Hard-Nosed CEO Takes On AIG

By Judith Crown
Financial News
September 21, 2008


Super-connected Edward Liddy, the former Allstate chief exec, is tapped by U.S. to restore order at seized-up insurer. He says this "mess is solvable."

As CEO of insurance giant Allstate, Edward Liddy presided with a Midwesterner’s even temper, able to make tough, often unpopular, corporate decisions and stick to them. In particular, Mr. Liddy caught substantial flak for his move to convert Allstate’s sales force to a network of independent agents, and stirred consumer wrath when the insurer stopped writing homeowners policies in coastal towns vulnerable to hurricanes.

That resolve should serve Mr. Liddy well in his newest position atop the hemorrhaging insurance giant American International Group. Mr. Liddy, who retired as chairman of Allstate five months ago, was tapped to replace CEO Robert Willumstad after rating downgrades sparked a liquidity squeeze and near-collapse at the insurer, setting up the Federal Reserve’s $85 billion bailout attempt last week.

Mr. Liddy’s fat Rolodex should also help as he takes on the job of selling off assets of the country’s largest insurer. He’s a member of an elite group of directors that overlap on a number of blue-chip company boards. (In late 2006, Mr. Liddy was number seven on FW’s Mightiest Directors list for his considerable clout in governance circles.) It was on the board of Goldman Sachs that Mr. Liddy got to know then-CEO Henry Paulson, and clearly made a good impression; as Treasury Secretary, Mr. Paulson selected him for his new post. Mr. Liddy also sits on the boards of 3M and Boeing.

AIG could be Mr. Liddy’s biggest challenge yet. While Allstate traditionally was narrowly focused on consumer, auto, homeowners and life insurance, AIG is a conglomerate with far-flung operations, including specialized and exotic products like insurance for corporate directors and identify theft, as well as the derivatives designed to protect investors against losses in subprime mortgages.

“It’s going to be a big job—more complex—than Allstate,” said Peter Newsome, an analyst at Chicago investment firm Sandler O’Neill.

Mr. Liddy gave some early clues to his approach last Thursday, telling employees that AIG plans to repay the government loan before the two-year deadline and may decide which assets to sell within weeks, according to news reports. He also said the basic insurance operations were well funded and that it’s not his intent to liquidate the company, saying the “mess is solvable.” But he will have to find a way to rid AIG of the albatross of the credit default swaps that were supposed to protect mortgage securities investors.

Corporate slicing and dicing is not new to Mr. Liddy. As chief financial officer of Sears Roebuck, he is credited as one of the architects of that company’s breakup in the early ’90s, which spun out brokerage firm Dean Witter, commercial real estate broker Coldwell Banker and Allstate.

“He’s the type of person you want in the room when you’re considering difficult decisions,” said Michael Moskow, a retired CEO of the Federal Reserve Bank of Chicago, who has worked with Mr. Liddy on local civic matters. “He’s sensible and has a good analytical mind.”

A native of New Brunswick, N.J., Mr. Liddy worked at pharmaceutical company G.D. Searle & Co. (now part of Pfizer) under former Defense Secretary Donald Rumsfeld, and at security giant ADT. As Allstate’s president and chief operating officer, he engineered the 1995 spin-off from Sears and became CEO in 1999.

Mr. Liddy started with a bang when he set out to convert the insurer’s 15,000-member sales force to independent contractors to cut expenses. That enraged many of the agents who now had to provide for their own health and retirement benefits and led to years of litigation. Though it alienated the very people it needed to sell its products, analysts say it was necessary for the company’s longer-term profitability.

“He made the tough decision and took a lot of heat for it,” said Anthony Diodato, group vice president at insurance ratings company A.M. Best.

Mr. Liddy was in the hot seat again following Hurricane Katrina, when the massive destruction around New Orleans and the Gulf Coast led to a record loss of $1.55 billion in the third quarter of 2005. Allstate rejected some claims, and subsequently either dropped coverage for homeowners in coastal areas or refused to write new policies. This time, it was homeowners, elected officials and local regulators who took aim at Mr. Liddy.

“He was good for holding down costs by screwing the policyholders,” said Robert Hunter, director of insurance for the Consumer Federation of America.

Those decisions led to solid results for his company. During Mr. Liddy’s tenure, sales at Allstate climbed 33%, to $35.8 billion in 2006, from $27 billion in 1999. Earnings nearly doubled, to $5 billion, and Allstate shares more than doubled to $61 in the same period; the stock has since fallen and currently trades at around $46. Morningstar analyst Jim Ryan calculates the insurer generated an average annual return on equity of 14% during Mr. Liddy’s stewardship. A.M. Best gives Allstate its second-highest rating: A+.

“He maintained discipline in underwriting and was well focused on capital management,” said Mr. Newsome of Sandler O’Neill. “He had a vision for Allstate and he stuck to it.”

Copyright © 2008 FBIC (www.badfaithinsurance.org)



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