Risky business.

Having guided AIG to profitability, Hank Greenberg is pushing his company into financial services. Will his instincts prove right yet again?

At age 17, Maurice Raymond Greenberg left his family's farm in the upstate New York hamlet of Swan Lake, lied about his age to join the Army, and ended up as a Ranger storming the beach at Normandy. He's shown a similar appetite for risk since taking over as chief executive of global insurance giant American International Group in 1967. Anyone who thought the CEO might be content with having plowed $88 billion-asset AIG into clover hasn't followed him or the company carefully. Though pushing 70, Greenberg is busy pushing AIG into financial services. That means the company now goes head-to-head against not only such multi-line carriers as Aetna, Cigna, and Chubb--on the international side, that number includes Germany's Allianz AG--but also Citibank and American Express.

In his time at the top, Greenberg's management philosophy has not changed. New York-based AIG insures high-risk business its competitors won't, including kidnappings and ransoms, oil rigs, and directors and officers insurance, and it pockets fat premiums for its trouble. Once he enters a business, Greenberg, 68, wrings out cost efficiencies and gauges risk with pinpoint precision. And he flatly refuses to underwrite any business that won't turn a profit.

Sounds simple? Some competitors imitate AIG's approach, but none match its performance: The company's ROE last year was 13.1 percent, compared with an industrywide average of -0.4 percent. Its combined ratio--the relationship of losses and underwriting expenses to premiums--consistently fluctuates between 5 and 10 points below the industry average. AIG stock hovered around $125 recently, marking an estimated 4,000 percent climb since Greenberg took the company public in 1969. Profits during that time have grown from $17 million to $1.7 billion.

"Most insurers write standard lines of business: If they can read a manual, they can write a risk," says Joe Macchia, CEO of Gainsco, an $84 million Fort Worth, TX-based surplus insurer that models itself after AIG. "What Greenberg is doing--working in areas other insurers won't--requires a lot more skill and imagination."

The search for a business that would counterbalance cyclical domestic property/casualty underwriting led Greenberg to financial services. An inherent advantage in this area: The company's triple-A credit rating enables it to raise funds more cheaply than its competitors. Thus far, the Financial Services Group is going like gangbusters: Operating income jumped 55.9 percent last year to $346.4 million. The group offers a range of interest rate, currency, commodity, and equity derivative products. It also trades in foreign exchange, precious metals, and petroleum products, and is involved in aircraft leasing and other, smaller businesses.

Appropriately named, half of American International's business, and half of its 33,000 employees, are overseas. While the company is active in 130 countries and jurisdictions, some 37 percent of its pre-tax operating income came from the Pacific Rim in 1992; AIG is the biggest foreign insurer in Japan, and it has a sizable presence in Taiwan, Hong Kong, Singapore, Thailand, Malaysia, and the Philippines. Greenberg's pursuit of new business takes him to the world's most unpredictable environments: He recently formed the Russian-American Investment Bank, a joint venture to act as a conduit for direct investment in the real estate and energy industries in Russia, and in defense conversion projects. Last October, AIG was licensed to operate in Shanghai--it is the first insurer allowed back into China since it left a year after the Communist Party takeover in 1949. Greenberg is negotiating to return to selling life insurance in Pakistan, which nationalized AIG's life business in the 1970s. AIG holds a 49 percent stake in Seguros Interamericana, a Mexico City-based general and life insurance concern. If NAFTA is ratified, Greenberg says, the company probably will exercise an option to expand that stake.

Are there any negatives? To the dismay of competitors, they're relative and minor. Trading is a potentially volatile area, but observers have ceased to expect any neophyte stumbles by AIG. Partly because Greenberg, now chairman and CEO, hasn't yet named a successor, some talented managers reportedly have struck out for greener pastures in recent years. Other factors affect AIG no more--in some cases, far less--than other insurance companies. Natural disasters last year pounded the industry, contributing to a massive underwriting loss. In addition, because pricing has remained soft, margins have remained thinner than even Greenberg can tolerate.

