Beyond the Turnaround at AIG
CEO Robert Benmosche has revived AIG and repaid its massive government bailout, but may not see the insurer regain its former dominance.
FROM THE 41ST FLOOR CONFERENCE ROOM AT THE TOP OF AMERICAN INTERNATIONAL Group headquarters near Wall Street, the morning fog is lifting over the East River bridges, bringing Manhattan and Brooklyn into full view. Robert Benmosche’s vision extends a good deal further.
In his three years at the helm of the giant insurer — dubbed “the most hated company in America”after its near-collapse triggered an unprecedented government bailout in 2008 — Benmosche has orchestrated arguably the greatest turnaround in corporate history. With a take-no-prisoners leadership style, he restored morale at the beleaguered company and convinced employees, clients and the government that AIG had a future. Benmosche then sold off more than two dozen businesses, shrinking AIG to roughly two thirds of its precrisis size and raising enough money to repay every penny of the $182.3 billion in federal aid it received and deliver $15.1 billion in profits to taxpayers. Today the company’s core life and general insurance businesses are operating profitably for the first time in years, and AIG looks set to return fully to the private sector within months.
Now Benmosche is looking to grow AIG again. His executives are employing the latest data and analytics to boost profits at the group’s property/casualty insurance arm and devising new products to help its life insurance and retirement services subsidiaries prosper in spite of today’s record-low interest rates. AIG’s transformation has already seized the attention of investors, who have made it the second most valuable insurer in the world behind China Life Insurance Co., and Benmosche is confident that the company will soon regain its longtime perch at the top of the industry.
“In another three years we will again be the largest insurance company in the world by market cap,” he tells Institutional Investor in a recent interview at his offices, surrounded by Chinese ceramics, statues and paintings that pay homage to AIG’s birth in Shanghai almost a century ago.
Less clear is whether Benmosche himself will be around to celebrate. Cancer treatment has melted pounds from his 6-foot-4 frame, turned his complexion florid and forced him to grow a beard because rashes have left his face too sensitive to shave. He declines to reveal what type of cancer he has because he doesn’t want the media speculating about how much time he has left. “It is a very aggressive cancer,” says the 68-year-old Benmosche (pronounced BEN-moh-SHAY), who disclosed his condition in October 2010 when the illness was first detected. “I’m not going to be cured. I know that the treatment will eventually stop working.”
Illness hasn’t dented his energy, though. With his booming baritone voice and outsize personality, Benmosche sucks up most of the oxygen in a room. He still jogs 15 miles a week and continues to run AIG at a forced-march pace. His turnaround has allowed the government to reduce its holding in the company from 92 percent after the bailout to 16 percent, and the Treasury Department is expected to sell its remaining stake by early 2013. AIG’s swagger is back. The group’s p/c and life subsidiaries, Chartis and SunAmerica Financial Group, have returned to the black on an operating basis and will be rebranded as AIG and AIG Life and Retirement this month.
“Management has been great for the company, Treasury and the taxpayer,” says Cliff Gallant, an insurance analyst at Keefe, Bruyette & Woods. “AIG is clearly on a sound footing today and making profits, and that’s something few people would have believed possible four years ago.”
AIG underscored its rebound by reporting strong third-quarter earnings early this month. The company posted net income of $1.9 billion in the period, compared with a loss of $3.8 billion in the 2011 quarter. The earlier results were depressed by valuation losses of $3.2 billion on AIG’s minority stake in AIA Group, the Asian life insurer it floated two years ago to finance its recovery, and on its interest in Maiden Lane III, a Federal Reserve Bank of New York vehicle created during the bailout to hold some of the toxic mortgage assets that had crippled AIG. For the first nine months of 2012, the company earned $7.6 billion, compared with a loss of $272 million a year earlier.
Lower catastrophe losses helped boost profits in the first three quarters, but it’s unclear whether that will continue in the wake of claims related to Hurricane Sandy. AIG didn’t announce its financial results from its headquarters because that building, along with four other Lower Manhattan properties it uses, was damaged by floodwaters from Sandy and remained shut one week after the storm.
