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By JACK ROBERTS, editor in chief of Risk & Insurance®

It hasn't been business as usual at AIU Holdings, Inc. the newly reconstituted commercial insurance company that's now a separate operation, wholly-owned by AIG. But, even with the new organization, it's hard to think of any other group of insurance executives who've had to confront on a daily basis screaming headlines, confused and worried employees and customers, aggressive competitors and blistering criticism from the nation's highest public officials.

On March 2, AIG announced that it would form a new holding company for its Commercial Insurance Group, its Foreign General unit and a number of other property/casualty insurance operations. The new entity will have its own board of directors, management team and a new brand called AIU Holdings, separate and distinct from AIG.

The initial plans call for the sale of about a 20 percent stake in the new company, possibly to the public. The proceeds of any sale would go to AIG, which will own 100 percent of the AIU Holdings stock. Eventually, Doyle and Robert Schimek, executive vice president and CFO of the AIU Holdings Property Casualty Group, say AIU Holdings may be able sell the 80 percent balance of the new company now owned by AIG. If that happens, all ties with AIG would be severed.

During the entire AIG crisis, Doyle and Schimek along with New York and Pennsylvania insurance regulators, have said that the commercial insurance operations were protected and walled off from the problems that AIG has had with credit default swaps and the subsequent financial bailout by the federal government.

The commercial operations have maintained investment grade financial ratings. This move makes that separation even more distinct and may facilitate the sale of the property/casualty assets--operations that are the historic heart of the business and probably the most valuable parts of AIG. Importantly, that sale could go a long way toward paying back the federal investment in AIG.

Mark Willis, AIU's executive vice president of commercial insurance, heads up the field sales organization and has spent 31 years at AIG. He may be one the best people to judge the impact of the financial explosion among the AIG and AIU employees throughout the country.

"AIG has this dark shadow over one of its units," says Willis. "Unfortunately, that has hurt us and we have to get away from that shadow and separate out the property/casualty operation."

WHAT'S NEXT?

Most financial analysts don't expect either the sale of a 20 percent stake in AIU Holdings or the sale of the entire operation anytime soon.

Explains one long-time, large equity investor in the property/casualty insurance companies, "I'm not sure that anyone would pay enough now to make the sale attractive to the government. The federal government would have to approve of any sale. But, if it does happen, public ownership through a public stock offering would be a validation of the ongoing viability of the new company."

Schimek explains that AIU Holdings has a book value of more than $40 billion. "Usually, insurance companies sell for some multiple or discount from book value," he says. Assuming a hypothetical sale of 20 percent of the company at book value, that could raise $8 billion that would go to AIG, the current owner of the stock. AIG could use the proceeds to pay back part of the debt to the federal government.

"Who knows whether book, or two-times book or even less than book, is the right price now," says the equity insurance investor. However, he did note that one possible investor might be another insurance company because insurance companies are exempt from federal antitrust laws. But, he adds that for the insurance investor, "AIG is not the only wounded insurance company now in the marketplace. Look at XL and The Hartford, for example."

Meanwhile AIU Holdings' management continues to focus on its customers, its employees and its competition and historic strengths: customer retention, underwriting profitability, innovation and product development, and service, especially in the claims area, Doyle explains.

The message, says Lou Iglesias, president and CEO of the Risk Management Group at AIU Holdings, is "we're focused on our businesses." He wants customers to know that AIU Holdings is "a meat-and-potatoes insurance company." That message is going out to employees too.

Peter Eastwood, president and CEO of Lexington Insurance, the largest excess/surplus carrier which is often considered the "gem" of the AIG property/casualty operations, has had a challenging communications task. Last fall, former CEO Kevin Kelley, who grew the Lexington operation over the past 21 years, left, along with Lexington president Shaun Kelly to join Ironshore, a Bermuda-based property/casualty insurer and reinsurer.

The loss of Kelley, almost an icon in the AIG and Lexington culture, had repercussions among employees, customers and even the ratings agencies. The immediate task at Lexington, as it is throughout AIU Holdings, became communication.

"Internal communication is critical," says Eastwood. "Our people want to hear from us even if it isn't the most positive news."

He says, "If you have a choice, you want to talk with as many people as possible face to face." The result, Eastwood says, despite some additional departures, is that "we've lost very few people and the executive management team has come together in a way that I think will strengthen us all."

