American International Group, Inc. (AIG) (NYSE: AIG) is an American insurance corporation. Its corporate headquarters are located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in La Défense, Paris, and its Asian headquarters office is in Hong Kong. According to the 2008 Forbes Global 2000 list, AIG was once the 18th-largest public company in the world. It was listed on the Dow Jones Industrial Average from April 8, 2004 to September 22, 2008.
AIG suffered from a liquidity crisis when its credit ratings were downgraded below "AA" levels in September 2008. The United States Federal Reserve Bank on September 16, 2008 created an $85 billion credit facility to enable the company to meet increased collateral obligations consequent to the credit rating downgrade, in exchange for the issuance of a stock warrant to the Federal Reserve Bank for 79.9% of the equity of AIG. The Federal Reserve Bank and the United States Treasury by May 2009 had increased the potential financial support to AIG, with the support of an investment of as much as $70 billion, a $60 billion credit line and $52.5 billion to buy mortgage-based assets owned or guaranteed by AIG, increasing the total amount available to as much as $182.5 billion.[3][4] AIG subsequently sold a number of its subsidiaries and other assets to pay down loans received, and continues to seek buyers of its assets.

American International Group, Inc. (NYSE:AIG) provides insurance and financial services in both the United States and abroad. One of the largest companies in the world by assets and employee size, AIG was a component of the Dow Jones Industrial Average from April 1, 2004 to September 22, 2008.[1] Through its subsidiaries, its holdings can be divided into four sections: General Insurance, Life Insurance and Retirement Services, Financial Services, and Asset Management.

Traditionally, AIG’s diversity and international holdings insulated it from poor performance in individual markets. However, weak corporate oversight and risk management combined with unchecked speculative trading in its Financial Services arm brought the company to the brink of bankruptcy in 2008. Because AIG was unable to raise any capital in the debt and equity markets, the Federal Reserve, fearing wide systemic risk and mayhem from an AIG bankruptcy, granted AIG an $85 billion loan in a historic move and effectively took control of the company with a 79.9% ownership stake.[2] By November 12, 2008, the AIG "rescue" had expanded into its third phase, with a total of $152.5 billion in government assistance.[3]

Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Business Segments
1.2.1 General Insurance
1.2.2 Domestic Life Insurance & Retirement Services
1.2.3 Foreign Life Insurance & Retirement Services
1.2.4 Financial Services
1.2.5 Asset Management
2 Government Rescue
2.1 Phase 1: Emergency $85 Billion Loan From Fed
2.2 Phase 2: Additional $37.8 Billion Secured Credit Facility (Total $122.8 Billion)
2.3 Phase 3: Purchase of Toxic Assets and Restructured Credit (Total $152.5 Billion)
2.3.1 Secured Credit Facility ($60 billion)
2.3.2 Senior Preferred Stock ($40 billion)
2.3.3 New Lending Facilities for MBS and CDS ($52.5 billion)
3 Sale of Various AIG Units
3.1 Sale of The American Life Insurance Company (ALICO)
3.2 Sale of American International Assurance (AIA)
3.3 Nan Shan Life Insurance Co.
3.4 AIG Star and Edison
4 Trends and Forces
4.1 Accuracy of risk models
4.2 Potential implementation of "Financial Crisis Responsibility Fee"
4.3 Impact of government regulation risk
4.4 Strength in foreign markets
5 Competition
6 References
Formal plans for the U.S. Government to exit as a shareholder of AIG began being discussed on September 14, 2010.[4] Preliminary plans calls for the U.S. Treasury to convert its preferred shares into common stock, which would initially raise its stake in AIG to above 90%. It would then sell shares of AIG to the open public over a number of years as it slowly divests itself of AIG shares. On January 8th, 2011 the government began auditioning banks for a public offering of its AIG shares.[5] As the Treasury's shares are sold back to the public, it will reduce its overall ownership percentage and may afford AIG more independence going forward.

On November 7, 2010 AIG announced it had a net loss of $2.4 billion for the third quarter of 2010.[6] The loss came as a result of a $4.5 billion charge related with various asset sales such as its sale of AIA in Asia. However, income from its remaining insurance businesses increased more than 6 percent from last year to $2.1 billion.[6]

Company Overview

AIG first went public in 1969, and is based out of New York City. AIG is well known for striving to generate an underwriting profit. Although difficult for most insurance companies to achieve, underwriting profit occurs when premiums taken in are greater than claims paid out before considering investment returns. Through its various subsidiaries, AIG offers a wide range of insurance and financial services.