AIG is a much slimmer outfit than it was before the crisis. The company has cut its balance sheet nearly in half, to $551 billion from $1.05 trillion, and reduced staffing to 62,000 from 96,000. It has tumbled to fifth place from first among the world’s general insurers, with $39 billion in premiums in 2011, far behind global leader Allianz’s €101 billion ($129 billion). Its life business, reduced by the $15.5 billion sale of American Life Insurance Co. (Alico) to MetLife, ranks outside the top 25 in the U.S. by premiums.
Adding to the challenge, AIG’s core businesses are mediocre performers, even if they have returned to profitability. Chartis’s combined ratio, which measures costs and claims as a proportion of premiums, stood at 102.3 percent in the first half of 2012. A number above 100 percent indicates that a company isn’t making money from insurance underwriting and has to rely on investment income for profits. Many peers did much better, with ACE at 88.9 percent, Chubb Corp. at 92.0 percent and Travelers Cos. at 96.3 percent. AIG’s p/c operation posted a modest 6 percent return on equity in the first half, well below ACE (12.6 percent), Chubb (11.8 percent) and Travelers (10.5 percent). It remains to be seen whether AIG’s life insurance unit, SunAmerica, can prosper in today’s prolonged low-interest-rate environment. “They have a lot of work to do,” says Josh Stirling, a senior analyst at Sanford C. Bernstein & Co.
Yet today’s difficulties pale in comparison with the existential crisis the company faced just a few years ago. AIG ran up record losses of $116.4 billion in the two years ended December 31, 2009. The giant insurer saw the departure of three CEOs and scores of other senior executives in the space of 14 months. AIG became a corporate pariah, its name a byword for corporate malfeasance. “We were vilified in the media and in comments coming out of Washington,” says Benmosche. “Employees had their children bullied at school.”
Benmosche, a former chairman and CEO of MetLife, was lured out of retirement to take over at AIG and stopped the rot with his blunt and aggressive leadership style. He recruited a number of senior executives to spearhead the turnaround, including Peter Hancock, CEO of Chartis and the likely candidate to succeed Benmosche at the helm of AIG.
Hancock, a derivatives specialist with no prior experience in insurance, has reorganized Chartis from a sprawling collection of fiefdoms in more than 90 countries into two major units — global commercial and global consumer — that are using technology and data analytics to tailor insurance policies for multinational clients and introduce successful retail products to new markets around the globe. “Scale is not an objective for us — we have it already,” Hancock tells II. “Our strategies are very much focused on growing the value of the company, not the volume of its transactions.” Hancock is counting on emerging markets like Brazil, China, Indonesia, Mexico and Turkey to drive future profits. AIG is the largest U.S. insurer in China and currently ranks No. 10 overall in Turkey, No. 11 in Mexico and No. 13 in Indonesia.
Meanwhile, SunAmerica, which focuses entirely on the U.S. market, has recorded six consecutive quarters of positive net flows. It has reestablished distribution platforms through brokerages that abandoned the firm during the crisis, and it is picking up market share in variable annuities, where its presence used to be negligible.
All these initiatives have helped AIG’s share price soar by 41 percent since the beginning of the year, to $32.68 early this month. Even at that level AIG trades at just 0.6 times book value, compared with 0.90 for Allianz, 1.03 for ACE, 1.07 for Travelers and 1.34 for Chubb. AIG boasts $105.53 billion in shareholder equity because of government infusions, the proceeds of asset sales and tax-loss carryforwards, compared with $62.7 billion for Allianz.
Bruce Berkowitz, founder and chief investment officer of Miami-based Fairholme Capital Management, was an early investor in postbailout AIG, and his flagship hedge fund, Fairholme Fund, now holds a 1.96 percent stake worth $1.2 billion. “I bought them because they were cheap. And their major businesses were intact,” says Berkowitz. He predicts the share price will rise to $70 next year as the government exits the company and Benmosche’s team continues to bolster the bottom line. “The best is just ahead,” he says.
