Chris Townsend talks to Tony Featherstone about managing AIG Australia through a crisis, the lessons learned and what a surge in class actions means for D&O insurance policies.
Q&A with Chris Townsend
The global financial crisis has been hell for most CEOs, none more so than Chris Townsend MAICD, CEO of AIG Australia. The 40-year-old Englishman arrived here two years ago to lead the general insurer amid more buoyant industry conditions. Soon afterwards, he watched his parent company, American International Group Inc (AIG), implode due to reckless derivatives bets.
As has been well documented, a small trading group within AIG brought down one of the world’s largest insurance and financial service companies and made AIG forever synonymous with the global financial crisis. Four US government bailouts – worth US$182.5 billion by March – eventually stabilised AIG, but with that came 80 per cent ownership of the company by the US government. The AIG brand was wrecked.
To compound the problems, bonus payments earlier this year to AIG executives, from a company living on the teat of the US taxpayer, led to a huge public backlash and raised the ire of US President Barack Obama. US Federal Reserve chairman Ben Bernanke said no company behaved worse than AIG during the crisis.
Chris Townsend has spent 17 years at AIG, but even he could not tell what would happen to the company globally or the Australian operation at the height of the financial crisis last September. Nobody could. As bank and insurance companies worldwide were sinking, Townsend had daily crisis meetings with AIG’s 40-strong global leadership team. His job was communicating about AIG to staff, clients, product distributors and Australian regulators to contain the fallout on the local operation.
AIG Australia lost 26 staff and its client retention rate fell from 92 per cent to about 86 per cent as competitors circled. Still, the damage could have been much worse given AIG’s global brand had become poisonous and speculation was rife that the company would not survive or if it did, would be unable to honour policy commitments. AIG Australia’s general insurance competitors were gifted a huge market share opportunity amid unfounded speculation that the local operation would be sold.
Townsend puts AIG Australia’s resilience down to relationships developed over five decades and tremendous staff efforts during the crisis. The Australian business turns over about US$600 million annually and employs 600 people. Townsend’s message, one no doubt rehearsed and given many times over the past six months, is that AIG’s global general insurance operations did not cause the company’s collapse and that they are profitable and sufficiently capitalised to honour policyholder obligations.
Similarly, AIG Australia remains a market leader in key markets such as directors’ and officers’ (D&O) liability insurance and is well funded with gross assets of more than $1.7 billion and 94 per cent of its investment portfolio in fixed interest or cash.
Townsend would like to think it is business as usual, but even he knows that is a long way off. AIG’s general insurance operations, including AIG Australia, are being spun off into AIU Holdings, which will have its own board, management team and a new brand. The hope is that the new structure will help AIG’s general insurance operations emerge from the company’s troubled shadow. AIG last month announced that AIU Holdings would be put into a special purpose vehicle in preparation for the potential sale of a minority stake in the business, further positioning the general insurance operation as an independent operation.
In an interview with Company Director, Townsend talks candidly about managing AIG Australia through crisis and the lessons learned. He gives important insights on how directors are responding to the growing threat of more class actions and what it means for D&O insurance policies and costs. He believes Australian company directors are facing class actions from disgruntled shareholders that are “more aggressive than anything in the US right now”.
And he says a second wave of legal actions against investment advisors who gave poor advice is starting. A third wave of actions against directors of smaller companies that go bust – and possibly trade while insolvent – is ahead, as shown by the rise in bad debts announced by the big banks. Townsend says many trustees of poorly performed superannuation funds, and directors of private companies, may be underinsured or unaware of their potential personal liability.
Here is an edited extract of this interview:
Company Director (CD): How are directors of Australian companies dealing with the threat of more class actions from disgruntled investors?
Chris Townsend: The overall way that boards look at risk has changed enormously over the past 18 months and especially in the last six months. The significant rise of class action litigation in Australia has become a much bigger topic in boardrooms around the country. Boards have become more risk averse in this environment and are looking to spread risks. Company directors are clearly more concerned about their D&O insurance and the ability of their policy to respond to problems. Certainly, directors we talk to raise this as a much bigger issue.
CD: How bad is the situation with class actions in Australia?
CT: We are seeing a very aggressive level of class actions in Australia right now, in part due to some well-funded litigation funders. These actions go against the company as well as its directors at an individual level. Often, the entire limit of the D&O policy is eroded to cover the legal action against the company and there is nothing left over to fund claims against individual directors. I’m not sure that enough directors understand fully how the breakdown in their D&O policy cover works.
CD: Will D&O premiums rise even further?
CT: The D&O insurance market was a relatively soft insurance market for several years during the boom times with premiums being driven down. Now, there is an avalanche of claims coming through due to the global financial crisis and a lot more to come. So D&O policy costs have to increase. The D&O policy cost for one US financial institution recently rose 300 per cent and in Australia increases have ranged from 10 to 100 per cent.
CD: How bad could the local fallout be from class actions?
CT: We estimate insurers will have to pay around $750 million collectively for class actions currently running in Australia if the companies lose their cases. The annual premium pool here for directors and officers of private and publicly listed companies is about $250 million. You can see the economics in the D&O market do not work given what is ahead, so rates have to increase.
CD: Has AIG Australia put up its D&O policy rates?