Leading up to 2008, AIG was highly levered to the U.S. housing market, making its success heavily dependent on the housing market. As such, when the U.S. housing market crashed, AIG's earnings did as well. In the fourth quarter of 2008 alone, the firm reported write-offs of $18.6 billion related to their mortgage backed securities (MBS) portfolio.[7] The nearly $20 billion that AIG has written down from losses on credit derivatives has also led the Securities and Exchange Commission (SEC) and Justice Department to investigate the possible overstating of the value of these credit default swap positions during the process of the revaluations.[8]

Business and Financial Metrics
2009, particularly in the second half, saw a broad recovery in financial markets as investors moved cash accumulated out of money market and short term investments into higher yield securities. AIG believes that the overall market improvement contributed significantly to its improvement from 2008 to 2009, as its loss from continuing operations declined from $106.5 billion in 2008 to $13.6 billion in 2009.[9]

During 2009, AIG posted a net loss of $10.95 billion from its total revenues of $96 billion.[10] Most of this revenue was earned from its $64.7 billion AIG collected from insurance premiums, $25.2 billion in net investment income, and $11.5 billion in other income.[10] However, these were partially offset by a net realized loss of $6.85 billion.


AIG Financials (In Millions) 2006[11] 2007[11] 2008[12] 2009[12]
Total Revenues 113,387 110,064 11,104 96,004
Total Expenses 91,700 101,121 119,865 109,652
Net Income 14,048 6,200 -99,289 -10,949
Business Segments
AIG breaks its operations into 4 reportable segments: i) General Insurance, ii) Domestic Life Insurance & Retirement Services, iii) Foreign Life Insurance & Retirement Services, and iv) Financial Services. Until 2009, AIG also had Asset Management as a reportable segment, but this segment was sold during 2009.

General Insurance
AIG's subsidiaries are multiple line companies writing all lines of commercial property and casualty insurance, as well as various personal lines. In 2009, AIG's General Insurance segment had a pretax income of $169 million, compared to a pretax loss of $2.45 billion in 2008.[13] Despite its underwriting loss increasing from $683 million in 2008 to $2.6 billion in 2009, it was able to turn a profit in this segment because its capital losses declined by $3.7 billion, more than offsetting the increase in underwriting loss.[13]

Domestic Life Insurance & Retirement Services
AIG's Domestic Life Insurance & Retirement Services segment offers a wide range of insurance and retirement service products and services, including whole and term life insurance, individual and group life insurance, and annuities among others. Pretax income for this segment in 2009 was a loss of $1.18 billion, compared to its 2008 pretax loss of $34.9 billion.[14] The main driver in this large reduction in losses is the realized capital losses, which totalled $36.4 billion in 2008 compared to only $3.5 billion in 2009.

Foreign Life Insurance & Retirement Services
AIG's Foreign Life Insurance & Retirement Services operations include products such as whole life insurance and term life insurance, endowments, personal accident and health products, and group products including pension, life and health, and fixed and variable annuities. These products are sold through independent producers, career agents, financial institutions and direct marketing channels. This segment had a pretax income of $3.2 billion in 2009, a turnaround from its 2008 loss of $3.3 billion.[15] The single biggest driver affecting the change was AIG's net investment income for this segment, which increased from $10.8 billion between the two years.

Financial Services
AIG’s Financial Services division offers a diversified range of products and services, such as aircraft leasing, capital markets, and consumer finance, among others. In 2009, AIG's Financial Services division earned a pretax income of $517 million, a gigantic turn from its 2008 loss of $40.8 billion.[16] The major turnaround was accomplished largely because AIG's Capital Markets subdivision wrote down $40.5 billion in losses in 2008 related to its credit and derivative positions.[17] The SEC is now investigating whether or not the AIGFP, which wrote down $28.6 billion from its Collateralized debt obligation (CDO) and Credit Default Swap (CDS) portfolio in 2008[18], intentionally overstated the value of CDS on mortgage backed securities (MBS).[19]

Asset Management
AIG's Asset Management segment offered investment products and services to individuals, pension funds, and other institutions. In 2008, this segment had an operating loss of $9.2 billion, compared to an operating income of $1.2 billion in 2007.[20] This loss was mainly due to write downs on securities, significantly lower fees earned, as well as losses related to falling equities markets and real estate.

