Hank Greenberg has resigned from AIG’s Board of Directors (last Wednesday), but the disarray within AIG continues. This marks the final separation of Greenberg from the company he led for decades and built from a small international insurer to a global force.
It appears that he was “estranged” well before the final resignation, as AIG was evidently withholding financial information from Greenberg. The resignation comes on the heels of the May 31 restatement of earnings by AIG, lowering net income over the last ten years by $3.9 billion (ten percent of total earnings).
Internal sources indicate there is a lack of decisiveness prevalent in AIG and the AIG companies that was previously unheard of. American General has switched target markets and market emphasis several times over the last year, leadership changes that appeared to be in process are now in limbo, and some underwriters at the AIG companies are unsure what they should be writing at what price.
Some confusion is always present in even the best-run companies, as communication through multiple layers and multiple individuals with disparate agendas is unclear at best. However, the extent of the issues at AIG indicates a larger problem. Perhaps the autocratic style that was so successful for the company for four decades is to blame, and/or politics is taking the lead over productivity as individuals scramble to position themselves while the sands shift under them.
What does this mean for you?
If you work at AIG, keep the faith. There are lots of very talented, highly motivated people at AIG, and barring unforeseen criminal indictments of the enterprise itself, the company will survive and prosper. It would be easy to say keep forging ahead and ignore the tumult around you, but probably more intelligent to suggest you keep reading the tea leaves. Unfortunately, so much of success in big companies is based on politics not productivity.

The mess at AIG may be getting worse. According to Reuters, on Wednesday, the state of Florida ordered American International Group Inc.:
“to turn over information about the company’s previously disclosed accounting misrepresentations or possibly be suspended from doing business in the state. The Office of Insurance Regulation order also requires AIG and its 43 units operating in the state to name and remove any culpable parties responsible for misrepresentations made on the insurer’s financial statements.”
Among other lines, AIG is one of the largest writers of workers comp in the state, with an estimated $200 million in premiums (plus claims administrative responsibilities for large self-insured risks). AIG also administers managed care programs throughout the state through its HealthDirect subsidiary. It is unclear from the report if there would be any impact on either the TPA or managed care programs.
According to Reuters;
“The Florida order also requires AIG to file by July 1 “true and correct” financial statements for the years of 2000 through 2005 for all AIG entities licensed in Florida. The company has said it expects to file its 10-K annual report with securities regulators by the end of May. If AIG does not comply with Florida’s order, the state said it will suspend the insurer, among other potential actions.”
What does this mean for you?
This is serious. It indicates a lack of faith in the veracity of AIG’s financial statements, and possibly concern about its finances. No one is suggesting, even remotely, that AIG is in financial difficulty. However, given how fast Kemper sank, and the very few indicators before their demise, one would be well-served to watch this developing situation closely.

AIG is still in trouble. The latest announcement indicates the firm is still unable to unravel the complex financial transactions that are causing distress in Mr. Spitzer’s offices, and thus will be unable to report their audited results (as previously promised) on Monday.
Instead, AIG will report unaudited results and indicate where they have found potential problems. So far, those problems “only” amount to $2.7 billion in overstated reserves, a figure that is a mere fraction of the company’s total assets. I do wonder why they would run the risk of publishing unaudited results, as they may well be wrong, and perhaps significantly so. If the unaudited results are in fact significantly different from the final, audited results, this premature disclosure will cast further doubt on management’s grasp on the fundamentals. A pretty scary thought.
On another, seemingly-unrelated topic, the burgeoning issue of AIG’s apparent willful decision to mis-report WC premium as liability premium in several states has led to possible investigations in NY and California. Simply put, AIG knew they were mis-representing some portion of their WC premiums as liability as far back as 1992, yet by 1997 they had not completely resolved the issue.
This is not just a meaningless accounting error. In many states, WC insurers pay a percentage of their earned premium into a guarantee fund that sets aside reserves to cover potential losses from insurers that go bankrupt. Thus, mis-representing WC premiums as liability saved AIG a lot of money.
I find it hard to believe that a company like AIG that is so numbers-oriented, that constantly measures and monitors its’ financial results, and that is so creative and innovative in all things financial, could take five years to resolve what is really nothing more than an accounting problem. Yes, it is possible, it just strains credibility.
As noted before, AIG is a very well run company with a lot of innovative, hard-working, extremely intelligent people. There is nothing more damaging to their productivity than constantly waiting for the next bad news.