Few could have imagined such a scenario four years ago, when the government took control of AIG. Back then, Sarah Dahlgren, the New York Fed’s representative on the AIG monitoring team, remembers, there was no time to even think about an endgame. “Everyday it was keep your head down, keep moving, keep fixing, keep coming up with ideas,” says Dahlgren, now head of the financial institution supervision group at the New York Fed.
AIG BEGAN LIFE IN 1919 WHEN CORNELIUS VANDER Starr opened an office in Shanghai, becoming the first Westerner to sell insurance in China. Mao Zedong’s Communist forces swept to power in 1949, forcing Starr to set up new headquarters, in New York, but AIG maintained its international outlook and expanded its reach into other parts of Asia, Latin America, Europe and the Middle East.
In 1962, Starr turned over management of U.S. operations to Maurice (Hank) Greenberg, who moved the company in radical new directions. Less interested in consumer lines than Starr was, Greenberg transformed AIG into a high-margin p/c insurer of big corporations. Greenberg succeeded Starr at the helm in 1968 and took AIG public the following year, unleashing a spectacular quarter century of growth. By the early 1980s, says Bernstein’s Stirling, AIG had become “a swashbuckling global underwriter that could drive both growth and margins.” Year after year Greenberg delivered what industry analysts dubbed “the three 15s”: 15 percent income growth, 15 percent earnings per share growth and 15 percent return on equity.
Trouble was, the story was too good to be true. By 2005 the U.S. Securities and Exchange Commission, the U.S. Justice Department and the New York State Office of the Attorney General had launched a series of fraud investigations into AIG. Greenberg was forced to resign in March 2005 over a scandal linked to the company’s overstated reserves and loose accounting. He is still battling New York State civil fraud claims over two suspect reinsurance transactions.
Martin Sullivan, who joined AIG as a clerk in its London office in 1970 and rose to co–chief operating officer and vice chairman, stepped up to the CEO’s office with Greenberg’s blessing, but the situation only worsened. The focus of the company’s problems shifted to its AIG Financial Products unit, headed by Joseph Cassano from offices in London and Wilton, Connecticut. Greenberg had created Aigfp in 1987 to act as an in-house hedge fund, using the parent company’s capital base to invest in derivatives and structured assets. The unit delivered hundreds of millions of dollars in annual pretax profits to AIG and commissions of 30 to 35 percent of those profits to Aigfp traders.
Sullivan allowed Cassano to ramp up growth by investing in collateralized debt obligations and other mortgage-backed assets, and writing tens of billions of dollars worth of credit default swaps on subprime-mortgage-backed securities, insurance that helped inflate the subprime bubble to the bursting point. By the end of 2007, Aigfp’s mortgage-backed portfolio had reached a massive $527 billion, including some $450 billion of CDSs. In December of that year, Sullivan told investors that AIG’s housing exposure was manageable and that the risk of a loss was “close to zero.” Events would prove otherwise. Over the next six months, the company announced unrealized losses of $20 billion on its supersenior CDS portfolio. When Standard & Poor’s downgraded AIG by one notch, to AA–, in May 2008, the downward spiral accelerated: Counterparties, led by Goldman Sachs Group, demanded that AIG post billions of dollars in collateral to cover declines in the value of the mortgage-backed securities being insured.
In the wake of Lehman Brothers Holdings’ bankruptcy on September 15, 2008, both Moody’s Investors Service and S&P downgraded AIG to A, prompting the insurer’s stock price to plunge by 61 percent on September 16, to just $1.25, and counterparties to demand an additional $10 billion in collateral. With a battered AIG threatening to trigger a chain of failures throughout the financial system, the New York Fed announced on the evening of September 16 that it would lend as much as $85 billion to shore up the insurer in exchange for a warrant for 79.9 percent of its shares. AIG used $62 billion of the loan to pay off its CDS counterparties — led by Société Générale with $16.5 billion and Goldman Sachs with $14 billion — at 100 cents on the dollar. The Fed abandoned efforts to get the eight counterparties to accept a haircut when only one of them, UBS, agreed to a minuscule 2 percent haircut and only if the others went along. Over the next eight months, the Fed would extend further credit and buy more toxic assets, and the U.S. Treasury would purchase $40 billion in preferred stock, raising the bailout cost to $182.3 billion and lifting the government’s stake to 92 percent.