In early September 2009, AIG sold most of its Asset Management segment for $500 million to Bridge Partners LP, a company owned by Hong Kong private-equity firm Pacific Century Group. Specifically, AIG sold its unit called AIG Investments, which operates in 32 countries and manages $88.7 billion of investments.[21] The sale fits within the company's plan to slim down and refocus on AIG's core businesses. Beginning in 2009, AIG no longer treated Asset Management as a reportable segment.[9]

Government Rescue

Phase 1: Emergency $85 Billion Loan From Fed
The beginning of the AIG's monumental downfall began on September 15, 2008 when its credit rating was downgraded from AAA as a result of years of poor oversight and risk management. On September 15, 2008, S&P lowered the firm's credit rating to A- and Moody's downgraded them to A2.[22] This crippled AIG, which was already low on cash, because it forced AIG to post an additional $13 billion in capital to its debtors and trading counterparties as a result of its lower credit rating. With its positions rapidly falling in value and the loss of its AAA rating, AIG's share price understandably fell, making it difficult to sell stock as a way to raise capital. To make matters worse, the 2007 Credit Crunch was still ongoing, essentially making the U.S. government the only source of capital. AIG initially sought a $40 billion bridge loan from the Federal Reserve to help it sell assets and stem losses.[23]

The Federal Reserve brought in Goldman Sachs and J.P. Morgan to assess possible options for AIG to avoid bankruptcy. After both firms were unable to come up with a solution, the Federal Reserve moved forward with its plan to offer the $85 billion loan to help prevent a systemic failure in the capital markets caused by an AIG bankruptcy.

The historic agreement was unveiled on September 17, 2008. AIG received an emergency $85 billion credit facility secured by all of AIG's assets, and the company would in turn pledge 79.9% ownership through warrants in effectively a debt-for-equity swap.[24] The loan was structured as a two year floating rate note. The Fed structured the payment from AIG to be the benchmark 3-Month Libor plus 8.5%.[25] The Fed also obtained the right to suspend dividends and has the right of first refusal, which means that AIG cannot sell assets unless the proceeds are first paid back to the government. This ensures that the government gets paid back before any other creditors.[26] The obvious implication from the "punitive" interest rate (as described by Unicredit Group analyst Marco Annuziata) was that the Fed did not intend for this to be financing for the firm to continue its operations. The loan was given with a single purpose in mind- for AIG to sell assets and pay off its obligations in the two year time frame.

Phase 2: Additional $37.8 Billion Secured Credit Facility (Total $122.8 Billion)
A mere three weeks after the Federal Reserve lent AIG $85 billion, the AIG was in the midst of yet another liquidity crisis. This second collapse was the result of the firm's securities lending program.[27] AIG lent out securities for a fee, and lost a great deal of the cash collateral when the securities it lent fell in value. AIG had lent out equities, bonds, and collateralized debt obligations (CDO) to firms in return for cash collateral and a borrowing fee. AIG suffered significant losses as its holdings, especially credit default swap (CDS), continued to decline in value, resulting in the need to post additional collateral. At the same time, firms that borrowed securities from AIG were redeeming and requesting their posted cash collateral back.

Thus, AIG again sought the Fed's assistance as the lender of last resort. This additional secured credit facility was actually structured as a loan from AIG to the Federal Reserve. On October 8, 2008 the New York Federal Reserve borrowed $37.8 billion worth of investment grade (BBB or better) fixed income securities, and in exchange posted the same amount of cash collateral to AIG.[28]

Phase 3: Purchase of Toxic Assets and Restructured Credit (Total $152.5 Billion)
As AIG's prospects continued to dim in tandem with the global financial markets, it became clear that the original loan package would cripple AIG. On November 10, 2008 the firm reported a third quarter loss of $24.5 billion. Since Congress had just passed the Troubled Assets Relief Program (TARP), the Treasury had the authority to purchase securities or equity from beleaguered financial companies. Rather than push AIG into complete nationalization or bankruptcy with the two year, $130 billion loan with an interest rate of over 10%, the Fed and the Treasury collaborated to help stem the actual source of the losses. The new deal was structured in three branches: i) a secured credit facility, ii) senior preferred stock, and iii) new lending facilities for mortgage backed securities and credit default swaps.

