NEW YORK (CNN/Money) -
The recent federal and state investigations aimed at global insurer American International Group are leading investors to wonder if Chairman Maurice "Hank" Greenberg may soon retire due to so-called regulatory fatigue.
Greenberg, a 79-year-old icon of the insurance industry who has headed AIG since 1967, may succumb to the same pressures that last year finally forced former Citigroup Chairman and Chief Executive Sandford Weill to give up his top spot, industry experts said.
Like Weill did in 2003, Greenberg now faces a series of state and federal probes.
Those include Securities and Exchange Commission scrutiny of several questionable deals AIG set up for PNC Financial Services Group; a criminal investigation by the Justice Department into insurance AIG sold to Brightpoint Inc., an Indiana-based cell phone distributor; and efforts by New York State Attorney General Eliot Spitzer to expose bid-rigging and price-fixing schemes in the property/casualty business.
New York-based AIG is the largest provider of property and casualty insurance in the world.
"The company's credibility and integrity is being questioned like it never has been before," said Clifford Gallant, an insurance analyst with Keefe, Bruyette & Woods Inc.
And according to analyst Michael Paisan at Legg, Mason, Wood, Walker, AIG the company and Hank Greenberg the man are "intertwined."
To be sure, most of the damage from Spitzer's investigation has fallen so far on the world's largest insurance broker, Marsh & McLennan Cos., whose chairman and CEO Jeffrey Greenberg – Hank's son and a former AIG executive himself – was forced to resign Monday.
In addition, AIG has already paid a $10 million fine to the SEC in connection with the Brightpoint case, without admitting or denying any wrongdoing.
But the tidal wave of questionable practices that has enveloped AIG since Oct. 14 – when Spitzer sued New York-based Marsh & McLennan for cheating customers and announced related criminal charges against two AIG employees – has already chopped $23 billion from AIG's $150 billion market cap and sliced 12 percent off its stock price.
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| Like other insurance stocks, AIG took a beating after Spitzer announced his lawsuit against Marsh & McLennan. |
AIG (Research) stock rallied Tuesday with the rest of the industry on Jeff Greenberg's resignation, and its rise of 7.5 percent made it the biggest gainer of the 30 stocks in the Dow industrials.
While last week's price drop tempted some money managers to add to their AIG positions, others were definitely spooked.
"It's rare that we get blindsided this way," said Scott Black, chairman and president of Delphi Asset Management in Boston, who holds 112,500 AIG shares worth $6.3 million. "In this era of Sarbanes-Oxley, governance is a front-burner issue. I just hope that the scandal doesn't become more widespread."
Jon Burnham, CEO of the Burnham Financial Group who manages the $130 million Burnham Fund, is also concerned.
Burnham, whose father founded a predecessor of Drexel Burnham Lambert and who was working at Drexel when the company was destroyed by scandal in 1990, has some experience with the genre.
"What's really worrisome is what Mr. Spitzer is going to do next," said Burnham, who holds 50,000 shares of AIG worth $2.8 million. "I don't know what wrongdoing AIG might have done. I would be very inclined to buy more of AIG but I don't know what Spitzer has up his sleeve."
Spitzer's office declined to comment.
While it's hardly certain Greenberg's departure will come as a result of AIG's current difficulties or that his exit would reassure – as opposed to rock -- investors, observers said efforts to settle the investigations quickly would be the best route for the 85-year-old company.
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Some corporate governance reform at AIG wouldn't hurt either, they said.
Rob Haines, an analyst at independent research firm CreditSights, predicted that Spitzer will call for an industrywide pact with insurance firms including AIG. The company, he said, may have to pay as much as $2 billion to make its current problems – and any future issues likely to crop up -- go away.
Given AIG's $678 billion in assets, $9.3 billion in net income – $2.5 billion in the third quarter alone – and $71 billion in shareholder equity, this type of fine would have little impact on the company's balance sheet, he said.
And while corporate governance gurus are not yet calling for Hank Greenberg's head, they are urging AIG to strengthen its board so it can better serve as counterweight against his enormous influence.
"Greenberg is part of the old breed; the last of the pre-Enron CEOs, the dominant CEO who runs everything, including his own board," said Nell Minow, editor and corporate governance expert at The Corporate Library.
"And we know what a risk factor that is. It produces the kinds of problems that we are seeing at AIG: failures of integrity and financial reporting."
The irony, she added, is that AIG is one of the largest providers of director and liability insurance in the world, so the company well knows what kinds of risk bad corporate governance can mean.
"It's just a classic case of the physician needing to heal himself," she said.
AIG, for its part, points out that nine of its 15 directors are so-called independent, or "outside" directors. It intends to seek a "prompt" resolution of outstanding issues with the SEC and the Justice Department, and has "cooperated fully" with Spitzer's investigation. AIG declined further comment on whether Greenberg would step down.
Still, the recent groundswell of criticism and calls for reform in the industry may, in the end, take their toll on Hank Greenberg.
"This has got to be a huge distraction," CreditSights' Haines pointed out. "This is not what he wants to be focusing on in the twilight of his career. Like Sandy (Weill), he'll just become exhausted. It's inevitable."
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