Michael Smith, president and CEO of Executive Liability, reports that "we did lose some good people and some good talent was lured away. But we have a deep bench and we've been able to fill those jobs with people in-house."

Willis says reports of high turnover are overstated. In the field sales organization, "our turnover really isn't any different than in the past. A few examples: in Philadelphia we lost seven out of 400 people; in Cleveland we lost another four out of 150. That's no different than any other year."

COMPETITION

Net premium volume at AIG's commercial insurance operations declined 22.1 percent during the 4th quarter of 2008. The CEOs of a number of large insurers have complained that AIU Holdings is aggressively cutting price to keep its current book of business and to get new accounts.

However, regulators and government investigators have yet to back up the charges, in fact characterizing AIU's pricing as not unusual for the current market environment. All levels of AIU management disagree with the accusations that AIU is on a price-cutting mission. Doyle and Shimek say most of the 4th quarter premium dollar declines can be attributed to a number of factors and not price-cutting:

--Last year, commercial insurance management decided to substantially reduce AIU Holding's workers' compensation exposure because of poor underwriting profitability in some important states, accounting for about a quarter of the decline.

--The recessionary affect on what Doyle calls "transactional business" which is especially true in areas like environmental insurance and construction-related insurance. With declining housing starts and commercial construction, for example, there is less need for construction insurance. Iglesias also points out that with fewer commercial trucks on the road transporting fewer goods and services, commercial fleet premiums will probably decline.

--The effect of commercial buyers reducing coverage because of other recession-related factors. As employment levels decline, there is less demand for employment liability insurance. These two recession-related factors account for as much as half of the premium declines.

--Soft market pricing conditions also continue to have an impact with prices down, on average, about six percent. As prices in certain lines continued to decline, that translates into less premium income.

--Additional premium declines occurred because of adjustment in the reinsurance portfolio.

Meanwhile, Doyle also acknowledges that large customers especially are looking at diversifying the number of carriers. Competitors say that if AIU is aggressively cutting price, beyond these factors, it will be evident in the first quarter figures.

Doyle and his management team emphasize that AIU will remain committed to profitable underwriting. Eastwood, for example, says particularly in underwriting, "you have to make a profit for the organization. If we can't get the rate and terms and conditions that we need to make a profit, then there is no reason for us to write the business."

Iglesias says he doesn't see the price cuts that are the topic of conversation. "I don't know where they are seeing it. We have really stepped up our efforts to monitor rates." There are tough lines to write, he says. "New business is tougher to write and often the market isn't adequate in terms of pricing."

Willis reports that "there is no truth to the charges from our competitors. Sure, we will fight for renewals, but we know we're in the business to make a profit." The best way to compete, Willis says, is "to listen to your customers and figure out how to solve their problems." But, he added responding to the pricing questions, "We're not going to do something that makes no sense."

CLAIMS

When the problems at AIG first surfaced, the biggest question among insurance buyers was whether claims would be paid. State insurance commissioners have all pointed out that reserves to pay claims for policyholders are more than adequate at the commercial insurance operations. Schimek points out that AIU reserves have been consistently growing and that those reserves are invested primarily in government bonds including high-grade municipal bonds, considered one of the safest investments, providing there isn't a crisis in that market.

Michael Smith said that risk managers received questions from board members about claims paying issues especially because of D&O liability exposures. And Iglesias says that on the casualty side, "customers are asking about our ability to pay claims--probably because some have had experience with other carriers which, in the past, didn't make it."

He points out that AIG had a long record of paying claims. He says similar questions come from customers required to post collateral in certain lines. "We have to spend time with people to help them see that especially under the new name we are a separate operation. We're a property/casualty insurance company, not something else."

The most elusive factor at AIU Holdings may be its culture of ambitious, competitive and smart executives. Some of those cultural issues may have been changing after former CEO Hank Greenberg left the company in 2005, but it's clear it still persists despite the recent setbacks.

Willis explained: "Yes, our people are pressed to succeed. There is a mystique about our culture and we're a group that wants to win."

He explains that the culture breeds employees that are creative problem solvers. It works for some people but some others don't fit. "We're hard-charging and have high expectations and I don't think that will change."

April 15, 2009

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