Martin Sullivan, who became CEO of American International Group Inc. in 2005, has left that post and the AIG board, the company announced.

The board of AIG, New York, has picked Robert Willumstad, 62, the chairman, to take the CEO title, and has named Stephen Bollenbach, 65, a banking executive affiliated with AIG shareholder Eli Broad, to be the “lead independent director.”

In May, AIG reported a $7.8 billion net loss on $14 billion in revenue. The price of the company’s shares has dropped to less than $35, from a price over $70 in the summer of 2007.

Willumstad has been a director of AIG as well as the company’s chairman since 2006. He was president of Citigroup Inc., New York, from 2002 to 2005.

Sullivan first began working for AIG in 1971. AIG chose him to succeed Maurice Greenberg as CEO after ousting Greenberg. Immediately before Sullivan became the CEO of AIG, he was president of AIG’s American International Underwriters unit.

“Martin successfully led AIG through the crisis it faced when he became CEO in 2005, and he has made significant contributions over the past three years in executing AIG’s strategy and building on its global franchise,” George Miles Jr., chairman of AIG’s nominating and corporate governance committee, said in a statement about Sullivan’s departure. “The board has determined that Bob’s broad managerial and financial services experience makes him the right person to lead AIG through today’s turbulent markets, drive further organizational change and rebuild shareholder value in the years ahead.”

Willumstad said AIG will conduct a “thorough strategic and operational review of AIG’s businesses and their performance.”

“The board and I recognize that results over the past 2 quarters have been unacceptable, but we are confident in AIG’s future,” Willumstad said. “We are determined to get the organization back on track as quickly as possible and ensure it is well positioned for future success.”

Insurance analysts at the securities arm of Bank of America Corp., Charlotte, N.C., said the departure of Sullivan does not “come as a large surprise, given the extremely disappointing results in recent quarters.”

Willumstad is well-qualified for the AIG CEO post, but he “will likely face a number of initial challenges as he stabilizes the business and takes steps to mitigate risk,” the BoA analysts wrote. “Beyond the financials, it is going to take long to change the culture built over the past 40 years.”

Andrew Kligerman, a securities analyst at UBS Investment Research, New York, said he has heard positive comments about Willumstad’s capabilities. But before the price of AIG’s stock will rise, “we think investors will need to see more than a new CEO, such as solid execution,” he wrote.

Citing “uncertainty” caused by the insurer’s abrupt management change A.M. Best Co. dropped the financial strength ratings of American International Group’s domestic life and retirement services subsidiaries a notch last week.

Best, which made no change for other AIG units, reduced AIG’s life retirement subsidiaries’ “Superior” financial strength ratings to “A-plus” from “A-double-plus,” and issuer credit ratings to “double-A” from “double-A-plus.”

Concurrently, Best said it has downgraded AIG’s issuer credit rating to “A-plus” from “double-A-minus.” The outlook for these ratings, it said, is negative.

Best said its downgrades reflected a belief that AIG’s sudden reversal decision to institute a change in management and the future uncertainty of the outcome of such a change highlight “a deeper level of systemic challenges facing AIG, surpassing A.M. Best’s expectations.”

Much of the drop in the company’s share price has been related to its huge losses from its involvement in investments impacted by the drop in the subprime mortgage securities market.

Best said it believes AIG’s need to embark on a companywide strategic and operational review of all of its businesses is not representative of its highest rating categories. “The uncertainty caused by such a review, coupled with the decision to upgrade management talent may have a negative effect on AIG’s franchises.”

Best noted that regardless of the management change, the AIG board headed by Willumstad “was in a corporate governance and oversight position during a crucial time with the responsibility to review AIG’s risk appetite, exposure accumulations and capital management.”

The insurer “is at a critical juncture now and will require future economic and business vision to allow a return of confidence from the company’s numerous constituents,” Best said. “Furthermore, the potential sale of noncore businesses would reduce the historical benefits of diversification.”

Best was not optimistic that the change at the top will rapidly reverse AIG’s fortunes, saying that under new leadership, “a quick economic turnaround, absent capital market improvements, is not expected.”

According to the rating firm, an AIG sale of mortgage-related securities “may not be imminent due to AIG’s ability to wait for market reversals. Given the size of AIG’s life and retirement services and property-casualty businesses, results from potential reengineering will be long term.”

Best said it believes AIG’s life and retirement services and property-casualty franchises continue to maintain enviable franchise value and sustainable competitive advantages, and have the ability to generate significant earnings, product proliferation, overall diversification and considerable intellectual capital.