By most accounts, Greenberg is a hard-driving, intimidating boss who doesn't suffer fools gladly. Few analysts want to talk about AIG on the record: Some fear even the mildest criticism of the company might prompt Greenberg to sully their firms' reputations or jettison them from the formidable AIG information orbit. Such concerns are hardly irrational: In 1990, Greenberg griped about a Shearson Lehman report critical of Transatlantic Holdings, a reinsurance firm in which AIG has a 41 percent stake. Shearson later issued another report summarizing his objections.

Greenberg's passion often leads him into the political thicket: A staunch free-market conservative, there are few issues on which he doesn't have an opinion. The CEO feels particular ire for Superfund: He calls for replacing its liability system with a no-fault cleanup mechanism. Some other pet peeves: the litigation explosion and "social engineering."

Greenberg, nicknamed "Hammering Hank" after the late Detroit Tigers' baseball star, is only the second man to run AIG since C. V. Starr, a young entrepreneur in the ice cream business who moved to Shanghai in 1919 and began selling insurance. A lawyer by training, Greenberg launched his insurance career with Continental Casualty, but left to start an overseas health and accident business for AIG in 1960. His turnaround of AIG's struggling American Home Assurance division, to which he was appointed president in 1962, prompted Starr to select him as a successor over others in the company with more seniority. In his plush New York office, tastefully appointed with Chinese porcelains, Greenberg spoke with CE managing editor Joseph L. McCarthy about the state of the company, the state of the industry, and the state of the nation.

CYCLICAL CONUNDRUM

What are the factors influencing the slow turnaround in the underwriting cycle?

There's a lot of capital in the insurance industry, but some of it is used foolishly. That's a contributing factor to the underwriting cycle.

For another thing, unlike in other businesses, in the insurance business you don't know the true results at the end of any single year. So the misinformed get even more misinformed. If they misbehave, it takes a long time to find out. And that relays in the cycle, because you have to believe that no normal person would deliberately underwrite to lose money. You have to assume that they either want to make money and don't know how, or they're willing to lose money in underwriting and hope to make it up elsewhere on the balance sheet. Some who have done this--call it cash-flow underwriting--haven't been successful. But all those things delay a cycle.

What can be done?

Probably nothing. If you believe in a market economy, you must believe that companies underwrite, and succeed or fail, by putting their capital at risk.

The part I find offensive is that if an insurance company fails in our country, then the healthy companies have to bail it out and pick up the insolvency fund charges. So we lose our business to the rate cutter and then have to bail out the companies that fail.

We've been fighting for a different approach, especially for the creation of industrial insurance, which would cross state lines.

What are the long-term dangers of cash-flow underwriting?

When you abandon underwriting, which is the basic business of an insurer, you ultimately weaken the culture of the company and endanger its ability to garner a reasonable return on equity.

Cash-flow underwriting is never a solution. It sacrifices sound basic principles in order to get cash for investment, and, in turn, hopefully to make enough of a return on that investment. But you can't count on the marketplace being such that you can harvest capital gains year in and year out. So in some cases, the balance sheet gets weaker and weaker, reserves get thinner and thinner, and ultimately you go into a sharp decline.

You call for stiffer pricing policies by companies in the industry. What can be done price-wise to hasten an upturn in the cycle?

If companies charged rates in relation to exposure, there would be a more even, or less volatile, cycle.

Why do you suspect the insurance industry is so timid when it comes to pricing?

Because it is more interested in market share than profit.

But bigger is not necessarily better. Banks found that out several years ago. What sort of conditions do you think it would take for the insurance industry to learn the same lesson?

I don't think the pursuit of market share will ever change. As soon as one group gets blown away, another group will come along with the same optimistic viewpoint.

There is speculation that insurance companies will cease writing high-risk ventures, such as protection against catastrophes. Is this is an inevitable, long-term trend?

No, it's not. I think what we're seeing is a reaction in the marketplace to a situation in which rates are disproportionate to exposure, and where risk is undertaken without much of a plan.

In terms of catastrophe insurance, as companies get better at limiting their exposure to what they prudently should absorb, other companies will come in and pick up the slack. That's the way a market economy works.

AIG is in the midst of creating another catastrophe reinsurance company. We expect to have it up and running by July. Our pricing will be in relation to exposure.

