AIG management changeover drives up P&C executive pay

The collective remuneration of the 50 highest-paid executives in the P&C (re)insurance industry stood at $536mn in 2017, The Insurance Insider’s executive pay league has shown.

While top-50 pay was up by 10.0 percent versus the prior year, the increase was entirely attributed to AIG’s mammoth pay-outs in 2017, resulting from its change of CEO in May that year and the ensuing senior management reshuffle.

Our annual survey includes over 200 named executives across 36 publicly listed P&C (re)insurers and ranks them in order of total compensation for the year, which encompasses base salary, cash bonuses, stock and option awards and other benefits such as pensions.

Management transition typically involves inflated reported numbers due to both the costs of recruiting new talent, but also the somewhat artificial contribution of accounting conventions that force companies to recognise a significant portion of long-term compensation incentives when granted.

If AIG executives are excluded from the analysis, the year-on-year comparison of compensation for the top-50 positions reverses, with a 10.8 percent decrease in 2017 with respect to 2016.

Including AIG, on average, each member of the top 50 earned $10.7mn in 2017 compared with $9.8mn in 2016.

But leaving AIG out of the picture, the average remuneration for the 50 highest-paid executives stood at $8.3mn in 2017 compared with $9.4mn for 2016.

The above figures include the firm’s CEO, CFO and highest-paid named executive officers. However, looking at CEOs in isolation, average compensation totalled $8.2mn last year, led by CEOs of US large cap carriers and US nationwides.

This included a $43.1mn pay packet for AIG’s newly appointed CEO Brian Duperreault, the highest on record in the industry since 2013, when John Charman was awarded $46mn to take the reins of Endurance. Duperreault's compensation included a one-off $16.1mn stock option award and a $12mn "make-whole" bonus, related to compensation he gave up on leaving Hamilton.

The improving fortune of CEOs in the two US peer groups was at odds with their colleagues in all other groups, with the top-brass position at London and Bermuda reinsurers taking lower earnings due to heightened catastrophe activity.

Indeed, while average CEO remuneration was up 3.5 percent as a whole from the $7.9mn earned in 2016, when US-based AIG is excluded, average CEO awards were down 14.8 percent year on year to $6.9mn.

By way of comparison, CEOs of S&P 500 companies saw their average compensation increase by 10.7 percent to $13.9mn in 2017, according to data compiled by the American Federation of Labor and Congress of Industrial Organizations.

AIG’s turnaround

Loss-hit 2017 was indeed also the year of the change of guard at AIG and this was evidenced in the company’s outsized participation in the list of highest-paid executives.

The insurance giant took up five of the top-10 positions, albeit three of these senior executives –including former CEO Peter Hancock – departed the company.

Having held the top job since September 2014, Hancock resigned in March 2017 only two weeks after the announcement of a multi-billion-dollar reserve charge which sealed the fate of his recovery strategy.

He was denied a $3.2mn cash bonus for 2016 as a result of the unexpected reserve development but was offered $5mn in 2017 for staying on during the transition period until the designation of his replacement.

Together with $9.6mn in other compensation received in accordance with his release agreement, he was awarded a total final remuneration of $24.2mn, making him the second-highest-paid executive in 2017.

In September, and following the appointment of Peter Zaffino two months earlier as COO, Duperreault announced a reorganisation plan that saw Peter Solmssen and Rob Schimek leave the company.

Solmssen – who only managed to serve 11 months at AIG – was released from his role as executive vice president and general counsel in September 2017 with $14.6mn in total compensation.

He was replaced by Duperreault’s favourite and former Marsh & McLennan Companies (MMC) alumnus Lucy Fato.

Unlike Solmssen, Rob Schimek had been with AIG for 12 years before the restructuring of AIG’s insurance business units prompted his exit.

Zaffino took on the combined commercial and personal insurance portfolios under the banner of general insurance. 

Schimek had been CEO of commercial insurance since late 2015 and departed the company in October with $16.5mn in hand, making him the seventh-highest-paid executive in 2017. 

New entrants

The other two AIG positions in the top-10 ranking were for Duperreault, who topped the chart, and Zaffino, who got the number-five spot.

Duperreault’s $43.1mn package included a $12mn cash award as compensation for unvested equity awards from his previous company, Hamilton Insurance Group, that he forfeited by leaving them to join AIG.