The property and casualty industry had a banner year in 2004, making money on an underwriting basis for the first time since 1978. The combined ratio of 97.9, combined with investment profits produced a return on equity of 10.4%, a significant improvement over historical results.
Explanation for non-insurance folks. The combined ratio is the sum of claims and administrative expenses, and represents all of the claims, underwriting, sales, and other expenses. Typically the P&C industry loses money on an underwriting basis (producing combined ratios of over 100%) and makes money on investing the premiums customers have paid. As many P&C insurance lines have long “tails”, claims may not come in for several years, and may not be paid in full for decades, allowing the insurer to reap the investment returns.
While all looks rosy, the underlying picture is somewhat troubling. The returns were driven by both increased prices for insurance and decreases in claims expenses. However, the growth in premiums is rapidly tailing off, with AM Best predicting growth in 2005 to be well below 2004’s 4.7%.
To quote Best,
“As a sign of things to come, net premium growth was only a little better than half the percentage increase for 2003. A.M. Best data show that increases in net premiums written have been reduced for the second straight year, from a peak increase of 14.7% in 2002 to 9.5% in 2003 and 4.7% in 2004. With the deceleration of rate increases giving way to price decrements in the latter half of 2004 in most major commercial and reinsurance lines, and with the expectation that this will be the norm in 2005, A.M. Best expects written premium growth will slow to 1.2% in 2005.”
This is happening because more insurers are seeking to cash in on the profitability boom, equity markets are poor alternatives for capital investment, the bond market returns are marginal at best, and real estate appears to be in or headed for a bubble. Why does this matter? For the simple reason that large investors are always looking for places to invest their money, and with other alternatives appearing strikingly unattractive, many are considering “parking” their funds in what is today a profitable vehicle, insurance capital.
The more that happens, the more price competition occurs. Thus the cycle begins anew, with price pressure leading to price cuts, leading to declining margins.
What does this mean for you?
P&C rates are likely to decline in the near future, especially for short-tail lines such as property and fire. Workers’ comp will not be far behind, with liability following soon after.

There has been some publicity recently regarding the possibility that there are fewer uninsured people in the US than the usual estimate of 45 million uninsureds. While this may be true, like many other arguments about statistics, if you get caught up in the statistical debate, you can easily forget that the real issue is there are tens of millions of uninsureds.
The argument partially stems from a definitional issue – one survey asks if you were uninsured during the previous twelve months, another asks if individuals were uninsured for the entire previous year. Obviously, there are meaningful differences in the question which will elicit different responses. The problem occurs when we focus on the academic issues rather than the overall problem. To quote Uwe Reinhardt of Princeton University (source LA TIMES); “Instead of addressing the problem, we say we must count the uninsured. It is literally, in my view, like making sure we know how many deck chairs we have on the Titanic”.
Experts questioned about the reasons for the discrepancy alluded to the possibility of undercounting Medicaid recipients, a reluctance on the part of respondents to respond to detailed questions if they answered “yes” to the “did you have insurance

I’ll be traveling extensively throughout April, and will not be able to post as often as I’d like.
However, between speaking at the Pharmacy Benefit Management Conference, moderating a panel at the Global Medical Forum Conference in Zurich on international pharmaceutical pricing, attending RIMS, and visiting with clients, there should be a wealth of material ready for publication towards the end of the month.
What does this mean for you?
not as many emails re new postings for a few weeks…