Annus horribilis doesn’t really come close to summing up the year that AIG UK boss Lex Baugh has had to contend with, following its parent group’s liquidity crisis and subsequent bailout in 2008. With the worst now over, he looks back at the low points and at what’s ahead for the reborn firm
“You become a bit of an adrenaline junkie,” smiles AIG UK’S chief executive, Lex Baugh. “It’s all about getting ready for the next thing.”
It’s lucky for Baugh that he’s into white-knuckle rides, because he has just lived through a year of what can only be described as every top executive’s nightmare. On 17 September 2008, the US government stepped in to bail out AIG, and the future of its UK division hung in the balance as brokers stopped placing new business and jittery clients pondered whether to pull their accounts.
Today, in a candid and engaging interview, Baugh is ready to tell the story of his remarkable personal journey. After months of press interviews, where he has had to vigorously deny market rumours of suicidal price-cutting, and a staff exodus, he’s keen to present a stable image and to show that AIG has come through the storm – a view largely backed up by brokers and rival insurers. He also wants to talk about the next step: the rebrand to Chartis and its possible IPO.
First, though,what about him? Has it been, as the tabloids might have it, “his year of AIG hell”? In a masterful understatement, he says: “There’s probably no way I could have envisaged exactly what has unfolded over the past 12 months.” That’s a good thing, however, as he admits: “If we had seen it all at once, it might have scared me – or my team.”
Baugh is philosophical about it now. “The events created a purge in the organisation,” he says. “I don’t think anybody would welcome that – and I don’t think anyone would ever think they need it – but we couldn’t have made the kind of changes we have made if we hadn’t been forced into that position. It’s been a rebirth.”
He talks of daily 7am meetings with the whole team, of fraught conference calls to New York, endless cups of coffee and a spirit that has brought the organisation through. This is surely something of a rose-tinted view, given that many of the top executives in London were paid huge retention bonuses to stop them defecting to opportunistic rivals, but we’ll let that one pass.
What was the worst moment for Baugh? He pauses for a long time. “Probably the worst times have come when I personally have been involved in meeting with the management of a client organisation and where I’ve not been able to convince them to keep AIG as their insurer,” he answers slowly, the memories clearly difficult even now.
“That’s been frustrating because at times I think the reaction has been more emotional than financial. We have spent a lot of time explaining the security chain, and I think it’s clear to see the regulatory structures have worked pretty well. The biggest frustration was in cases where I wasn’t able to make that point – they were the periods when I would have gone home most angry.”
It’s hard to imagine this well-groomed American stomping home in a fury. Do any particular moments stand out? “There was one north American client,” he recalls. “It was the strangest conversation because the person was being extremely open and basically saying ‘I agree with everything you are saying about the financial strength of the organisation’, but he just couldn’t get over the fear of the unknown. He was visibly emotional – he’d been a long-term client.”
In the worst months, the firm’s client retention rate dropped from the low to mid 90%?range to the high 80% range. A massive drop, Baugh admits, when you are talking about millions of clients.
Under such circumstances, did it never occur to Baugh to leave? He pauses for even longer this time. “I guess I wouldn’t be honest with myself if I said that there weren’t moments when I questioned—” he breaks off. “Probably one you should ask my wife,” he laughs ruefully.
“It was interesting,” Baugh says finally. “There were many people who were interested in buying this business, or some part of it, and in a way that galvanised my sense of the fact that, okay, there’s a lot of value here. And, personally, my sense of values has never been that you jump at a time of pressure or when the chips are down. If I made a decision like that, I would rather be making it from a position of strength.”
Whatever the soul searching that went on behind the scenes, the captain decided to stay with his ship – and earned the vocal respect of the UK market in doing so. “At Biba, he was there on the stand,” one rival recalls of the annual brokers’ conference in May. “He was just answering everything they chucked at him. It was a really brave thing to do.”
Baugh’s high profile – which also included visible appearances at the Airmic conference and numerous media interviews – was all the more remarkable given AIG’s previous closed-door policy. It had traditionally kept very quiet, at least in the UK.
All that had to change from September last year, when not only the media, but other insurers, rounded on the wounded giant. One major rival was actively approaching brokers, pitching for their AIG accounts, and all of them were whispering loudly about unsustainable price cuts – something AIG has always denied.
Was there a lot of central control on how Baugh handled the fall-out from the US crisis? “The international management of AIG, a lot of whom had spent their careers overseas or who were not US nationals in the first place, recognised early on that the most good the leadership team could do would be to stay with the teams in their home countries, and not pull everyone back to the centre,” he says.
The firm’s decentralised culture, where businesses sprang up all over the world held together only by a name, a spirit and a founder – Hank Greenberg – was, for a long time, what defined AIG. It is also what got it into trouble, with one small UK-based unit specialising in financial derivatives nearly toppling a sprawling global empire. For a dyed-in-the-wool AIG man like Baugh, who has been with the company for 26 years, that must be a tough dichotomy to face.
“The whole philosophy of the founder of the company was to build up small businesses locally, and that’s where this entrepreneurial culture comes from. I think we’ve maintained the concept of being an international company. There’s not a kneejerk reaction to say, ‘This is the way it’s done in America and therefore this must be the right solution’.”
But isn’t that the problem? “Yeah,” he sighs. “That’s the other side of an entrepreneurial organisation. That has had to change.” He speaks later of the additional reporting that now goes on, the conference calls that have become a habit, and the “voracious appetite” of the US government for financial information. “But I believe the two are not mutually exclusive – you can have the right information tools without destroying that entrepreneurial culture, but it’s a challenge.”
If the past year is anything to go by, Baugh is well able to handle that. Whether the global business can is a very different matter. Its future is now being hammered out in boardrooms around the world as the general insurance businesses are unknitted from their complex ownership structures and brought into Chartis, a special purpose vehicle, and a dedicated GI firm with its own management. According to AIG’s latest results, its fortunes may already be on the turn. In August, it posted its first quarterly profit since 2007: a net income of $1.82bn.
As an arm’s-length business, Chartis will be insulated from any financial problems AIG might have. Its subsidiaries will also be able to support each other if that were ever needed, though each national subsidiary will be regulated locally and hold its own ring-fenced capital in line with national regulatory requirements.
Baugh is open about the fact that AIG is positioning Chartis for a flotation, which he says the company will be ready for by the end of next year. The money raised would pay off the US government, which currently owns a majority stake in the company. Baugh can’t put a timetable on it. “The board has to consider at what point it’s the best way to realise value,” he says. “Paying back the US government is certainly a primary goal.”
It’s a funny motivation for a business, and with so many question marks over its future, AIG is not out of the woods yet. But here in the UK, the industry at large agrees that AIG has come through the worst of it surprisingly well. Much of that is down to Baugh, who has emerged from this rollercoaster ride with his dignity and reputation intact. IT