Secured Credit Facility ($60 billion)
The Treasury restructured the Fed's secured credit facility to a much more favorable agreement for AIG. This time, the firm was offered increased liquidity through equity and asset purchases. The new agreement also reduced the amount of the loan from $85 billion to $60 billion, lowered the interest rate from 3-Month Libor plus 8.5% on the entire facility to 3-Month Libor plus 3% on drawn funds and plus 0.75% on the unused balance, and extended the life of the loan from two to five years.[27][29][30]

Senior Preferred Stock ($40 billion)
The second part of the Treasury's restructured package was to utilize the TARP program to purchase $40 billion of senior preferred stock. AIG used this new capital to pay down funds drawn from the initial secured credit facility. The Treasury also placed limitations on executive compensation and put a freeze on the bonus pool of the top 70 company executives. [31]

New Lending Facilities for MBS and CDS ($52.5 billion)
The final piece of the restructured agreement attempts to attack the source of the problem - AIG's overexposure to mortgage-backed securities (MBS) and credit default swaps (CDS). The Federal Reserve and AIG worked together to create two new limited liability companies (LLC) to move the toxic assets off of AIG's balance sheet. The first was created with a $22.5 billion credit facility from the Fed and was used to purchase residential MBS from AIG. The firm would post $1 billion of its own capital to the LLC and bear the risk of the first billion in losses. The second LLC has a $30 billion facility from the Fed to purchase Collateralized debt obligations (CDOs) that AIG had written credit default swaps (CDS) on. This was effectively used to unwind the CDS that AIG had written. AIG contributed $5 billion of its own capital and would be accountable for the first losses as well. These LLCs would only be guaranteed by the assets they possess, rather than all of AIG's assets, and will be repaid by the cash flows of the underlying assets.[30]

Sale of Various AIG Units

There are a number of units that AIG has sold or plans to sell as part of its strategy going forward. Since hiring Benmosche as Chief Executive Officer (CEO) in August of 2009, AIG has essentially stopped asset sales, as Benmosche feels he can turn many of these divisions around.

Sale of The American Life Insurance Company (ALICO)
In an apparent misnomer, The American Life Insurance Company (ALICO) provides life and health insurance outside of the United States. The company operates in 54 countries, although more than half of its revenues are generated in Japan.[32]

AIG originally planned to sell off ALICO to help raise cash to pay back the U.S. Treasury. However, after it became apparent that their competitors' bids were too low (since AIG's competitors were low on cash at the time as well), AIG then decided to "spinoff the unit as its own business. Unable to get a deal completed quickly, on December 1, 2009, AIG awarded the Federal Reserve Bank of New York a $25 billion stake in AIG's ALICO and American International Assurance Company (AIA) in a debt for equity swap.[33] This deal was beneficial for both sides, as AIG reduced its debt while making it more likely that the Federal Reserve would get paid back on its loans.

On February 17, 2010 a $15.0 billion deal was agreed upon with Metlife.[34] On March 8, 2010 the terms of the deal were finalized, with AIG receiving $6.8 billion in cash and roughly $8.7 billion in Metlife shares.[35]

Sale of American International Assurance (AIA)
On March 1, 2010 Prudential agreed to purchase the AIA unit from AIG for $35.5 billion, with $25 billion being paid in cash and the remainder paid in Prudential stock.[36] Despite this agreement, on May 28, 2010 Prudential tried to renegotiate this deal because many of Prudential's shareholders feel that the price paid is too high. Many of its large institutional shareholders such as BlackRock (BLK), believe a more reasonable price is in the $30 billion range, and there was doubt on whether Prudential will obtain enough shareholder support to approve this acquisition. On June 1, 2010 AIG announced that it will reject Prudential's attempt to price the transaction at a discount, and will stick with the original $35.5 billion price.[37] As a result, the deal eventually fell through.

AIG then announced that it will sell shares of AIA through an Initial Public Offering (IPO), using Citigroup (C), Deutsche Bank AG (DB), Goldman Sachs Group (GS), and Morgan Stanley (MS) as underwriters for the deal.[38] After the AIA IPO jumped 17%, AIG increased the size of the IPO to $20.5 billion, thereby boosting the value of the AIA to above the $35.5 billion, which was the sale price that AIG planned to sell to Prudential for.[39] It also earned the honor of becoming the third largest IPO ever.