The company’s C suite reflected the turmoil. Sullivan stepped down as CEO in June 2008 and was replaced by chairman Robert Willumstad, who lasted until the bailout, when he was replaced as CEO by Edward Liddy, a Goldman Sachs director supported by then–Treasury Secretary Henry Paulson, a former Goldman CEO. In March 2009, AIG reported a loss of $61.7 billion for the last three months of 2008, the largest quarterly loss in corporate history. The company sparked renewed outrage when it announced that it had distributed $165 million in executive bonuses and that bonuses for the entire company might reach $1.2 billion, including $450 million for staff at AIG Financial Products. Senator Chuck Grassley, an Iowa Republican, suggested that AIG senior executives “resign or commit suicide.” Liddy needed no further prompting; he announced at the end of May 2009 that he would step down as soon as AIG’s board could find another CEO. They located the unlikely replacement halfway around the world. Benmosche, who had retired three years earlier from MetLife, was spending his time sailing along Croatia’s coast, tending his vineyard north of Dubrovnik and reminiscing with his grandchildren about his long corporate career.
BORN IN BROOKLYN IN 1944, BENMOSCHE WORKED as a Coca-Cola Co. truck driver and sales rep to put himself through prep school and Alfred University in upstate New York. After earning a BS in mathematics and serving in South Korea as an army lieutenant, he became a computer programmer and joined Chase Manhattan Bank.
In 1982 he joined Paine Webber, rising from a marketing job to chief financial officer of the retail brokerage division and ending up as head of operations and technology. “The guy could do anything and always exceptionally well,” says former Paine Webber president Paul Guenther, who hired Benmosche.
In 1995, Benmosche joined MetLife and oversaw the life insurer’s merger with New England Mutual Life Insurance Co. Three years later he was named MetLife chairman and CEO, and he stayed until his retirement in 2006.
According to Benmosche, the first suggestion that he should run AIG came in January 2009 — from Hank Greenberg, of all people. Greenberg was in no position to make such a proposal (although his company, Starr International Co., still owns 0.94 percent of AIG), but he was desperate to keep alive the company he had grown into a global behemoth. “I told Hank, ‘I’m not like you. I don’t want to work forever,’ ” recalls Benmosche.
But Greenberg aroused Benmosche’s appetite for one last hurrah — and fanned his fears that his own wealth was at risk. Benmosche owned 500,000 MetLife shares and held options for 2.1 million more. “I saw MetLife struggling,” says Benmosche. “I knew that if AIG failed, it would bring the industry to a low that nobody would really understand.”
The government’s key AIG hands — Jim Millstein, the Treasury’s chief reconstructing officer, and Dahlgren of the New York Fed — also saw Benmosche as the company’s best potential savior, and they arranged for him to interview with Treasury Secretary Timothy Geithner and Lawrence Summers, then director of the National Economic Council at the White House.
With a reputation for speaking his mind, Benmosche was by no means an instant hit in Washington or on Wall Street. “He is always very direct, very open, regardless of impact,” says Helene Kaplan, who was a MetLife board member when Benmosche was CEO. “It’s something you just don’t see in the corporate world.”
No sooner did Benmosche agree to take the AIG job than he announced he was going back to Croatia for a two-week vacation with his family. But before doing so he held a meeting with AIG employees in which he vowed to tell the company’s critics in Congress to “stick it where the sun don’t shine.”
