A job well done–Robert Benmosche, AIG

Robert Benmosche retired as the chairman and chief executive officer of MetLife in 2006 following a successful career in the insurance and financial services industry. In the summer of 2009, at the request of AIG’s board and company stakeholders, Mr Benmosche came out of retirement from his vineyard in Dubrovnik, Croatia to help breathe life back into the company and return it to profitability. Commercial Risk Europe met Mr Benmosche, who was diagnosed with cancer in 2010, at the AMRAE conference earlier this year. We asked the former Coca-Cola delivery driver and lieutenant in the US Army, who served a tour of duty in Korea in the Signal Corps, why he took on this huge challenge when he could have been harvesting his beloved grapes. Adrian Ladbury (AL): You came out of retirement to lead AIG out of crisis, pay back the US taxpayer and get the business back on track. Now that the job has been done, how long do you plan to stay at the helm? You have suffered ill health, would you not like to enjoy your retirement having seemingly achieved your goals?hideBob Benmosche (BB): My plan is to be able to finish the job through 2014, and so I could retire in March 2015 after reporting another good full year. If my health holds up then we’ll see what happens in 2015. So far I’ve been able to hold my own and stay pretty active. The illness hasn’t slowed me down at all and I enjoy what I do. Actually love what I do. It’s been a great deal of fun. But I would say we’re probably on the last lap, in the last year. AL: What was in your mind when you took charge of a company in crisis? What were the main objectives, have you achieved them and how? BB: When I came to AIG, I looked at the sum of the various parts of the business and decided that those would hopefully become greater than the whole. And that whole, as I defined it, would have to be big enough to pay back everybody everything. It should have shareholder value. So what hit me early on was the need to create shareholder value because that means you are solvent. With this basic need in place it would follow that everybody else would start to feel better about the business, improved credit ratings would follow and we would be able to get out from underneath the enormous debt that we had on our books. That was my initial vision. AL: Did Hank Greenberg play a role in your decision to take on this huge job? BB: I met with Hank in January 2009, we had lunch and he said he would like me to consider becoming CEO of AIG because he thought I could make a difference. It was quite an honour for me that Mr Greenberg would even think of me for the role. I said I’d give it some thought and get back to him. Being Hank Greenberg he called me three weeks later and asked what I had decided? I said I hadn’t had time to give it that much thought and so, again being typical Greenberg, he said: ‘Well you said you would, why don’t you come in and have lunch again?’ So I went to have lunch with him in February 2009 and I could see in his eyes the desperation of a man that was seeing his life’s work being destroyed and I felt horrible for him. I felt horrible for all the people of AIG because as a competitor they were annoying! They were very annoying because they were successful and good at what they did. So I felt bad at that lunch and said: ‘Look Hank, I don’t think you’ll get it done, but if it comes to pass I promise you that I will do it for a year or whatever it’s going to take to get it back on track before it’s too late’. But nothing did happen and I never received a call from him. However in March 2009 I saw this spectacle of a commercial inquiry going on in Washington against the people of AIG. I felt for them and could see that they really needed an advocate. It was at that time I got this thought that the US taxpayer had given this company $182bn—why wouldn’t the people of our government want to help the people of AIG pay it back? Why wouldn’t they want the people to stay at work and do their jobs so they can pay back the money instead of wanting to see the company implode? That is what almost happened in March 2009 and I thought it was a sad statement of our history in this country. AL: Thankfully for the people at AIG and the US taxpayer the company was not allowed to implode under a welter of accusations and back-biting, particularly about compensation for AIG staff, and you took over and helped lead the insurer back to recovery. How did this actually come about? BB: The critical thing that happened back then was that people in our government, however critical I choose to be of them, made decisions. I believe that if Tim Geithner (CEO of the New York Federal Reserve Bank), Hank Paulson (Treasury Secretary) and Ben Bernanke (Chairman of the Federal Reserve) had not all got together and made decisions, the financial system would have collapsed. Had they allowed AIG to collapse because of the credit default swaps we would not know the world we know today. Institutions outside the US, as well as within the country, would have collapsed. We have to accept in America that we have a system called the capitalist system. It is about employment at will for the employer and employment at will for the employee. That’s the way it goes and if you keep poking people in the eye they will eventually do something different. So while I was criticised a lot for defending the staff I was merely attacking anybody who thought it was OK to criticise our people. AL: Apart from compensation for AIG staff there was also a lot of pressure on you to break up the group and sell off the various parts to try and recoup some of the investment made by the taxpayers. But on the whole you decided against that fire-sale strategy. Was that the right thing to do with the benefit of hindsight? BB: When I took over at AIG I immediately stopped the fire-sale that was going on, where businesses and parts of our company were being sold for way less than their true value. I said: ‘You’re not selling anything anymore’. For example, I was under intense pressure to sell our mortgage guaranty insurance business, United Guaranty. Eventually I got my way and we did not sell it and I think that will be proven to be the right decision over time. We also unfortunately sold the iconic building at 70 Pine Street—AIG’s headquarters. But I don’t like to look back on what we could have done, because it’s the past. AL: But you have just done a deal for the sale of the aircraft leasing business ILFC to Aercap Holdings for $5.4bn. Was that a good deal? BB: We are very hopeful that we finally found the right buyer. The challenge in 2009 was stop the sales, get the morale