The AIG Story

Maurice R. Greenberg, Lawrence A. Cunningham

• Publisher: Wiley
• Year: 2013
• ISBN:
  9781118519578
• Edition: 1
• Topic: Business
• Subtopic: Business History
• Index: Business

Selected as one of Motley Fool's"5 Great Books You Should Read" In The AIG Story, the company's long-term CEO Hank Greenberg (1967 to 2005) and GW professor and corporate governance expert Lawrence Cunningham chronicle the origins of the company and its relentless pioneering of open markets everywhere in the world. They regale readers with riveting vignettes of how AIG grew from a modest group of insurance enterprises in 1970 to the largest insurance company in world history. They help us understand AIG's distinctive entrepreneurial culture and how its outstanding employees worldwide helped pave the road to globalization.

• Corrects numerous common misconceptions about AIG that arose due to its role at the center of the financial crisis of 2008.
• A unique account of AIG by one of the iconic business leaders of the twentieth century who developed close relationships with many of the most important world leaders of the period and helped to open markets everywhere
• Offers new critical perspective on battles with N. Y. Attorney General Eliot Spitzer and the 2008 U.S. government seizure of AIG amid the financial crisis
• Shares considerable information not previously made public

The AIG Story captures an impressive saga in business history--one of innovation, vision and leadership at a company that was nearly--destroyed with a few strokes of governmental pens. The AIG Story carriesimportant lessons and implications for the U.S., especially its role in international affairs, its approach to business, its legal system and its handling of financial crises.

Part One

Chapter 1

Independence

In 1952, days after returning as an officer in the U.S. Army in the Korean War, 27-year-old Maurice R. (“Hank”) Greenberg was walking along William Street in Lower Manhattan.1 Earlier that day, Greenberg had visited fellow alums of New York Law School. Needing a job to support his young family, he was considering practicing law, pursuing national service, such as at the FBI, or re-upping with the Army. Along William Street, Greenberg happened to pass the offices of the Continental Casualty Company, among the largest insurance companies of the day. Greenberg popped his head into the office to ask about job openings.

The personnel manager acted as if he had no time for the inquiry, giving Greenberg, barely out of uniform, the cold shoulder. Stoking his anger about how Americans largely ignored the Korean War, Greenberg stormed into the office of the branch vice president, Bob Vollreide, and told him he thought his personnel manager was a jerk. Vollreide seemed impressed with Greenberg’s candor and even his judgment. Intrigued, after a lengthy conversation, Vollreide offered Greenberg a job. Greenberg took it, beginning as an underwriter trainee. That day, Greenberg’s career in insurance was launched.

Greenberg quickly learned that the insurance business was regulated by a state bureaucracy whose approval was often required before insurance products could be sold. He found out that backlogs in the filings at the New York State Insurance Department were often considerable and that many insurance managers accepted resulting delays as a matter of course. Greenberg thought such inefficiencies meant incurring unnecessary costs. He determined that the backlogs could be broken by developing direct relationships with state officials managing the approval process. He set out to meet those people and provide explanations that would speed the process.

An early example of the value of personal relationships in state regulation involved steps that eventually led to the creation of the American Association of Retired Persons, today’s ubiquitous AARP. In that era, few elderly Americans had health insurance. Medicare did not exist and private coverage was scarce. An insurance broker from a small firm in Poughkeepsie asked Continental Casualty if it were possible to provide group-wide accident and health insurance for members of a New York association of retired teachers.

After researching the question, Greenberg could not find any provision of the applicable New York insurance law that specifically authorized it. So he inquired of his personal contacts at New York State’s Insurance Department and successfully lobbied them to support legislation adding retired teachers associations to the list authorizing such “blanket” insurance.2 That breakthrough attracted followers, including the National Retired Teachers Association, founded by Dr. Ethel Percy Andrus, a retired high school principal and proponent of the notion of “productive aging.” Dr. Andrus soon broadened her mission beyond retired teachers to all elderly Americans, by founding AARP. Continental Casualty developed a novel mix of group health and accident products for many other customers as well.