Nowadays Benmosche insists his irascibility was part of a strategy to lift morale at AIG. Thanks to the media furor over his remarks, he says, AIG employees and brokers worldwide rallied around the new boss. “They were excited for the first time since the crisis that somebody was going to stand up for them,” says Benmosche. The New York Fed’s Dahlgren agrees. “He got folks to realize that it’s not ‘Woe is me; I’m AIG’ but rather ‘We’re here to stay, and we’re going to make it through this very difficult time,’ ” she says.
Benmosche’s first order of business was to convince employees, from junior actuaries to senior executives, that he would not preside over the liquidation of AIG. On August 10, his first day as CEO, he immediately moved to countermand a decision by the board and its government monitors to shut down Aigfp and sell all its assets by November 1. “I told the AIG Financial Products people, ‘You can’t afford to do that, so stop immediately,’ ” he recalls. “ ‘I don’t want any more sales unless they can be done at decent prices.’ ” The division was holding positions with a notional value of some $1.2 trillion, and executives projected they would lose $10 billion to $20 billion in a hasty liquidation. “If we had lost the money, AIG wouldn’t have survived,” Benmosche asserts. Instead, these once-toxic assets were sold off slowly, and they have recently found eager buyers — AIG among them (see story, page 29).
Similarly, the CEO put a halt to plans to sell Chartis. Jeffrey Hayman, then head of the p/c unit’s Asian operations, remembers flying into New York from Tokyo in August 2009 to work on a proposed spin-off of the business. “Then Bob Benmosche arrived and we stopped talking about that anymore,” says Hayman, head of global consumer insurance at Chartis.
To help keep AIG afloat and start repaying the government, Benmosche focused on selling noncore assets, though not always with immediate success. AIA, the company’s large, Hong Kong–based life insurer, was the most marketable property. In 2010 the U.K.’s Prudential proposed to acquire AIA for $35.5 billion, an offer Benmosche was eager to seize, but the deal collapsed when Prudential shareholders balked at the price. So Benmosche resorted to an IPO on the Hong Kong Stock Exchange, raising a record HK$138.3 billion ($17.8 billion) by floating a 58 percent stake in October 2010. Two further sales, the latest in September, have reduced AIG’s holding in AIA to 14.5 percent and raised a total of $28.5 billion.
In the midst of the AIA drama, AIG agreed to sell its non-U.S. life insurance business, Alico, to rival MetLife for $6.8 billion in cash and $8.7 billion in MetLife shares and securities. The AIG board negotiated that sale to avoid a potential conflict of interest for Benmosche given his large shareholdings in MetLife. “I would never consider giving up my MetLife shares. That’s a huge amount of money,” he says.
By early 2011 the strategy of deleveraging and recapitalizing AIG and repaying the government was well advanced. It was time for AIG’s senior executives to turn SunAmerica and Chartis into blue-chip operations once again. “It became very clear that AIG needed to prioritize the turnaround at Chartis,” says Bernstein’s Stirling.
Hancock, 53, was an improbable candidate to run Chartis. Born in the U.K. and raised in Hong Kong, he studied politics, philosophy and economics at the University of Oxford before embarking on a career in banking. He spent 20 years at J.P. Morgan & Co., where he helped develop the CDS market in the 1990s before rising to become head of the risk management committee and chief financial officer. He left the bank in 2002 to co-found and run Integrated Finance, a New York–based financial advisory outfit.
On the advice of the New York Fed’s Dahlgren, Benmosche brought Hancock on to oversee AIG Financial Products in February 2010. His recruit’s pay package was not skimpy: In 2010, Hancock earned $5.7 million, including $1.5 million in cash salary, $2.4 million in stock and $1.8 million in cash incentives. His 2011 compensation package was $7 million.
“I am fortunate Peter was able to come aboard,” Benmosche says. “It allowed me in the first year and a half to get control of some of our investments, rebuild risk management and stay on top of our financial products group.”
In March 2011, Benmosche put Hancock in charge of Chartis, believing his strengths in risk management and analytics would more than offset his lack of insurance experience. Analysts say Hancock’s outsider status has been a plus for a p/c business that hadn’t met its cost of capital for at least a decade. “Hancock started asking people basic questions like ‘what drives claims, where are hidden structural costs, and how can risk be better priced into products?’ ” says Bernstein’s Stirling.
