NEW YORK-When-or even if-the other shoe will drop ultimately will determine how American International Group Inc. recovers from the ousting of long-time Chief Executive Officer Maurice R. Greenberg last week.

If the finite risk deal with General Reinsurance Corp. that apparently led to Mr. Greenberg's departure and to the delay in AIG filing its annual financial statement is an isolated incident, then AIG should recover quickly and maintain its position as the world's leading commercial insurer, observers say.

But if more revelations over AIG's use of arcane reinsurance structures emerge as targets of investigations by regulators and prosecutors, then the New York-based insurer and its newly installed chief executive officer, Martin J. Sullivan, could face serious ongoing problems, they say.

The company's release of its 10-K "will be a critical point," said Grace Osborne, a director of rating agency Standard & Poor's Corp.

The delay in filing the 10-K came with the announcement last week that Mr. Greenberg was stepping down as chairman and CEO of the company that he had transformed in his more than 37 years at the helm. In addition AIG announced last week that its chief financial officer, Howard I. Smith was being placed on leave and replaced, and that vp-reinsurance Christian M. Milton also had been placed on leave. AIG did not disclose the reasons behind the leaves.

Some observers say the executive changes and delayed financial reporting create significant uncertainty as to just how deep AIG's problems are.

Others, though, dismiss these concerns and say it is only natural that Mr. Sullivan and AIG's new chief financial officer, Executive Vp Steven J. Bensinger, would want some extra time to review the financial report before signing off on it.

The main question, say observers, is how far AIG's problems go, if at all, beyond the 4-year-old loss portfolio transfer AIG assumed from General Re, which apparently led to Mr. Greenberg's resignation. That deal is under investigation by the New York attorney general and the Securities and Exchange Commission (see story, page 25).

Meanwhile, observers say the change in leadership should have no immediate significant impact on commercial insurance buyers. Although the issues surrounding AIG are likely to be a distraction for its new management for at least the near future, the insurer is expected to remain a powerful, financially strong and innovative insurer.

Changes, delay

In addition to elevating Mr. Sullivan to the CEO role, AIG also named Donald P. Kanak as executive vice chairman and chief operating officer, focusing on Asian business. Previously, Mr. Kanak was vice chairman and COO. Mr. Bensinger had previously served as senior vp, treasurer and comptroller.

Mr. Greenberg, who has been AIG's chief executive since 1968, will remain with the insurer as nonexecutive chairman.

Commenting on Mr. Greenberg's departure from the CEO role, Frank G. Zarb, chairman of the board's executive committee, said in a statement that while the board appreciates Mr. Greenberg's "enormous contributions" over the years, it concluded that it is now in the "best interest" of AIG's shareholders, customers and employees "to turn to a new generation of leadership."

In announcing the changes, AIG also said it would delay filing its annual report, which was expected to arrive last Wednesday, because of the executive moves and its "ongoing internal review of the accounting for certain transactions" amid regulatory inquiries. The company hopes to complete that review within the next couple of weeks, Mr. Bensinger said during a conference call with analysts Tuesday.

AIG announced in February that it had received subpoenas from New York Attorney General Eliot Spitzer and the Securities and Exchange Commission "relating to investigations of nontraditional insurance products and certain assumed reinsurance transactions and AIG's accounting for such transactions."

Prior to the current investigations, AIG last year agreed to pay $126 million in penalties and disgorgement payments to the U.S. Department of Justice and the SEC to settle charges over certain structured financial transactions between AIG units and Pittsburgh-based PNC Financial Services and Plainfield, Ind.-based Brightpoint Inc., a mobile telephone distributor (BI, Nov. 29, 2004).

As part of that settlement, AIG also agreed to the appointment of an independent consultant to review certain transactions from 2000 and 2004 to determine whether they violated accounting rules or were used to manipulate financial results.

Following the announcement of Mr. Greenberg's departure, the leading rating agencies re-evaluated the highly rated insurer. A.M. Best Co. and S&P placed their financial strength ratings on AIG's insurance operations under review with negative implications. In addition, Moody's Investors Service revised the outlook on AIG's long-term debt ratings to negative from stable, and Fitch Ratings downgraded AIG's long-term debt ratings to AA+ from AAA.

Extent of problems?

Donald Light, a San Francisco-based senior analyst with Celent Communications, a business and technology research and consulting firm, said the issue will be manageable if the General Re deal is the only outstanding transaction that is questioned by investigators. The insurer would likely pay an affordable fine or restitution and move on, he said.

"The more scary scenario is that the AIG-Gen Re transaction is not a single case that they have, that there's multiple other transactions," he said. Even more damaging would be a scenario where any other deals are discovered over time and AIG has to revise its financial reports more than once, said Mr. Light. "That gets very ugly" from both an investor and an insurance buyer point of view, "so there's a big value placed on doing one revision and getting it right," said Mr. Light.

Joyce Sharaf, managing senior financial analyst at Best said, "We are concerned for both the known, negative issues, as well as the unknown issues that could potentially arise."

"Our concern is whether what we understand to be a strong balance sheet is truly a strong balance sheet and we'll be more comforted when the new management team signs off on the 10-K," she said. Best can then evaluate any "remaining issues that are hanging over the company," said Ms. Sharaf.

Mark Lane, a principal and research analyst with William Blair & Co. in Chicago, pointed to Mr. Smith's departure as a concern.

"We're dealing with incomplete information, right now, and we don't understand exactly what impact the regulatory investigations are going to have." The CFO's departure "is more disturbing to investors than the change at the top, because we really don't know what that means," said Mr. Lane. Furthermore, "We don't have a firm understanding of the potential for earnings restatement here, and how material that could be" in light of the delayed 10-K.

John Ward, a Cincinnati-based independent insurance analyst, said the AIG-Gen Re transaction "which is getting all the focus now, by itself does not appear to be a material transaction to AIG's operations."

He added Mr. Greenberg's resignation "is a cumulative effect of a lot of the issues surrounding AIG in recent months, and in this day and age of corporate governance, the directors feeling they just had to take action because of the cumulative effect of what's happened."

Other observers say there is little significance to the delayed 10-K filing. James Inglis, managing director at Philo Smith & Co., a Stamford, Conn.-based boutique investment bank that specializes in the insurance industry, said AIG typically files its 10-K right up against the deadline and its delay now "doesn't mean there's a huge problem. It's just the nature of what's come up" in recent weeks.

It could be just a matter of the lawyers "simply working on wording," said John Wicher, of San Francisco-based John Wicher & Associates, an insurance investment bank. "I don't think you should read too much into it."

Little change expected

Meanwhile, brokers say risk managers should expect little change in AIG's operations, at least in the near future.

"Obviously commercial buyers are always concerned about the quality, but AIG is a world leader in this business," said John E. Cay III, chairman of brokerage Palmer & Cay Inc. in Savannah, Ga. "It will weather this storm, and I believe you will see that the quality is restored."

"Frankly, I'm not sure we're going to see much change or impact," said broker David L. Eslick, chairman, president and CEO of Briarcliff Manor, N.Y.-based USI Holdings Corp.