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American International Group (AIG)Stock (Financial Services Industry, Insurance Industry, Property & Casualty Insurance Industry)
 AIG’s diversity and international holdings generally help to insulate it from poor conditions in isolated markets. It posted net revenues of $110 billion and profits of $6.2 billion in 2007. However, weak corporate oversight has recently become an issue for AIG, and media focus on former CEO Maurice Greenberg's alleged funneling of several hundred million dollars to his private corporation while CEO has hurt AIG's public image. Though AIG's large size and diversity, both geographic and in terms of the services it offers, has helped to protect it from poor conditions in any one market, the recent downturn in the U.S. housing market and fallout from the collapse of the subprime mortgage industry has nonetheless pressured its earnings. Particularly in the company's Capital Markets division, the credit crunch has taken a bite out of the bottom line; in 2007, the firm reported write-offs of $11 billion on one of its investment holdings. AIG expects the pressure from the housing and credit markets to continue, stating on February 29, 2008, that it would not buy back any additional shares for the foreseeable future.[1] The nearly $20 billion that AIG has written down from losses on credit derivatives has also led the SEC and Justice Department to investigate the possible overstating of the value of these CDS positions during the process of the revaluations.[2]
[edit] History and Business OverviewFounded as the American Asiatic Underwriters insurance agency in 1919 in Shanghai, China by philanthropist Cornelius Vander Starr, AIG rapidly expanded to the rest of the world. Originally specializing in marine and fire insurance, the company soon spread into other markets. In 1962, AIG’s U.S. focus shifted from personal insurance to high-margin corporate coverage, with insurance being sold through independent brokers to avoid paying salaries to agents who sold little to no insurance. The company went public in 1969, and is based out of New York, New York. AIG is best known for its business model, which strives to generate an underwriting profit. Underwriting profit occurs when the amount of premiums taken is greater than the claims paid out before considering investment returns, though naturally this is difficult for most insurance companies to achieve. AIG has cultivated a strong relationship with China, having been issued the first foreign insurance license in 40 years in 1992.
[edit] General Insurance Primary business units of general insurance include:
AIG's subsidiaries are multiple line companies writing all lines of commercial property and casualty insurance, as well as various personal lines domestically and abroad. Workers compensation business is the largest single class of General Insurance, accounting for about 15% of net premiums during 2006. The vast majority of General Insurance is in the casualty classes, which account for about 30.7% of the company’s operating income. Thanks to AIGs diversity, the company can take or leave rates that other, more one-dimensional companies are forced to take. For this reason, while the property and casualty industry as a whole posted a combined loss of $4.83 billion in 2003, AIG reported an underwriting profit of $667.2 million in the same area. That same year, the expense ratio was 18.2%, more than a third less than the industry average of 24.8%. Even with the increased focus on life insurance, property and casualty remains one of AIGs strong suits. [edit] Life InsuranceLife Insurance is a rapidly growing section of AIG's operations suite. Alone, it accounts for the largest section of revenue, at 49%. Of this, 68% was earned from operations in foreign countries, with the remainder garnered domestically. The trend of AIGs acquisitions over the last two decades places its balance of insurance squarely in the life insurance area of the industry, away from its previous mainstay, property and casualty. Notably, it’s 1970 purchase of Taiwan’s Nan Shan Life Insurance Company and 2001 acquisition of American General Corp demonstrates that AIG is focusing more heavily on this area. The American Life Insurance Company is AIG's mainstay for both domestic and overseas Life Insurance services. While AIG is already the largest individual operator in this field, it is still shifting its holdings’ focus from property and casualty to life insurance. The reason behind the shift is because the life insurance industry is less cyclical than property and causal insurance, making earnings much less volatile in this sector. With AIG moving more and more into life insurance, its profit and net growth rate should settle to a more consistent level. The top three geographic sectors for life insurance are the EU, U.S., and Japan. AIG possesses significant holdings in each country, with its foreign assets in the EU and Japan providing a large advantage over its competition. [edit] Financial ServicesAIG’s Financial Services division has been a growing source of revenue in recent years, though tough conditions in global financial markets in 2007 led to both negative revenues and an operating loss for the year. AIG's financial services offerings are extremely diversified and include:
Of these subdivisions, the aircraft leasing and consumer finance operations generate the majority of financial services revenues. International Lease Finance Corp. (ILFC) is AIG’s aircraft and equipment leasing subsidiary. It is valued at over $35 billion and is the world's largest aircraft leasing company. With a fleet larger than any airline carrier, deals worth hundreds of millions of dollars in the works with both Airbus and Boeing, and annual operating profit margins are consistently above 22% since 1992, ILFC is a strong part of AIGs financial services performance. This group was responsible for holding over $60 billion in credit default swaps. As of June 2008, over $20 billion of this CDS portfolio has been written down as a loss. The SEC is now investigating whether or not the financial products division intentionally overstated the value of CDS on mortgage backed securities [3] [edit] Asset ManagementAsset Management is the smallest and least developed of AIGs business operations, accounting for 5% of 2007 revenue. The services offered include:
The primary subsidiaries in play here are AIG Retirement Services, Inc., which includes AIG SunAmerica Asset Management Corp. (SAAMCo), and AIG SunAmerica. Profit is made from fees received for investment products and services provided, including standard equity, fixed income, and alternative investment funds, as well as securities lending and custodial services. [edit] Other HoldingsIn addition to its aircraft leasing company, AIG also owns 9.9% of the People’s Insurance Company of China directly, and 19.8% through subsidiaries. 62% of the 21st Century Insurance Group is owned through several subsidiaries of AIG. Finally, most of the Bulgarian Telecommunications Company and Bulgarian mobile operator Vivatel is owned by AIG. [edit] Trends and Forces[edit] Accuracy of risk modelsAs with any insurance company, risk modeling is a primary factor in AIG’s performance. Since 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. [edit] Government regulation risk Insurance companies in the United States are regulated primarily by the individual states. There is no federal regulatory agency that oversees insurance companies. Insurance companies are required to meet certain financial requirements and are required to demonstrate periodically (at least annually) to a state's Department of Insurance that they continue to meet or exceed the minimum financial requirements in order to continue to conduct business in the state. The Department of Insurance can take various actions against an insurance company that fails to conduct its business in a financially sound manner, including action to cause the company to cease operation in the state. Another way the government affects insurance companies is through the interest rate. Interest rates affect any type of investment-related firm, or firms that issue corporate debt or equity. Since debt is determined by the time-weighted average of payments discounted by current interest rates and equity is determined by the present value of a firm plus future projects discounted over the risk free interest rate, interest rates have a large impact on the financial bottom line. However, this matters less to AIG than most of its competitors due to AIG’s major diversification and heavy investment in foreign holdings. Fluctuation in long and short interest rates would have a marginal impact at best on AIG’s bottom line. [edit] Strength in foreign marketsAIG's foreign roots took hold in China in 1919 and Japan in 1946. 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 guarantee dominance amongst 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's business savvy came into play with offerings like SARS-related insurance, stricter control on overhead, and top ratings from credit companies (a major selling point in regions with iffy insurers, like China). Issues in Japan are different, with the main foe being a sluggish economy. This was offset with a series of acquisitions, mostly of General Electric's (GE) old holdings in Japan. Outside of the big two, AIG has a strong presence in the rest of Asia, though it is being challenged both by other foreign investors and local insurance companies. While its presence in China and Japan is strong, AIG faces stiff competition from Prudential and state-backed insurers in India. The rest of the South East Asian market continues to expand, and while AIG has holdings in Vietnam, Thailand, and South Korea, none are dominant on the level of its Chinese and Japanese holdings. As a whole, Asia accounted for about a third of AIG's revenue and a significant, but undisclosed, chunk of its profit. In other regions, AIG has significant life insurance holdings in the EU, which provide a big lead over the competition there. [edit] Competition Due to its various holdings, AIG has a very eclectic group of competitors. In the life insurance industry, AIG already possesses the largest share of the United States market, even as it brings more of its assets and capital to bear. Since 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. Generally, AIG is outperforming its major competitors. In the United States, AIG has the largest individual company share of the life insurance market, at 11% overall. Combined with its strong overseas performance in the EU, China, and Japan AIG has a stranglehold on the international life insurance market.
 American International Group2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
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