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American International Group, Inc

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American International Group, Inc - May 3rd, 2006

American International Group, Inc

Type Public

Founded 1919

Location 70 Pine Street, New York, New York

Key people Martin J. Sullivan, CEO

Industry Insurance

Products Insurance

Revenue $98.6 Billion USD (2005)

Employees 86,000

Website American International Group, Inc

American International Group, Inc. (AIG) NYSE: AIG TYO: 8685 is a major Insurance corporation based in New York City. It is the third-largest company in the world according to the 2005 Forbes Global 2000 list. The company became a component of the Dow Jones Industrial Average on April 8, 2004.

History

AIG was founded in 1919 by Cornelius Vander Starr in Shanghai, China. Starr was the first Westerner in Shanghai to sell insurance to the Chinese. When his business was successful there, he expanded to Asia, Latin America, Europe, and the Middle East.

In 1962, Starr gave management of the company's unsuccessful U.S. holdings to Hank Greenberg, who shifted the company's U.S. focus from personal insurance to high-margin corporate coverge. Greenberg focused on selling the insurance through independent brokers, and not agents. This is because Greenberg did not want to sell insurance at prices that sometimes became too low (to cover the future payouts) because of competition from other companies; if the company had agents it would have to continue paying their salary while selling little to no insurance. Instead, with brokers, AIG could always price insurance properly and have little to no sales of certain products for long lengths of time with very little extra expense. In 1968, Starr named Greenberg as his successor. The company went public in 1969. Greenberg resigned as the company's CEO in February 2005 amid concern from the board about regulatory inquiries. a


Holdings

AIG owns ILFC, the world's largest aircraft leasing company, with hundreds of aircraft ranging from Airbus A319s to Boeing 747-400s.

The company also owns a ski resort (Greenberg skis frequently) and a private golf course in Morefar, upstate New York.

Business

It is the world's leading international insurance and financial services organization, with operations in more than 130 countries and jurisdictions. AIG member companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In the United States, AIG companies are the largest underwriters of commercial and industrial insurance and AIG American General is a top-ranked life insurer. AIG's global businesses also include financial services, retirement services and asset management. AIG's financial services businesses include aircraft leasing, financial products, trading and market making. AIG's growing global consumer finance business is led in the United States by American General Finance. AIG also has one of the largest U.S. retirement services businesses through AIG SunAmerica and AIG VALIC, and is a leader in asset management for the individual and institutional markets, with specialized investment management capabilities in equities, fixed income, alternative investments and real estate. AIG's common stock is listed on the New York Stock Exchange, as well as stock exchanges in London, Paris, Switzerland and Tokyo

Business Model

Besides being a financial conglomerate to cause more stable earnings, and the sale of commercial insurance through brokers and not agents as described earlier, a third focus of AIG's business model is the concept of an underwriting profit. For example, an auto insurance company collects money every month from its customers. If one gets into an accident it has to pay money for the accident, but in the meantime the money can be invested. Returns from investments are one (and for many insurance companies throughout time, the only) source of profits for an insurance company. If the amount of money over time paid out is less then what is taken in, this excess is an additional profit, which is called an "underwriting profit". Greenberg believed that it was necessary for an insurance company to make an underwriting profit, even though this is not normal for many companies in different segments of the insurance industry.

Litigation

In November of 2004 AIG reached a $US126 million settlement with the U.S. Securities and Exchange Commission and the Justice Department that resolved the matter in part, but the insurer must still co-operate with investigators who are continuing their probe into the sale of a "non-traditional insurance product". The settlement was related to a so called "finite insurance" product.

Accounting Fraud Claims

In 2005, after a scandal on insurance and mutual funds the year before, AIG is under investigation for accounting fraud. The company already lost over 58 billion US dollars worth of market capitalisation because of the scandal as of May.

Timeline

In early May 2005, AIG restates financial statements, and issues a reduction in book value of USD $2.7 billion, a 3.3 percent reduction in net worth. AIG's share price falls due to conservative investors selling shares.
On February 9, 2006, AIG and the New York State Attorney General's office agreed to a settlement in which AIG would pay a fine of $1.6 billion.
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