Will AIG Management Shakeup Improve Results?

Article

American International Group Inc., the insurer being pressured by activist investor Carl Icahn to boost returns, said last week that Chief Financial Officer David Herzog is among top managers leaving the company as Chief Executive Officer Peter Hancock shakes up management.

Sid Sankaran, the chief risk officer, will take on the CFO role after AIG files its annual report with regulators early next year, the New York-based insurer said in a statement Thursday. Also leaving is John Doyle, head of commercial insurance, which is one of AIG’s most important businesses. Rob Schimek, who is CEO of the Americas, will take on Doyle’s role.

Hancock, who became CEO in September of last year and reshaped leadership that month, told investors after posting a third-quarter loss in November that the company plans to dismiss about 23 percent of the top 1,400 members of senior management. He told staff in a town-hall meeting that they shouldn’t count on lifetime employment with the insurer, according to people familiar with his remarks.

“We are moving forward with a continued sense of urgency,” Hancock said in the statement. “I have streamlined my senior leadership structure in a manner that will accelerate our decision-making and ensure that we have strong end-to-end accountability.”

Significant Pressure

“The company is clearly under significant pressure from activist investors including Carl Icahn to improve results or split up the company,” Jay Gelb, an analyst at Barclays Plc, said in a note. “We doubt this management shakeup will result in much improvement in core results.”

AIG has suffered for years with higher-than-expected claims costs at the property/casualty operation, including when it was run by Hancock before his promotion to CEO. The business guards corporate clients against lawsuits, natural disasters and cyber attacks.

Herzog had been CFO since late 2008, helping the insurer recover from its bailout earlier that year. He was one of AIG’s top-paid employees and had focused recently on redeeming debt that was issued when interest rates were higher. Herzog was named in October by the U.S. Treasury Department to the Federal Advisory Committee on Insurance, joining other industry leaders including New York Life Insurance Co. CEO Ted Mathas.

Surprise Departure

Sankaran joined the company in 2010 from consulting firm Oliver Wyman, a unit of insurance broker Marsh & McLennan Cos., as AIG sought to avoid a repeat of the oversights that led to billions of dollars of losses on derivative contracts and the U.S. rescue. Hancock was also brought on that year in a risk- management role.

“We are very surprised by Mr. Herzog’s departure,” analysts led by John Nadel at Piper Jaffray Cos. said in a note. “We think Mr. Herzog is likely to land a new role within the industry very quickly. On the other hand, we are less surprised by the departure of Mr. Doyle given the recent lack of any significant improvement in commercial results.”

Schimek joined AIG in 2005 after spending almost two decades at Deloitte LLP, and has worked in various positions at the insurer since. He’ll be responsible for turning around commercial property-casualty results after AIG said underwriting income from operations fell to $65 million in the first nine months of this year from $123 million a year earlier as premium revenue declined.

‘Considerable Headwinds’

The insurer reported pay of $7.7 million for Herzog and $8.2 million for Doyle last year. Both received about $1 million in salary and about $2.4 million in other cash awards. Herzog plans to retire, according to Jon Diat, an AIG spokesman. The CFO didn’t return a message, and Doyle declined to comment.

Icahn said in October that Hancock should break up AIG into three separate companies, one selling life insurance, a second offering property/casualty coverage and a third backing mortgages. The billionaire also mocked Hancock’s inability to generate a 10 percent return on equity. Icahn didn’t immediately return a message Thursday seeking comment.

“The operating performances of the key divisions has deteriorated,” John Heagerty, an analyst at Atlantic Equities, said in a note Thursday before the departures were announced. “We see considerable headwinds remaining – a deteriorating commercial insurance market, low interest rates and the strong U.S. dollar.”

Dachille, Maag

Also leaving are Jose Hernandez, who led the Asia-Pacific region, and Eric Martinez, who was executive vice president of global claims and operations. Their positions have been eliminated. The company had decided about a year ago to shrink the size of the leadership team, according to a person familiar with the situation who asked not to be identified discussing internal deliberations.

Doug Dachille, a former colleague of Hancock at J.P. Morgan & Co. who was named in July as AIG’s chief investment officer, was given the additional duty of supervising Chief Science Officer Murli Buluswar. Dachille will be managing a science team of about 100 people and an investing team of about 1,000.

Hancock has highlighted the role that Buluswar’s operation can have analyzing trends in claims costs, by working closely with the property/casualty operations. AIG intends to continue to increase Dachille’s duties as the science group grows, according to the person familiar with the company’s plans.

Hogan, Quane

Seraina Maag, who was head of the Europe, Middle East and Africa region, is also adding duties. She was named CEO of regional management and operations. The EMEA, Americas and Asia- Pacific CEO roles are being consolidated.

Kevin Hogan, who runs consumer operations worldwide, will have increased oversight of Japan. AIG has taken longer than it previously planned to integrate the AIU unit with Fuji Fire & Marine in that country.

Alessa Quane will replace Sankaran as chief risk officer and retain the role of chief corporate actuary, reporting to the CFO and to the board’s risk and capital committee.

–With assistance from Katherine Chiglinsky and Caleb Melby.