In building such new products, Continental Casualty earned a reputation for being innovative, an uncommon trait in that era’s insurance industry. In recognition of his leadership and lobbying skill, Greenberg became manager of a special risk division in New York and, working with Joe Norton, the regional vice president of the company’s eastern U.S. region, handled the company’s government relations there. Norton soon saw that Greenberg would likely find the operations side of the insurance business appealing. So Continental Casualty transferred him to world headquarters in Chicago and promoted him to assistant vice president. His portfolio included accident and health insurance for individuals and groups, as well as direction of the advertising department.

Combining these duties and building on Continental’s earlier innovations, Greenberg and the chief actuary created a novel promotional effort marketing accident and health insurance to senior citizens, a market other companies had considered too small to bother with. The pitch would open enrollment to anyone who chose to participate within a stated period of time, from 15 to 30 days. The campaign would be initially offered in a test market using ad pages in the Des Moines Register. Greenberg and Continental’s actuaries thought that a limited open enrollment period would work. They supposed that when many people join in a short period, they are likely to be a good cross-section of high and low risks; however, if enrollment without examination is open indefinitely, an excessive portion of high risks is likely.3 This campaign proved them correct. The concept of open enrollment for limited times eventually became a staple in the field of accident and health insurance so widely recognized today.

Continental Casualty was unusually innovative compared to other insurance companies of this period, especially in the accident and health field. It had invented coverage of medical treatment for polio and other so-called “dread diseases.”4 Greenberg enjoyed this setting, winning the trust and confidence of the company’s president, J. Milburn (“Mil”) Smith, who became Greenberg’s mentor. Smith, a prominent fixture of the insurance establishment, told Greenberg he valued his imaginative approach to insurance, especially pioneering innovative products and opening new markets. One year after his arrival in Chicago, Greenberg was promoted to vice president, the youngest person in Continental Casualty’s history to earn that rank.

In 1960, Smith resigned from Continental Casualty due to a falling out with its chairman. He took a trip overseas to discuss business prospects. In Hong Kong, he called upon Cornelius (“Neil”) Vander Starr, a legendary American insurance entrepreneur who had built a collection of insurance agencies and companies around the world. Starr, a California native, began building these businesses in Shanghai in 1919 when he was in his late twenties.5 His business in China was prosperous almost from the start, when Shanghai was a bustling international center of commerce.

A flagship of Starr’s early business was the American International Underwriters (or AIU), a membership association of U.S. insurance companies that held licenses to underwrite insurance in various countries, usually for other U.S. businesses. The AIU acted as agent for members in markets where they held licenses. An American industrial company, such as General Electric, needing insurance in Hong Kong, could use the AIU to write a policy by an American insurer, such as Fireman’s Fund. Having AIU act as agent meant that the member companies did not need to station substantial personnel or assets abroad but could still engage in lucrative underwriting there. Each member, an insurance company, had a percentage of the AIU pool by which its part of payments and liabilities was derived.

Through the 1950s, Starr’s businesses were primarily in Asia, though he began planting the seeds for operations elsewhere around the world, including Cuba, Lebanon, Pakistan, and selected countries in western Europe. His companies acted as a general agent, writing commercial policies for U.S. insurance companies within the AIU as well as writing insurance directly in subsidiaries of Starr’s Bermuda-based holding company, American International Reinsurance Company (AIRCO). Obtaining those franchises was an extraordinary achievement, considering the relatively slow means of transportation and communication in those decades, when it could take months to transact business between Asia and the States. For example, uncertainties about liabilities and delays in payment arose because the AIU’s policies and associated claims would not necessarily become known to the insurers for months.

Besides salesmanship, Starr’s achievements displayed his fierce independence. He was able to work halfway around the world with virtually no support from a home office in the United States. In building the AIU and AIRCO, Starr attracted like-minded executives. They were self-reliant internationalists who showed creativity and independence and a strong work ethic.6

Starr knew of Smith’s independent, innovative approach to the insurance business. In a lengthy discussion on Smith’s 1960 visit to Hong Kong, Starr said how much he admired many of Continental’s insurance lines, especially its accident and health business. Starr, a visionary, predicted an increase in global trade and travel, convinced that it would lead to rising prosperity and thus demand for accident, health, and travel insurance outside the United States. Starr wondered whether Smith knew of any good executives who might be willing to open global markets for those products. Smith named Greenberg, referencing his entrepreneurship and knowledge of the insurance business.