In terms of disasters, you've spoken about the need to create a nationwide system of earthquake insurance. Why?

I've said that in any country that has natural disasters, there's only so much finite capital to deal with infinite risk exposure. So it's rather silly for an industry to hold itself out and say, "We can insure, or reinsure, ultimate limits that are far beyond the capital of the industry."

We need a reinsurer of last resort. The industry would pay a premium for reinsurance, as it would to any commercial reinsurer, on the same basis at commercial rates.

MAKE-OVER MOTIVATION

Why did you decide to push into financial services?

We had a triple-A rating, which is kind of the Holy Grail in our business: In many of our financial services businesses, the parties involved will only deal with triple-A companies. Financial services also allows us to capitalize on our international network and entrepreneurial culture. In addition, we wanted to build a business that would help even out the domestic underwriting cycle in property/casualty.

Was the decision based on a long-term assessment of the insurance industry?

Absolutely not.

Let's talk about the international side of AIG. You recently set up the Russian-American Investment Bank. Where do you hope to go with it?

We have a number of partners in this venture. There's Chemical Bank, Smith Barney, Harris Upham & Co., and J. Rothschild, Wolfensohn & Co. on the Western side, and some Russian shareholders, including the Public Fund for Social Guarantees to Servicemen, which is a pension fund for the military, and a number of strategic regions within Russia. The investment bank will function more as an agent than a principal. It will help in advisory services, privatization, and joint ventures. We understand the changes happening in Russia. Nonetheless, we think the country has potential, and so, we're sowing seeds there.

Why do you think American companies have such a hard time competing overseas?

It's taken us years to plan an entry into some countries. But many American companies don't take that approach. There's no quick fix in international business.

One of the painful things we always have to deal with is when some American company says it wants to be like AIG. So it goes out, hires some people from AIG, sets up in one of the countries we do business in, screws up the market, infuriates all the local participants, loses money for five or six years, then packs up and goes home. Nothing affects corporate image worse than that.

Isn't part of the problem that a lot of companies try to run their overseas businesses from here?

More likely, they simply don't know how to run an international business at all. They don't understand enough about the culture. Often, senior managers have visited Asia only once or twice in their lives on a shopping trip. Most think international means London or Paris.

POLLUTION PROBLEMS

You've taken a strong stand on political issues that impact the industry, and you feel particular ire for Superfund.

Superfund has failed. It was an emotional response to a national problem. The only beneficiary of the fiasco has been the legal profession. I say let's replace Superfund's liability system with a no-fault cleanup mechanism financed by a surcharge of 2 percent on business' insurance premiums with a comparable amount for self-insured companies.

You have a pretty substantial pollution insurance business. Given the expanding definitions of liability for corporations--and for the concerns that finance and insure them--how can you make money?

Today, we know who we're insuring, and we know what they're doing. So we price according to our assessment of the risk.

What's the biggest problem with the insurance regulatory system?

Fifty different regulators. And so, the cost of regulation is not commensurate with the benefits. The EEC has harmonized regulation--if you enter one country, it's the same as entering all of them. The U.S. ought to move in a similar direction.

Originally, the purpose of regulation was to provide for the solvency of insurers. But now the system is consumer-oriented. That's wrong, because the consumer is not served well by an insolvent industry.

Is that why you've criticized the workers' compensation system and left that market in some states?

Well, there it's not only the insurance regulatory system, it's the whole political system that simply says the insurance companies are not going to get rates commensurate with their loss experience. This is an example of social engineering at its worst.

Are there any circumstances under which a company should be compelled, out of a sense of social responsibility, to remain in a business in which it is not making money?

Not if you believe in a market economy. Why should the shareholders of a public company be singled out to pay what amounts to an additional tax because they happen to invest in an insurance company?

OFF THE WALL?

You've shown remarkable candor in assessing previous presidents. Any comment on Bill Clinton?

I'm glad the first 100 days are over.

I see pictures on your wall of you with former Presidents Bush, Reagan, and Ford. Any chance Mr. Clinton will make your collection?

(With a wry grin) Gosh, I don't know.