AIG's new CEO gets his big break

June 16, 2008 5:51:31 PM PDT
When Robert Willumstad said goodbye to Citigroup Inc. three years ago, he boldly declared he was leaving to run a major company. Now, at 62, he's making good on that promise - at a floundering AIG during the most challenging climate of his four-decade career.

Wall Street has yet to be convinced that American International Group Inc. is headed for profitability anytime soon. Not only did the world's largest insurer get trampled when the credit markets seized up last year, but it also never quite recovered from then-New York Attorney General Eliot Spitzer's industry shake-up a few years ago.

But if AIG needs a clean-up, most industry watchers are saying - tentatively - that Willumstad is the man for the job. Trained by the master cost-cutter himself, Citigroup's ex-CEO Sanford Weill, Willumstad had a strong record at the world's biggest bank by assets.

"I consider myself a hands-on manager," he told investors on a conference call Monday.

He's also been on AIG's board since 2006, long enough to know the basics of what went wrong at the company during the last year.

Willumstad said he will conduct a review of AIG over the next two to three months. In that time he will meet with shareholders, ratings agencies, regulators, and AIG's noisiest stockholder: ex-CEO Maurice "Hank" Greenberg, whom Willumstad said he telephoned Sunday night and plans to meet with this week, schedules permitting.

Willumstad's review could mean some more management reshuffling at AIG. The new CEO said that finding a new chief financial officer to replace Steven Bensinger - now a vice chairman - is a priority, and that AIG needs to make sure it has "the right people in the right positions."

The review could also result in AIG shedding some of its businesses. Though Willumstad said "it would be very hard for me to imagine seeing the insurance businesses broken up," he also said that "nothing is off the table, and there will be no sacred cows."

The most likely candidates for shearing appear to be AIG's credit derivatives business - which has been the most problematic of AIG's segments lately - and its airplane leasing business, said Stifel Nicolaus analyst Michael Paisan. AIG's asset management is another non-insurance segment of AIG, but it offers significant synergies with the insurance business, according to Paisan.

It is also possible that AIG will pull out of certain regions, Paisan added. AIG operates in about 130 countries worldwide.

After an emergency board meeting over the weekend, directors late Sunday named Willumstad to the CEO position to immediately replace Martin Sullivan, who took the helm back in 2005 when then-CEO Greenberg was forced to leave amid accusations of fraudulent accounting. According to an April regulatory filing, as of Dec. 31, 2007, Sullivan was entitled to about $35 million in termination payments and benefits if dismissed "without cause."

The management changes arrived after AIG lost billions of dollars in investments linked to mortgages and other risky debt.

Analysts on the whole reacted positively on Monday to the choice of Willumstad, but they remain cautious about the company's outlook.

Though the management change was not unexpected, the suddenness of the decision worried some investors that the company might be in worse shape than they thought. The insurer, even after its recent $20 billion capital-raising effort, faces huge problems with its exposure to mortgages and other types of debt.

Lehman Brothers analyst Jay Gelb said the shake-up was "a step in the right direction," but that he expects "few quick fixes for AIG's problems related to the subprime credit crunch and lack of strong earnings power in its core insurance franchise."

Shares of AIG waffled on Monday, slipping 17 cents to close at $34.01. Analysts are expecting the company to post a second-quarter profit next month, but estimates are all over the map, ranging from a profit of a penny per share to $3.92 per share.

AIG has survived other crises throughout its history - which began in 1919 in Shanghai, where American founder Cornelius Vander Starr started selling insurance to the Chinese.

Still, "this appears to be its most vulnerable moment," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co.

Considering how many losing assets they have on their books right now, Battipaglia said, the strength of the team that Willumstad builds around him will be just as important - if not more so - than the board's decision to name him CEO.