Starr asked another favor of Smith. Starr, a divorced millionaire who never had children, developed a tradition of giving financial support to young people and encouraging them in their education and careers. Among the first of these was T. C. Hsu, the son of one of Starr’s bankers in Shanghai. Hsu lost his father in the months before World War II when the Japanese military blew up the plane carrying him on a business trip. Starr put Hsu through college and graduate school in the United States and then hired him, forging a lifelong bond akin to father and son. A contemporary recipient was Chiharu (“Chick”) Igaya, a Japanese Olympic skiing champion, who attended Dartmouth University on a scholarship that Starr had provided.7 Starr described Igaya as a protégé and asked Smith if he could help find Igaya a spot in a U.S. insurance training program. Smith obliged.

Shortly thereafter, Starr sent an assistant to visit Greenberg in Chicago to probe whether he might be willing to leave Continental Casualty to join one of his companies. Greenberg made it clear that he was not interested in a move. Undeterred and sensing the need to reach out personally, Starr devised a plan to meet Greenberg. Smith had persuaded Greenberg to accept Igaya into his training program, and Starr used the cover story of visiting Chicago to catch up with Igaya as a way to meet Greenberg. Starr hosted Greenberg and his wife, Corinne, along with Igaya and his wife, for cocktails and dinner at Chicago’s renowned Pump Room. Starr, known as a bon vivant, struck Greenberg as an interesting entrepreneur. But Greenberg, on the fast track at Continental, was not convinced that he should make a move. However, Continental was not the same after Smith’s departure. Greenberg also had concerns about his career path, at a time when Jews rarely got top insurance company jobs.

For Starr’s part, on his return from that trip to Chicago to meet Greenberg, he told Hsu, “I think I found the man.”8 As a result, Starr persisted, and the two had several more dinners. Finally, at a lunch meeting in New York, Starr offered an opportunity that was hard to resist: opening a new worldwide accident and health insurance business. Starr said: “We’ve talked many, many times and I hope you will decide to join us.” Greenberg appreciated Starr’s tenacity; the opportunity to open a new business abroad intrigued him, as his world travels with the Army had aroused a keen interest in international adventure and foreign policy. The next morning, Starr had the president of C. V. Starr & Company, William Youngman, call with the details.

Youngman, an old-school Bostonian and lawyer, did not impress Greenberg as an effective ambassador. Greenberg considered the offer Youngman presented on Starr’s behalf to be laughable. He turned it down and Youngman did not budge. (It was not obvious whether Youngman was merely not communicating well or was not on board with Starr’s enthusiasm.)

Later that day, as Greenberg packed his bags at his hotel room in preparation to return to Chicago, the phone rang. It was Starr. He apologized for how the offer Youngman delivered came across and reiterated his personal enthusiasm. Starr urged him to unpack, stay another night, and meet again with Youngman in the morning. Greenberg decided to give it a second chance and, as predicted, Youngman brought a more appealing offer the next day. The offer included appointment as a vice president of C. V. Starr & Company, the company at the top of Starr’s organization. After some additional negotiation, Greenberg finally said yes and in December 1960 left Chicago, selling the family car on the way to the train station for the trip home to New York.

Other executives at C. V. Starr & Company and the AIU had mixed feelings about this new hire. Most, such as the towering Englishman Edwin A. G. (“Jimmy”) Manton, president of the AIU, the flagship overseas operation, thought Greenberg was just another idiosyncratic Starr recruit. Although Starr certainly was very good at spotting executive talent, he also had a reputation for occasionally choosing protégés more accomplished as athletes than insurance executives. Others resented the hiring of Greenberg directly into ...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Chairman’s Note
• Preface
• Acknowledgments
• Part One
• Part Two
• Epilogue
• About the Companion Web Site
• About the Authors
• Photo Insert
• Index