Nan Shan Life Insurance Co.
On October 15, 2009 AIG sold its Taiwan life insurance unit, the Nan Shan Life Insurance Co. for $2.15 billion, incurring approximately a $1.4 billion loss on the sale.[40] This sale follows the trend of AIG selling off many of its units at steep discounts as the pressure to repay the government loans increases. However, the Taiwan Government is conducting a probe to see if all proper regulations have been followed. In particular, because of the tense relationship between China and Taiwan, Taiwan has set restrictions on Chinese investors with regards to investing in Taiwan companies. The Taiwan Government is looking into whether the source of funding for this deal is ultimately coming from China, which would violate their policy.[41]

AIG Star and Edison
On July 1, 2010 AIG announced it was putting AIG Star and Edison back up for sale, both of which are Japanese life insurers. The company is looking to sell these subsidiaries in order to raise capital to help repay the government, and it is expected to raise about $5 billion in total for both life insurers.[42]

Trends and Forces

Accuracy of risk models
As with any insurance company, risk modeling is a primary factor in AIG’s performance. Since the level of risk determines insurance premiums, insurers consider every available quantifiable factor to develop profiles of high and low insurance risk. Due to the impracticability of determining insurance on a case-by-case basis, this general profile of high and low insurance risk is applied in the form of an algorithm to sort all clients between the two categories. Just like other algorithms that are used to simplify complex systems, insurance models suffer from a lack of scope. Situations that would have a large impact on risk but are nearly impossible to predict (natural disasters, terrorist attacks, etc…) can create difficulties in determining an appropriate premium. However, in more conventional situations, the profit or loss of insurance companies is determined by their accuracy in sorting high-risk clients from low-risk ones.

This being said, AIG also faces low obsolescence risk - that is, there is little chance of the company's services becoming obsolete due to a lack of market demand. So long as the company continues to diversify the insurance products it offers in accordance with the current industry trends, there is also little chance of competitors offering substantially different risk models that undercut AIG's. Essentially, the company will remain at about the same level of demand so long as it remains in the insurance industry.

Potential implementation of "Financial Crisis Responsibility Fee"
Obama announced in January of 2010 a plan to tax the largest banks and financial institutions to recover TARP funds that the government used to bailout many of the banks. The proposed plan calls for a 0.15% tax on each firm's liabilities, excluding Tier 1 capital and those already insured by the FDIC, with the goal of raising $90 billion over ten years.[43] Although it is generally believed that the only financial institutions subject to this fee are only those with over $50 billion in assets, AIG was explicitly named as one of the targeted companes. If this plan gets passed into law, it could represent a large cost to AIG for up to ten years.

Impact of government regulation risk
Insurance companies in the United States are regulated primarily by the individual states as there is no nationwide federal regulatory agency that oversees insurance companies. Insurance companies are required to meet certain financial requirements and to demonstrate periodically (at least annually) to a state's Department of Insurance that they continue to meet or exceed the minimum financial requirements. The Department of Insurance can take various actions against an insurance company that fails to conduct its business in a financially sound manner, including causing the company to cease operations in the state.

However, because AIG has received tremendous amounts of government support, it has been subject to extensive Federal regulation. Current CEO Benmosche was on the verge of leaving AIG in November 2009, just three months after taking the job. Among other issues, he cited frustration over a large number of constraints imposed upon him by the Federal government. The most notable issue is one of executive compensation; because executive pay is limited by President Obama's "pay czar," Benmosche feels he is unable to reward performance with compensation.[44] This has a significant impact, as AIG's competitors can effectively take all of the top talent from AIG which would further hinder AIG's recovery.

Strength in foreign markets
AIG's foreign roots took hold in China in 1919 and Japan in 1946, and it is now the top foreign insurer in both nations. Despite the entrance of American and European competitors, AIG's head start in the region should help continue its dominance among the foreign insurers. Whether or not AIG can become more than a niche player compared to the existing Chinese and Japanese insurers is an open question. The company has made efforts to adapt to the local market by offering SARS-related insurance, implementing stricter control on overhead, and earning top ratings from credit companies (a major selling point in regions with iffy insurers, like China).

While its presence in China and Japan is strong, AIG faces stiff competition from Prudential and state-backed insurers in India. The South East Asian market continues to expand, and while AIG has holdings in Vietnam, Thailand, and South Korea, none are as dominant as its Chinese and Japanese holdings. As a whole, Asia accounted for about a third of AIG's revenue.

Competition

Due to its various holdings, AIG has a select group of competitors. In the life insurance industry, AIG remains one of the largest players in the United States marke. Since historically AIG has the security of a diverse investment portfolio, it can afford to leave risky rates and pursue the rarer, better ones, unlike one-dimensional companies that are forced to pursue all leads as to stay afloat. Therefore, much as it did earlier in property and causal insurance, AIG will be able to maximize its holdings in life insurance.

Some of AIG's top competitors include ING
Groep N.V. (ING), MetLife (MET), and Prudential Financial (PRU).
 
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