Hancock immediately reorganized Chartis into the global commercial and global consumer groups and instructed executives to look to emerging markets for growth. “We already do business with 97 percent of the Fortune 1000,” he says.
The Chartis chief preaches risk-adjusted profitability, or RAP, a metric that measures return on equity minus the company’s cost of equity. “In places where we get a good RAP spread, we will employ more and more equity, while in places that is not true we will extract capital,” says Hancock. Using that standard, Chartis has moved to raise prices and reduce capital in long-tail U.S. commercial casualty business lines such as workers’ compensation and excess casualty. They are “much less attractive than shorter-tail businesses that have attractive combined ratios,” he says.
A good example of the latter is direct-to-consumer marketing. Chartis has big businesses in Japan and South Korea that use the Internet and telephone marketing to sell auto, home, health and accident policies. “But those practices never got transferred to other geographies,” says Hayman. “We can do that now by moving people who had experience in Japan and Korea, and the models they implemented there, to new markets like Brazil, China, Turkey and Indonesia.”
Overall, Hancock aims to boost the consumer business, which traditionally has generated less than 35 percent of Chartis’s revenue, to deliver 45 percent by 2015. Consumer lines tend to be more predictable and have shorter tails than commercial business, and they are a lot less capital-intensive: Of the $66 billion in loss reserves held by Chartis, only $5.4 billion is on the consumer side. The CEO is making progress: In the second quarter consumer business provided 38 percent of revenue, or $3.5 billion. Notably, more than 75 percent of consumer revenue comes from outside the U.S.
Hancock and his team are making greater use of data and technology to drive down costs and target more-profitable products and markets. It’s hardly a new idea for the insurance industry, but it’s an area where Chartis has lagged badly.
Consider AIG’s U.K. commercial auto insurance business. Chartis culled its own worldwide claims data to devise ways to improve fraud detection, create paperless procedures and figure out how to get a claim to the right examiner more quickly. The so-called OneClaim initiative resulted in a 10-point drop in the U.K. unit’s combined ratio last year, AIG says, without disclosing the actual ratio. “As we roll out this claim method to other locations, we expect them to improve as well,” says Hancock.
AIG believes the reorganization of its p/c business and the focus on data mining will allow Chartis to match the performance of its most efficient rivals by 2015. Some analysts have their doubts. Although they applaud Chartis for embracing technology and analytics, some are concerned that legacy issues could cause problems. “My worry is that between 2008 and 2011, when AIG was struggling, they may have mispriced business and that we haven’t yet seen the full impact of that,” says KBW’s Gallant.
The return to financial health of SunAmerica, AIG’s life and annuity insurance arm, has been as notable as the rebound at Chartis. Operating income for the first nine months of this year was up 29.8 percent over the same period in 2011, to $3.1 billion, even though premiums shrank by 3.8 percent, to $1.8 billion.
Behind the surge in operating income were improved products, especially variable annuities, and beefed-up distribution channels as the AIG taint receded among insurance brokers and their clients.
The need for new, more attractive products is being driven by the prospect of abysmal investment returns, a problem facing the entire life insurance industry. Last year fixed-maturity instruments — U.S. Treasury securities and corporate bonds — accounted for 82.7 percent of SunAmerica’s $189.3 billion investment portfolio. Other investments included mortgages (8.9 percent), alternatives (6.7 percent), short-term investments (1.7 percent) and equities (a negligible 0.1 percent).
If ten-year Treasury yields persist in their recent low range of 1.4 to 1.7 percent, SunAmerica projects, its earnings will fall by as much as $125 million in 2014 and $200 million in 2015 as it’s forced to roll over maturing assets into lower-yielding instruments. “There isn’t much that SunAmerica or any other life insurer can do to boost returns on investment,” says Kevin Walsh, an analyst at Citigroup Global Markets.