CT: We have had some price increases, but our strategy is to compete on the breadth and features of cover and to keep innovating. For example, we recently separated sections A and B of our D&O policy (which covers directors and officers) from part C (which covers companies). This means if the policy is completely eroded by claims against the company, there is still a separate policy for directors.
CD: Are private company directors spending more time reviewing their director liability?
CT: A large tract of the private company market in Australia does not buy D&O insurance and I think it’s fair to say many private company directors do not perceive it as a big issue. They don’t realise how exposed they are personally to issues such as occupational health and safety and sexual harassment claims. I strongly believe it is an area more private companies need to address.
CD: What about superannuation trustees? Are they adequately covered against lawsuits?
CT: Again, in the bull market, superannuation trustee insurance cover had a low or moderate risk profile. That has been blown apart by unit price losses and some funds losing money due to inappropriate investment strategies. As with D&O insurance, superannuation trustee cover is underpriced relative to the higher risks it now carries.
CD: Will investment advisers be the next big target of more lawsuits?
CT: Our research suggests legal actions will come in three waves. First are class actions against prominent corporate collapses in areas such as investment banking and property. Second are more actions against investment advisors who gave inappropriate advice in the bull market. That is just starting now. Yet to come is the third wave of actions against smaller and medium-size companies that collapse. Here, directors may be liable for trading while insolvent, for example. One can see from rising bad debt levels reported by the big banks that this wave of legal actions is not far off. And, I would add that the public backlash against big business due to the financial crisis will lead to more legal actions generally.
CD: Moving to AIG Australia, what has it been like leading the division during turbulent times?
CT: It has not been easy. But having said that, it has been very rewarding to see my staff respond so well to the situation and clients and brokers stick with us, even though it was very difficult for all AIG stakeholders. You soon realise who your friends are when everything turns.
CD: There has been talk that AIG will sell its Australia operation? How do you respond to such speculation?
CT: The Australian operation is categorically not for sale. We have responded to that type of speculation for some time and the message remains the same. We are not interested in selling. The real value in AIG’s general and life insurance operations is the global network and ability to deal with multinational clients. We have no intention of breaking up what is a very valuable franchise.
CD: The perception is that AIG is full of greedy executives who can’t be trusted, gorging on taxpayer money?
CT: I understand clearly why the damage caused by AIG in the US is such an emotive issue. I recognise there is an enormous amount of negativity about AIG and that the brand has been badly polluted. But again, the problems were caused by a small group of people within a very large global enterprise. That doesn’t absolve AIG of the problems. Rather, my point is that AIG’s general and life insurance operations – about 90 per cent of the company’s revenue – have performed very well for a very long period with a large number of very satisfied clients. And, the Australian operation had nothing to do with the problems caused overseas. AIG Australia is well capitalised, well regulated and our policyholders are very well protected.
CD: How bad was it at the height of the global financial crisis last September?
CT: It’s very hard when you don’t have all the answers and facts. You become prey to innuendo and rumour and it’s hard to fight back when you can’t convey a clear message due to the uncertainty. It was a real challenge to separate fact from rumour and if one believed everything one read about AIG in news reports, we would have had much bigger problems in Australia. But insurance is ultimately about relationships. Our clients and distribution partners understood the facts and figures. Of course they were concerned, but overall our stakeholders have been extremely supportive.
CD: What crisis management tips can you give other business leaders from your experience?
CT: In reality, you don’t necessarily do anything fundamentally different in a crisis than you normally do – it’s just that everything is concertinaed. Sure, there are specific tasks that relate to the crisis, but the basic values and behaviours of good leadership do not change. For my team, it was about timely, honest communication with key stakeholders such as staff, clients, product distributors and regulators once we knew the facts. It was obvious we needed very frequent communications and a tonne of transparency. I’d like to think we got the facts out quickly for what was a very complex issue and explained it clearly and consistently. Thankfully, we had strong relationships with the trade media, which helped.
CD: Is there a risk of just relaying whatever communication comes out of head office?
CT: Definitely. It is very easy when you are working for a global organisation just to put out the same head office message. But you have to recognise local clients have local needs. You have to customise the communication and you can’t shy away from the hard questions and local issues and hide behind the global communiqué.
CD: What has been fallout for AIG Australia?
CT: We lost some staff to competitors, but that gave an opportunity to others who were waiting for a chance. In all, we lost 26 staff out of about 600 between last September and now, but our 2008 turnover is actually lower than our 2007 turnover. Our client retention rate is still high and we are recovering lost ground. Our strategic plan, which has targets for 2012, will be delayed, but we are still confident of meeting our goals.
CD: What have you learned personally from the drama?
CT: You absolutely have to retain your sense of humour. You can’t stress out about things beyond your control. A lot of the global problems were out of our hands so I realised early on not to worry about things you cannot control. I also think you can’t lose focus of your strategic intent and become too distracted by day-to-day events. You have to keep paying insurance claims, keep winning new business, keep innovating, keep training staff and so on.
You have to do whatever it takes to keep working on the business as usual. It’s all about finding the right balance between short-term problems and long-term strategy. Personally, I took a number of short, sharp breaks and my wife insisted I keep my Blackberry out of the bedroom! It’s dangerous working for a US-centric company in a crisis, given time differences. Thankfully, our daily update meetings have now moved to a weekly meeting.
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