Hundreds of senior management positions are being cut at American International Group (AIG), according to a recent Wall Street Journal article titled, “AIG Posts Loss, Cuts Top-Tier Jobs.” Overall, 300 to 400 jobs are slated for elimination, representing 20% of senior positions. Additional cuts are expected in 2016.
While the specifics of which operating units are targeted for cutbacks were not disclosed, it would seem prudent for insurance defense law firms to expect that some level of cost cuts will apply to the litigation management function.
Here are some considerations for law firms that are members of the AIG panel counsel program:
- Stay in close contact with your assigned claims executive.
- Be alert to any change in the rate of incoming cases.
- Know your performance metrics, and how they compare to competitive law firms. You may need them to make your case in the event that AIG insurance panel members are cut.
- Maintain a healthy pipeline of new prospects, particularly if AIG represents a significant portion of your revenue stream.
Of course, this integrated course of action applies in good times as well as bad. There is opportunity in change, but the risk of potential revenue loss would indicate support for an accelerated business development effort by AIG panel members.
Carl Icahn, an activist shareholder who recently disclosed his stake in AIG, is one of the key drivers behind the budget cuts. In a recent open letter to AIG CEO Peter Hancock, Icahn calls for the insurance giant to break up into smaller units. He writes,
Despite years of dismantling and selling non-core assets, AIG is still too large. The combination of life insurance and P&C insurance into a single entity offers no net benefit to shareholders (proven by industry low ROE), a fact that has driven other major multiline insurers to aggressively focus on a single line of business. We believe you must acknowledge that the current multiline strategy is not generating competitive returns. Separate monoline companies will be more focused, more efficient, generate better returns and, as a result, command significantly higher market valuations.
AIG, which the government bailed out to the tune of $85 billion in September of 2008, is now considered by the Financial Stability Oversight Council (“FSOC”) to be a non-bank “systemically important financial institution” (SIFI). The SIFI status imposes increased Federal Reserve oversight and higher capital requirements on AIG.
Icahn describes the SIFI classification to be a “tax on size,” and claims that AIG is best served by shrinking both its footprint and attendant risk levels.
AIG’s commercial insurance pre-tax operating income decreased 34 percent to $815 million in the latest quarter, due in part to lower investment income and reduced hedge fund performance. Property and casualty pre-tax operating income decreased 40 percent to $569 million, due to lower net investment income as well as an increased underwriting loss. These are indeed significant declines, and underscore the pressure on AIG to demonstrate improvements in profitability and operating ratios.
As insurance defense law firms know, AIG’s commercial insurance line is extensive. Insurance coverage options include: accident and health, aerospace, alternative risk, benefit solutions, casualty, crisis management, environmental, fronting and captive services, management liability, marine & inland marine, mortgage insurance, political risk, professional liability, property, trade credit, travel insurance, surety and warranty.
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