Fixed annuities, a staple product for life insurers, have been especially hard-hit by the low-interest-rate environment. “The consumer at some point became tired of longer-term investments with a 1 percent rate of return,” concedes SunAmerica CEO Jay Wintrob. Fixed annuity sales in the first half of 2012 were down by 45 percent compared with the same period last year for the life insurance industry, according to Bank Insurance and Securities Research Associates. The decline was a far steeper 74 percent at SunAmerica, to $1.1 billion in the first half, but a rise in variable annuities partly made up for the drop. Variable annuity sales shot up 45 percent, to $2.3 billion, in the first half as SunAmerica grabbed market share. Hartford Financial Services Group, John Hancock Financial Services and ING announced this year that they were pulling out of the market, while MetLife has said that it intends to cut variable annuity sales to $18 billion this year from a market-leading $28 billion in 2011.
Traditionally, insurers hedge lifetime withdrawal benefits on variable annuities with stock investments. The growing risks of those positions have prompted many players to cut back or quit the business. SunAmerica has been devising ways to get policyholders to share its risks. One of the company’s new variable annuity products, the Volatility Control Fund, charges a fee to the client that rises or falls based on the movement of the Chicago Board Options Exchange’s Market Volatility Index, or VIX, the so-called fear index that measures expectations of stock market volatility. “As far as I know, SunAmerica is the only insurer that does this,” says Frank O’Connor, director of insurance solutions at Morningstar in Chicago.
SunAmerica also has a restrictive investment portfolio requirement that offers a roughly 45 percent maximum equity exposure within the benefit, while the rest is invested in fixed-income securities. The fund uses a derivatives overlay to manage risk.
Besides creating new products, SunAmerica has wooed back many broker-dealers that abandoned the life insurer in the wake of AIG’s meltdown in 2008–’09. “As the AIG story has gotten better and better, we have rebuilt our distribution network,” says CEO Wintrob. Over the past two years, SunAmerica has regained important platforms like Edward D. Jones & Co., Wells Fargo Advisors and Commonwealth Financial Network.
OF ALL THE BAILOUTS UNDER THE Troubled Asset Relief Program, AIG’s was by far the largest and most contentious. In September 2008 the Treasury Department projected that taxpayers would end up losing $5 billion on the operation, a figure most analysts dismissed as wildly optimistic. At the time, AIG’s stock price was hovering around $4, and Treasury’s break-even cost for AIG shares was $28.73. The government stands to add to its profits by selling its remaining stake, worth a little more than $9 billion. The CDS rate on AIG bonds, which reached 3,000 basis points at the height of the crisis, is now back down to about 140. “So it’s full circle back to pre-Lehman levels,” says Philippe Bodereau, head of European credit research at Pacific Investment Management Co.
Benmosche would like nothing more than to see the government complete its exit and enhance AIG’s appeal to investors. It could do so as early as this month, at the end of a 60-day lockup following the previous sale, totaling $18 billion, on September 10. For the first time since his arrival, Benmosche has the luxury of waiting for the best market conditions before making further sales of noncore assets. When analysts expressed disappointment in September that AIG hadn’t unloaded its remaining stake in AIA, he said, “Time is on our side, not theirs, and we want to sell at the best price for our shareholders.”
According to Benmosche, the same criterion applies to AIG’s largest remaining noncore business, International Lease Finance Corp. The company is the world’s second-largest aircraft leasing business, behind General Electric Co.’s GE Capital Aviation Services unit, with a $35.1 billion book value for its 933-plane fleet. ILFC ran up $995 million in operating losses last year after a $698 million loss in 2010.
The biggest uncertainty is how long Benmosche will be running AIG. That is one call the CEO can’t make. “I would be happy to stay for another year or two, but it all depends on my health,” he says. “We have a succession plan in place. The board is actively engaged in looking at some of our key executives and outside candidates as well. And the fact is, I am going to be 70 years old in 2014. Maybe it’s the new 50, but it doesn’t feel that way.” • •