Subprime disaster hits insurance chiefs' pockets smh.com.au

American International Group cut last year's cash bonus of its chief executive, Martin Sullivan, by 42 per cent as the world's largest insurer reported its biggest quarterly loss in 89 years. Ambac Financial Group denied Robert Genader any bonus, slashed his cash compensation by 71 per cent and then replaced him as chief executive in January. The reduction was the most of any insurer in the Standard & Poor's 500 Insurance Index.

Boards are holding chief executives accountable for $US38 billion ($40.9 billion) of subprime losses by slicing their salaries and bonuses by an average 20 per cent, regulatory filings from companies in the S&P insurance index show. That compares with an average 8.2 per cent increase for chief executives in 2005, when directors excused them for $US41.1 billion of costs from Hurricane Katrina, the most expensive disaster in American history.

Fewer and fewer companies are willing to pay bonuses in a bad year," said Richard Furniss, an executive compensation consultant at Towers Perrin who tracks insurance companies. There's too much liability, too many red faces, and too much bad publicity for the directors if they do that."

Twelve of 20 insurers in the S&P index that have reported chief executive compensation so far paid their chiefs less in salary and bonuses last year, regulatory filings show. The pay reductions cover a year when the S&P insurance index fell 7.7 per cent, including AIG's 19 per cent decline in New York Stock Exchange composite trading, Genworth Financial's 26 per cent drop, and Ambac's 71 per cent plunge.

Insurance chiefs may not get pay rises this year either, based on the International Monetary Fund's estimate that industry losses tied to mortgage markets may reach $US130 billion. Most of the writedowns stem from subprime loans to people with poor credit histories. Management should be paid on how well they pull that off."

AIG, which led insurers with $US18 billion of subprime markdowns, singled out those losses in cutting the pay of Sullivan and his deputies, including the chief financial officer, Steven Bensinger, and "senior executives with direct responsibility for financial services and asset management operations", the company's filing shows.

Genworth, the insurer spun off by General Electric, cut the annual cash incentive of its chief executive, Michael Fraizer, to $US1.4million last year from $US3 million in 2006 after the company's profit fell 8.1 per cent on losses in its US mortgage insurance business and mortgage-related bonds.

Mr Fraizer has been Genworth's chief executive since the company began trading publicly in 2004. Share and option awards are excluded from the calculations, since annual figures for equity compensation reported to the US Securities and Exchange Commission can include grants from earlier years.

Executives can decide when to cash in such awards after they've vested. Commission reporting requirements on share awards make determining boards' intentions difficult, while the annual cash bonus "is most reflective of annual performance", said Towers Perrin's Mr Furniss. Motoring: Subaru halts turbo sales A strange engine noise has left about $50 million worth of high-performance cars stalled.

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