back up and get the businesses performing correctly. It was about operating the company, not selling the company AL: How did your strategy affect the people at AIG? I remember at the time I had some pretty intense meetings with your people, brokers and customers about whether you would survive or not. But there was quite a remarkable level of loyalty on the corporate insurance side of the business at least. How did that happen? BB: Well, first of all it didn’t happen overnight. Hank [Greenberg] left behind a company of very strong, entrepreneurial, innovative and empowered people, there’s no question about that. As I visited our people around the country and then around the world, I began to realise how strong they were. Around that same time, in 2010, I also decided to meet about 200 of our best and biggest clients around the world and about the same number of top brokers. What they told me is that they could always rely on the confidence and judgement of an AIG person and that our people really make a difference. My job was to give the staff hope. If you deprive people of hope you may have deprived them of the last and only thing they have left to look forward to. So that was my challenge, and it’s a theme I’ve used for many years in my career. As a leader I have to give my people a vision and I’ve got to make sure that they believe that vision is attainable and is good for them. So when I attacked the government and I called them certain names, which is all documented on the internet, people eventually applauded. They said: ‘Oh my God, he’s actually taken them on. He actually cares about us’. People realised that I really cared about only one thing and that was restoring this company, paying back its obligations and going back to making wine! What also retained the clients in the crisis was the belief that AIG would survive as a regulated entity. The clients understood the difference between AIG the holding company and AIG the insurance company. AL: You paid the $182bn back with interest quicker than most people thought you would. What do you think is the lasting impression of this affair on your customers? BB: I would say that every customer I’ve met since we paid the money back is elated to see that happened. But it’s not only customers that are happy, also people across the insurance industry—CEOs of other companies and the like. This is because it said that we in the insurance industry are pretty responsible people and we have the capacity to go through some tough times and still be here. I’m amazed at how many people, competitors, said: ‘Thank God you pulled it off, it’s great for all of us’. I think people took a great deal of pride in the sector seeing AIG pull it off. It’s the comeback kid! AL: Broadly speaking you would have to say that the comparison between the performance of the insurance and banking sectors over the last few years has been great for the insurance sector. You and others such as XL had your problems but pulled through. There were no major casualties and this is surely a huge bonus for your sector? BB: The banking sector is very different and you have to understand that banks are not dealing with long-term liabilities and that’s a big deal. People bring their money to a banking institution and say: ‘I want you to keep it here until I want it, keep it safe’. Banks have to do business with other banking institutions in other countries and within a globalised system. There are a lot of payments between the institutions and if you stop the music on any given day it could be pretty tough. It’s so integrated and complex today that it’s hard for any one person to really understand if there’s a chink in the armour. I remember when I was at Chase Manhattan Bank they talked about a huge snow day in New York when parts of the state were completely paralysed. They didn’t know who to call and ask what do we do with loans in this kind of situation when people couldn’t get to work to move the cash around. The state didn’t know how to open and so they called George Champion who was then the chairman of Chase Manhattan and he said: ‘Calm down guys I’ll get on the phone’. He called all of the banks and said: ‘Here’s what we’re doing—I’m going to reconcile this, you do this and he laid it all out.’ He even had to turn on the lights. Today nobody knows whom to call! So the banking system is very intertwined. I was on the board of directors at Credit Suisse at the time of the credit crisis and nobody could tell at that moment who was still standing, therefore the inclination was to stop. Such paralysis could cause the financial system to collapse. The regulatory reaction to this was to demand more capital so the financial institutions have so much cash, so much liquidity that it would be pretty hard for the system to need anybody else. But the downside of this is that it is strangling growth. That is why people are frustrated about how long it’s taking to get over the recession. People are struggling with why there are not any new jobs. This is because people are sitting on so much cash because the regulators and governments haven’t really figured out how to protect the financial system so it can run reasonably efficiently. AL: Yes it does seem like there is still a lot of work to do on the regulatory front as it is clearly not just about building bigger capital buffers but rather making sure that risk is properly analysed and priced. What would you like to see happen to improve this? BB: They really should think about having the right safeguards in place so that if any one institution fails it would not bring down the system. I think regulators don’t understand that it’s actually OK for a company to fail. You can’t have institutions that can never fail. You’re never too big to fail. We don’t even have governments that can’t fail. There is no question in my mind that any large financial institution in America can withstand any financial crisis of significant magnitude. You have to carry out stress tests. When we decided to pay a dividend last year and decided to buy back a billion dollars of our stock, people said I guess they’re OK. We did a stress test unofficially because the Federal Reserve has not put us under their regulation yet. We had a budget for a two-year period of time. During that period we ran some pretty significant stress tests, and we asked questions like what would happen if we under-performed our pre-tax profit budget by a significant amount of money. So instead of making money during that period of time, we lost money and we’re under budget. In addition to that the credit rating is cut and unemployment goes to twelve and a half per cent. In addition