This record compensation was on top of a $20mn sum that AIG had to pay to Hamilton – of which Duperreault was a founding member – to waive him from restrictive covenants preventing his appointment.

An additional payment of $20mn to Hamilton will be made contingent on the completion of Duperreault’s second year as CEO of AIG.

Meanwhile, former Marsh CEO Peter Zaffino, who joined AIG in July, was awarded $17.7mn in his new role as general insurance CEO and global chief operating officer, making him the fifth-highest-paid executive in the industry and the best remunerated of all in the COO positions.

The usual suspects

Besides AIG, positions in the top-10 ranking were populated with familiar names at the pinnacle of the executive pay league.

While holding on to the podium for third consecutive year, Chubb CEO Evan Greenberg was, however, least favoured in the top 10, with remuneration of $19.1mn, down 21.7 percent with respect to 2016.

Chubb compensation philosophy led to significantly reduced variable compensation to most of their top executives based on the major impact of natural catastrophes on their 2017 financial results.

On the opposite side of the spectrum, Allstate chairman and CEO Thomas Wilson was rewarded with a 35.8 percent increase in his pay packet, which amounted to a total of $18.8mn.

The personal lines carrier’s chief oversaw the second-highest improvement in net income of all 36 companies in our panel in 2017, with a 69.9 percent jump boosted by a combination of tax cuts and loss reductions.

Similarly, Travelers’ new CEO Alan Schnitzer leapfrogged five positions to the eighth place in the pay league, with total compensation of $15.2mn, up 31.8 percent year on year.

Despite cutting his annual cash incentive compensation by 10 percent on the back of cat-hit results, the board of the Hartford-based company decided to grant Schnitzer – who took over from the late Jay Fishman in 2016 – an additional $4mn in stock and option awards “in light of the very successful completion of his first full year as CEO” and the need to adjust his compensation “to reflect the increased responsibilities of the role”.

Daniel Glaser, MMC president and CEO, took up the sixth position of the executive pay league, with total remuneration of $17mn.

His pay was 8.0 percent up from 2016 despite losing two positions in the ranking.

Also well known to the top-10 club, Aon boss Greg Case received $14.6mn in remuneration, making him the ninth-highest earner in the industry.

However, his pay was down 4.1 percent with respect to 2016 and far from the $29.7mn he received when he topped the league in 2015.

Risers and fallers

Back to the analysis of the top-50 positions, the list of biggest movers was also tinted by the leadership shake-up at AIG with two of the five most significant risers belonging to the company. 

While Schimek’s 43-position jump in the rankings was determined mostly by his release agreement, the 40-place movement of CFO Siddhartha Sankaran evidenced

the effect of AIG board’s decision to grant one-off restricted stocks units to members of the executive leadership team to “promote stability” during the transition that ensued the resignation of Hancock in March 2017.

The 41-year-old executive saw his remuneration shoot from $4.9mn in 2016 to $12.0mn, making him the highest-paid CFO in the industry in 2017.

In fact, when considering chief investment officer Douglas Dachille – seated in the 11th position in the pay league – AIG was able to claim the highest-paid CEO, COO, CFO and CIO of the whole P&C (re)insurance industry in 2017.

But the strongest riser of the league was Nicolas Papadopoulo, who was promoted to chairman and CEO of Arch Worldwide Insurance and CUO for P&C operations in October last year, allowing him to enter the illustrious list of top-50 highest-paid executives.

As for the most significant fallers, Aon’s former group president Steve McGill fell 23 positions having stepped down from his role at the end of January 2017.

The 40-year market veteran’s compensation was made up almost entirely of the first of three annual separation cash payments of $7.5mn, contingent upon his compliance with his separation agreement’s covenants.

Vice chairman and chief legal officer at Travelers Avrohom Kess dropped 19 places in the ranking as the year-on-year comparison reflected the effect of his December 2016 sign-on bonus and deferred compensation in recognition of the forfeiture of pension benefits at his prior employer.

Finally, at XL Group, which is to be acquired by Axa, Stephen Catlin retired from his role as executive deputy chairman at the end of 2017, bringing him 14 positions down. Long-standing CEO Michael McGavick was denied his annual cash incentive based on the company’s overall financial performance relative to peers, resulting in a drop of 12 positions in the ranking.