AIG's Breakup Sparks a Price War

CEO Liddy vows to hang onto the lucrative commercial insurance segment, but wary customers are driving some hard bargains

As American International Group's (AIG) new chief executive officer, Edward M. Liddy, prepares to break up the embattled insurance giant, he has declared that one piece is not up for sale: commercial insurance. With its lucrative multimillion-dollar policies for some of the world's largest companies, the unit has long been viewed as AIG's crown jewel.

But the $52 billion business may be losing its luster. Customers are nervous about AIG's future, and competitors are rushing to capitalize on AIG's battered reputation amid an $85 billion federal bailout following massive subprime losses, and an additional infusion of $38 billion from the Federal Reserve Bank of New York to cover the company's other obligations. Industry headhunters say competitors are courting top AIG underwriters, who play a critical role in the relationship-driven industry.

The battle has already morphed into a price war. Insurance brokers whose clients' policies came up for renewal on Oct. 1 say AIG slashed premium rates by as much as 50% on key accounts, though the company says rates have not changed materially overall. Rivals are offering discounts of up to 20% to woo people away. Within the industry, AIG's air of desperation is palpable. "Competitors smell blood," says Cliff Gallant, an analyst with Keefe, Bruyette & Woods (KBW), "and they are trying to steal that business as quickly as they can."

Short-Term Focus

Now comes the real test of AIG's viability as a force in commercial insurance. Jan. 1 is one of the biggest days of the year for policy renewals, and AIG may have to scramble to maintain market share. In a recent survey conducted by New York insurance research firm Advisen, 71% of respondents who are AIG commercial policyholders said they plan to get quotes from competitors when their policies renew. John Q. Doyle, CEO of AIG Commercial Insurance, acknowledges the pressure but insists that "client retention has remained strong." He says AIG continues to hold vigorous competitive advantages, including "our capacity for risk, underwriting quality, geographical spread, breadth of product, and service overall."

Still, customers are already exerting more sway in driving down prices. Lance J. Ewing, vice-president for risk management at Harrah's Entertainment, says a good chunk of the $100 million he pays in annual premiums starts to come up for renewal on Dec. 1. While Ewing won't say how much of that business is with AIG, he argues that Harrah's is "in a better negotiating place with AIG, and obviously we will use that to our advantage."

AIG's Doyle and his colleagues are struggling to keep the unit untarnished by AIG's larger problems. The commercial chief says he and his unit's chief financial officer, Robert S. Schimek, have talked to thousands of customers in person and by phone since the parent company took the rescue package on Sept. 16 to avert bankruptcy. Daily updates on press coverage are sent out from headquarters to prepare staff for customer questions.

But one of the biggest challenges is motivating AIG employees who have seen their stock options and retirement plans shrivel up. With all the uncertainty, Steve Grabek, who heads commercial insurance for AIG in the Midwest, admits that it's hard to focus on building the business: "My priorities have become much more short-term-focused, very immediate," Grabek says. "Not much of my time is spent on strategy for the second half of next year."

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