Sleepless Nights for CEOs as They Take the Blame for Poor Results

Uneasy lies the head that wears a crown.” King Henry’s 15th century lament over his lack of sleep may well be shared these days by a number of 21st century CEOs, as investors call for their heads in the wake of plummeting earnings reports and a free fall in company share prices.

In one nine-day period last September no less than four company heads were forced out. Bob Mendelsohn, director and Group CEO of U.K.’s Royal & Sun Alliance, was ousted on Sept. 12. The next day Gianfranco Gutty, resigned as the chairman of the Board of Italy’s largest insurer, Generali SpA. In the week that followed Lukas Mühlemann stepped down as chairman and CEO of Credit Suisse, the parent company of the Winterthur Group, and, proving that the carnage wasn’t exclusively European, Paul Batchelor was forced out as the CEO of Australia’s AMP.

With the possible exception of Gutty, all of them were forced out because their company stock prices fell after they failed to achieve the results expected by their larger shareholders. Owners of major league sports franchises exhibit a comparable operational mentality. If the team performs poorly, fire the coach.

Mendelsohn’s problems really began in January of 2001, when he announced that the Group had adopted a strategy of concentrating on its core P/C business, and would gradually sell off its life operations and other non-core assets. The news was welcomed by estimates that winter storms in the U.K. and Canada would cost the company around $350 million.

In seeking to become, what Mendelsohn called “a global player,” R&SA embarked on an ambitious program, just at the time when the technology boom was ending and investment values were starting to decline. It then ran headlong into Sept. 11 and the growing loss estimates for asbestos and environmental claims. The insurer failed to reduce its combined ratio to 103 percent, one of Mendelsohn’s primary goals, and the disposal of assets became more of a necessity than a strategy, as the company scrambled to rebuild reserves. The rating agencies downgraded its credit ratings—S&P’s in November of 2001 and again last August. A.M. Best in February and again in August.

That was the beginning of the end. The Financial Services Authority (FSA), the U.K.’s financial and insurance regulatory body, imposed a £1.35 million ($2.1 million) fine on R&SA over misrepresentations in pension sales that it failed to address quickly enough. Shareholders expressed extreme displeasure after the company announced dividend cuts of over 50 percent to around 18.7 cents a share. Its stock price tumbled from just under 600 pence a share (around $9.35) in January of 2001 to around 100 pence ($1.56) currently. Cheerio, Bob.

Credit Suisse (CS), the parent company of U.S. investment bank Credit Suisse First Boston (CSFB) and the Winterthur Group, ousted Mühlemann following a number of similar negative developments.

The former Chairman and CEO of Swiss Re was primarily responsible for the Group’s acquisition of Winterthur in 1997, shortly after he took over. In 2000 he was instrumental in acquiring the investment bank Donaldson Lufkin & Jenrette (DLJ) from France’s AXA Group for $12.4 billion. Neither acquisition worked out.

Winterthur has continued to perform poorly. CS was required to provide SwF 1.7 billion ($1.12 billion) in additional capital to the insurer last June, and, as had been expected, shelled out another SwF 2 billion ($1.338 billion) earlier this month. It bought DLJ at the top of the bull market, and by most accounts paid way too much for it. A one-time leader in the junk bond investment field, it’s seen its activities decrease dramatically in the current global financial crisis. CS’ ADR shares have fallen on the NYSE from around $50 in early 2001 to around $20.

Adding to its problems is the ongoing investigation by New York State Attorney General Eliot Spitzer and three regulatory agencies into alleged conflicts of interest by some of CSFB’s stock market analysts that could result in multi-million dollar fines. Auf Wiedersehen, Lukas.

Assicurazioni SpA Board Chairman Gianfranco Gutty’s resignation followed Mendelsohn’s by a day. While it came just after Italy’s largest insurer announced that it would write-off 1.5 billion ($1.47 billion) worth of investments, there were clearly other reasons behind his departure—the third Generali Chairman to resign in as many years.

Gutty had been under pressure for some time from shareholders, most notably the powerful Mediobanca financial group. The Board of Directors relieved him of executive responsibilities last April, and most analysts saw his resignation mainly as the result of a power struggle with Mediobanca.

Although it owns only 13.6 percent of Generali’s shares, the financial group is still seen as exercising control over the insurer’s decisions. Gutty’s mistake was apparently in opposing that influence. His successor Antoine Berheim, 78, a former executive at the investment bank Lazard Freres, who previously served as Generali’s Chairman from 1995 to 1999, is considered to be far more willing to follow Mediobanca’s “suggestions.”

The 1.5 billion in writedowns, however, certainly didn’t help Gutty keep his position. While most forecasts had predicted that the value of the company’s investment portfolio had fallen and would require write-offs, the total amount was far larger than had been predicted. While Generali reported a first half net profit of around $50 million, that’s a lot less than the $711 million it earned in the same period last year. Ciao, Gianfranco.

Paul Batchelor’s demise as CEO of AMP had little to do directly with events in Australia. He was ousted after the company’s shares nose-dived following the announcement that AMP might have to inject up to £500 million ($780 million) into Pearl, it’s U.K.-based life and pensions subsidiary, in order to meet regulatory requirements.

Although the Board declined to cite the problems with Pearl as the reason for Batchelor’s departure, it coincided with the shares of AMP hitting an all time low of A$10.73 (U.S.$5.82). They’ve lost over 40 percent of their value since the end of April. No worries, Paul.

While analysts and commentators have asserted that each of the executives departed because they failed to devise and implement successful strategies for their companies, an equally valid explanation is that they simply got hit by the global meltdown in the world’s stock markets. While the Dow Jones Industrial Average suffered its biggest decline since 1987 in the third quarter, down 18 percent, European stock indexes did even worse, especially in the insurance sector.

While the industry suffers from lower interest returns, it’s also particularly sensitive to declines in the asset value of investments, as more assets need to be sold to cover any increase in reserve requirements. This in turn limits a company’s ability to write policies, depresses overall earnings, and, as the third quarter of 2002 amply demonstrated, leads to a steep decline in share values.

Even a company as strongly capitalized as AIG has lost nearly half its share value over the last year. While “Hank” Greenberg’s job doesn’t appear to be in danger, many of his contemporaries aren’t in as strong a position, and there may be more sleepless nights ahead for many of them.

To comment on this story, e-mail cboyle@insurancejournal.com.