.


  After all, the prior day's announcement wasn't just about Greenberg. AIG also said it was delaying filing its 2004 10-K with the Securities & Exchange Commission and that Chief Financial Officer Howard Smith was taking a leave. Just five days earlier, AIG had abruptly canceled attendance at investor conferences hosted by J.P. Morgan Securities and Goldman Sachs (GS ).

Some investors see these as flashing red signals that more problems could lay ahead. "It's starting to remind me of the cockroach theory," says Michael Panzner, head trader at Rabo Securities. "It makes you wonder if there are really a lot more things scurrying around that we don't see yet."

Panzner says the action in the stock on Mar. 15 -- when AIG dropped $1.93, or 3%, to close at $61.92 -- was particularly unsettling. Normally, stocks rally when CEOs are replaced following bad news. Value investors swoop in, figuring the worst is over. "The fact that the stock isn't rallying sends more ominous warning signals about what's going on," he says


  Stock analysts so far have mostly kept their ratings unchanged. Raymond James downgraded the shares, but Merrill Lynch analyst Jay Cohan kept his buy rating. He acknowledged in a Mar. 14 report that some investors were concerned that more "issues" would emerge now that Greenberg has stepped aside. "We see no basis for such a scenario," he wrote. Greenberg will be replaced by Martin Sullivan. AIG didn't return calls seeking comment for this story before deadline.

Credit-rating agencies, however, haven't been so forgiving. On Mar. 15, Fitch Ratings downgraded AIG's long-term debt a notch, and Standard & Poor's, Moody's Investor Service, and A.M. Best all placed its debt ratings under review, noting potential for a downgrade. S&P said in a statement that it was keeping its top rating at least until AIG's 2004 10-K is filed. "However, uncertainty exists as to whether the financial information -- both public and private -- upon which the ratings have been based will be modified," the note said.

AIG might not be the only one caught in the latest net, worries Peter Cohan, an author and management consultant in Marlborough, Mass., who owns AIG stock. Spitzer's office, the SEC, and the Justice Dept. are investigating whether the company purchased what is known as "finite risk insurance" from General Re, a division of Warren Buffett's Berkshire Hathaway (BRK.A ), to boost reserves. "That's a pretty widely adopted product," says Cohan. "You have to wonder how widespread this is."


  Richard Moroney, editor of Dow Theory Forecasts, agrees that the General Re transaction is at the heart of investor concern over the matter. "When a company is accused of making transactions that don't seem to have any economic validity, then alarm bells start going off," he says. "As an investor, you have to wonder how many more shoes are going to drop." In a release dated January 6, 2005, Berkshire Hathaway acknowledged requests for documents from regulators regarding General Re's insurance businesses, including finite reinsurance. It said it would "cooperate fully with these requests."

Merrill analyst Cohen's hope is that Greenberg's shift will help AIG's relations with regulators. "A change at the CEO post could allow the company to take a fresh approach to dealing with regulators, potentially allowing for a quicker resolution," he wrote in a Mar. 14 note. Greenberg, who has a reputation as a tough, autocratic leader, is believed to have stonewalled investigators, an approach that apparently doesn't work too well with the hard-driving Spitzer.

At a February, 2002, meeting with reporters, Greenberg tried to brush aside the then-burgeoning concern about AIG's role in complex financial transactions. "There's a difference between complex transactions and dishonest transactions," Greenberg said. "If we're going to go back to simple transactions, we can start trading in beads." If AIG's current problems get any worse, Greenberg may wish that he had done just that.

Stone is a senior writer for BusinessWeek Online in New York

Edited by Beth Belton

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