to that credit spreads widen by over four hundred basis points, housing prices fall and the mortgage backed securities market collapses. And, if that’s not enough, since we are an insurance company, assume that Superstorm Sandy comes back through New York again. Then you ask yourself whether you have the level of capital necessary for your credit rating? Do you have enough liquidity to continue to meet the needs of your business? These are the two big questions that you have to ask yourself and in all cases we had plenty of money. So the board of directors agreed to give some of it back to the shareholders. If you can handle that kind of a crisis you’re doing pretty well. The point is that we are so well capitalised today that we can’t bring the financial system down. So you can over regulate us so that the shareholders don’t always have the value they should, but I’m not sure it’s a good regulatory system. A good regulatory system ensures that all of our customers are protected and all the promises that we made as an insurance company can be paid. Surely it’s up to the bondholders and stockholders to figure out whether they want to continually leave their money here as an investment. You can’t protect the investors like the policyholders and I think the regulators out there are just afraid and not really thinking about what they are there for. AL: Is globalisation the biggest threat to all of this because we have a global economy that is still effectively run by national and regional governments not designed for the job? There is a fundamental problem here surely? BB: I think that the current governmental and regulatory system restrains the global economy. I think we’re at a point where the system will make it more difficult to move money from here to there. Switzerland clearly has said that it cannot afford to have two institutions that are bigger than the country itself. To what extent do you want Credit Suisse and UBS to be allowed to be so big that they can fundamentally impact the position of Switzerland? How do you protect their depositors? More countries are also looking at their own banking institutions to support their own growth. So you have depositors in Germany that need to be protected and they’re not concerned about depositors in France. The question asked is how to protect your country rather than any institutions that are part of a worldwide network. I just think the world is shifting, I’m not sure where it’s going but its people are becoming more parochial again in this day and age. AL: It seems that the political reaction does not match the economic reality. People increasingly have a global perspective, the economy is increasingly global but national governments are still running national budgets. How do you square that? You run an international company and you are regulated all over the world because you have subsidiaries all over the world. You are a global business attempting to transfer the global risks of global customers but you face local governments who are telling you that you can’t transfer that risk on a global basis. You have to leave some of the risk in the country even if the local insurance industry does not have the capacity to carry it and you have to pay tax on that. How is that problem going to be solved? BB: It’s complicated but it’s our core strength that we are continuing to build upon. Like it or not Proctor and Gamble are going to be all over the world. Like it or not Walmart are all around the world. As companies continue to expand around the world they are going to have to comply with what they need to and we will as well. The key is to be skilled at pulling it all together. That is what is important and that is what we do in an effective way. We have achieved enormous geographical risk diversification so that we can offer large property cat coverage for example. If I were looking at exposures here in France it would make it very difficult for me to insure that exposure if we were just focused on the size of our French business. But we don’t think of it that way. We think about France as a location among many. We look at that risk and aggregate it with all the risks of Japan, Thailand, Indonesia, South Africa, Middle East, Israel and the US. It is complex but it’s the management of that complexity that allows AIG to do things for clients that others can’t. AL: So it goes back to people again. If you can manage that process, if you can manage the people, the relationships with the local governments, the regulators and so on then you have a critical edge over the competition? BB: Yes and this is why we made a big change at AIG as we entered into 2011. We decided to focus on consumer business around the world and the commercial insurance business. And within the commercial insurance business we decided to focus on our key products. They are property, liability, casualty, energy, shipping and so on. We said don’t think about a US and a non-US business as in the past. We used to be very traditional. If we had people in the US expert in earthquake, hurricane or other cats, they were not allowed nor invited to understand how we could apply some of that to what goes on in Europe or Asia. So we could have been over-exposed or under-exposed, we didn’t know. Now we have one person running it globally so he can sit down and assess our global appetite for risk, the global size of the premium and then decide if we want to take on a billion dollar property in Paris. He may choose to do that because it fits the diversification. So it’s about the law of large numbers and the laws of significant diversification of risk. That was a major shift in our strategy. It’s just starting to take hold and we’re beginning to see very good results from it. AL: It sounds like you have more or less achieved what you set out to achieve when you took the helm at AIG. Is there anything else you want to do before you go back to your wine? BB: I think we’re close to achieving it. It’s a matter of sustainability and how much time do you need to know that something is sustainable? I believe that we have made some dramatic changes in the organisation. We’re investing in our technology. We are working hard to become state of the art and improve the way we think about risk. Investment in such systems is very expensive so we’re criticised for spending too much money. But you can’t succeed until you spend some money to reinvest in infrastructure. I think people are finally realising that AIG is actually pretty healthy, alive and just as competitive, if not more, than it was before.

A job well done–Robert Benmosche, AIG

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