Insurance scandals humble the mighty house of Greenberg

When the board of American International Group - the world's largest insurer - met recently, it took a decision that would once have been inconceivable. In the light of regulatory probes into unusual and possibly illegal insurance contracts signed by the company in 2000 and 2001, the directors asked Hank Greenberg, the steely chief executive of almost 40 years, to step down from the day-to-day running of AIG.

When the board of American International Group - the world's largest insurer - met recently, it took a decision that would once have been inconceivable. In the light of regulatory probes into unusual and possibly illegal insurance contracts signed by the company in 2000 and 2001, the directors asked Hank Greenberg, the steely chief executive of almost 40 years, to step down from the day-to-day running of AIG.

The move was an extraordinary blow for one of America's corporate grandees, who is among President George Bush's inner circle of business supporters, and whose face is familiar in political and financial circles around the world.

The decision was also the latest serious setback for the Greenberg dynasty. While Hank Greenberg has ruled the AIG empire - which has more than 50 million customers in 130 countries - his son, Jeffrey, was in charge of the biggest insurance broker in the world, Marsh & McLennan. His second son, Evan, runs Ace, a leading underwriter based in Bermuda that has attracted a great deal of attention from the regulators.

Now only Evan remains in his job. His elder brother was ousted from Marsh after New York's Attorney- General, Eliot Spitzer, launched a lawsuit against the company charging it with illegally rigging insurance bids in order to make higher fees from clients. AIG and Ace, which do a lot of business with Marsh, were also named in the lawsuit.

For the moment, the elder Greenberg, who turns 80 in May, remains non-executive chairman of AIG. Martin Sullivan, formerly its chief operating officer, has been promoted to the top job.

But plenty of insiders in the insurance world believe there needs to be a clean break between the authoritarian Hank Greenberg and the business he built from a small holding company in 1960 to a mammoth entity, which last year made profits of $11bn (£5.8bn) on sales of $98bn.

"They have prized two of his fingers away, but such is his grip that it is a two-stage process," said one senior insurance industry source.

The crunch could come at AIG's annual meeting, scheduled for May. Greenberg could come under intense pressure from investors and members of the board not to stand for re-election as a director and to opt for a long-postponed retirement.

Directors who wish to stay loyal to Greenberg might be put off. He could face prosecution for his personal involvement in striking at least one of the insurance deals with General Re - the reinsurer owned by Warren Buffett - which may have been illegal. A question mark also hangs over Howard Smith, AIG's finance chief, who was suddenly replaced last week.

Greenberg has not at this stage been accused of entering into the insurance contract in bad faith. But he has not built up a bank of goodwill with the powerful office of the New York Attorney-General, or with the Securities and Exchange Commission, the US regulator. Both are now scrutinising AIG's books.

Employees of the regulators say Greenberg has been consistently unhelpful in previous investigations, and he has been famously dismissive of the harsher tone adopted by America's watchdogs in the wake of massive corporate scandals. Last month, just as the scandal was about to hit AIG, Greenberg said publicly that regulators were "turning foot-faults into murder charges".

Meanwhile, Sullivan has the task of restoring confidence in the insurer, whose shares have fallen 10 per cent since it said last month that it had received subpoenas relating to the contract with General Re.

Analysts say that will require substantial reform, including simplifying AIG's complex corporate structure, which has a myriad of subsidiary companies, and making its management style less opaque.

The company said on Monday that it was delaying filing its annual report in order to review its accounting methods.

The British-born Sullivan, who has worked at AIG since 1971, will also have the unenviable task of tackling Greenberg over his role at two private entities, CV Starr and Starr International. Greenberg holds the reins of these vehicles, which dole out compensation to AIG executives. He is also still chairman of Starr Foundation, one of America's largest charitable foundations.

It is a process that will be watched closely by regulators, both in the US and the UK, where the company does a lot of business in the London insurance market. And meanwhile, there will be plenty of spare time for members of the high-powered house of Greenberg to mull over their fate.