Aig

Fin 626-Team Project

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FIN 626

Term Project -

AIG Company

By,

Team Members

Andrey Skroznikov Harsh Mehta Kevin Matos

Mahaveer Jayanth Ran Wei


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Table of Contents

The History of AIG Page 3

Lines of Business and Major Products Page 5

Business Strategy Page 6

Basic Financial Information about AIG Page 8

Financial Performance of AIG Page 11

Customers Page 14

Competitors Page 17

Recent Events of Interest Page 20

References Page 21


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The History of AIG

American International Group, Inc. is a global insurance company that provides services

and products to individual and institutional customers. AIG is one of the few insurance

companies that is well known, and by many it can be considered to have a spectacular history.

The origin of the company can be traced back to 1919, when Cornelius Vander Starr founded

AAU (American Asiatic Underwriters) in Shanghai, China. AAU started off as a general insurance

company and a couple of years after inception it shifted the focus on life insurance operations.

Early years of the company were very successful and in the mid 1920s AAU set on a rapid

global expansion campaign which lasted for approximately 50 years. Branches of the company

were opened in Hong Kong, Vietnam and Philippines. The first U.S. branch was opened around

1926 in New York, under the name of American International Underwriters. The company

continued to expand area of its operations and to bringing insurance products to the following

countries: Cuba, Japan, Germany, France, Mexico, Singapore, Brazil, Italy, Australia, United

Kingdom and South Korea. In 1967 the company incorporated as an American International

Group and AIG stock commenced public trading in 1969.

During the period when AIG went public the company suffered consequent challenges

related to global political changes. The company had to cease business operations in

communist China; AIG further experienced losses in Cuban operations, due to Cuban revolution

and the takeover by Fidel Castro. In response to numerous political affects, the company

changed its expansion strategy and started to pursue the creation of new and innovative

financial products, supplemented by the creation of new subsidiaries with the purpose to


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provide financial services to diversified group of industries. For example: AIG Oil Rig, Inc. was

created to manage insurance for offshore oil and gas drilling rigs, A.I. Credit Corporation to

finance general insurance premiums for affiliate and non-affiliate insurers. Around 1975

significant part of revenue growth was contributed by pension-fund management. In pursuit of

health care services AIG commenced acquisitions of Jurgovan & Blair (1980s), while United

Guaranty Corporation was acquired for its residential mortgage services. During 1980-1990s

shares of AIG became tradable on Tokyo Stock Exchange and London International Stock

Exchange. In 1988 AIG was severely hit with 162 million dollars insurance claim by Enron, AIG

was forced to pay 2/3 of the judgment. By the end of the century AIG experienced significant

expansion into financial industry, which further resulted in expensive acquisitions of financial

companies ($100 million was spent to acquire SPC Credit LTD, which was a Honk Kong

commercial finance company, $150 million was spent for a 7% stake in Blackstone Group which

was a leveraged buyout firm).

Further, in the beginning of the new century AIG suffered $820 million in losses related

to September 11, 2001 attacks; however, these losses were offset by the enormous revenue of

the company. Perhaps the most severe financial crisis for the company, followed in late 2008

when AIG entered into credit default swaps to ensure $441 billion worth of securities, which

lost most of their value. AIG was asked to provide additional collateral, with the trading counter

parties further stipulating a liquidity deficit and default which ultimately led to $85 billion dollar

bail out by the Federal Government. Up to December 2012, assets, subsidiaries and

government owned stock of AIG have been sold off to reclaim the Federal bailout money.


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Lines of business and Major Products

The primary line of business for AIG is individual and institutional insurance, which is

supplemented by professional money management and consulting services. AIG is no longer

the giant that it used to be before the 2008 crisis; however, the variety of products and services

that it provides today is formidable.

Products and Services for individuals:

Accident and Health Insurance: flexible and affordable products to protect health

Annuities: products designed to secure future income

Life Insurance: policies, custom tailored to deliver benefits at acceptable risk

Travel Insurance: wide array of policies to cover, rentals and transportation

Warranties: policies that cover consumer electronics and major appliances, extended service plans

Mutual Funds: investments that offer diversification and money management

Asset Management: providing consulting, and portfolio management

Educational Savings Plans: programs designed to accumulate money for future education expenses

Residential Home Loans: the purchase of such loans and loan servicing

Individual Retirement Accounts: money accumulating programs for secure retirement

Products and Services for Businesses:

Alternative Risk: helping companies to mitigate risk, that is not addressed by traditional insurance

Casualty: insuring risks associated with commercial transportation, excess liability, DBA

Environmental: versatile pollution insurance programs in managing exposure

Professional Liability: policies to address errors or omissions, negligence claims

Property: insurance to cover material damage to property

Trade Credit and Political Risk: policies to mitigate global risks and non-payments on ACC REC

Independent Broker Dealer: access to investment solutions, marketing tools and trading platforms


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Business Strategy of AIG

The business strategies for Core Insurance Businesses of AIG are given below-

1) AIG Property Casualty

a) Grow High Value lines and optimize business mix

b) Execute on technical underwriting, improved claims management and analytics

c) Capitalize on global footprint; presence in over 90 countries

2) AIG Life and Retirement

a) Maintained balanced portfolio of products and leverage scale advantage

b) Optimize spread management through new business pricing and active crediting rate

management

c) Expand distribution network and increase penetration of multiple products through

each distribution partner

3) AIG Mortgage Guaranty

a) Selectively underwrite based on multivariate model to achieve higher risk adjusted

returns

b) Actively manage legacy book


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With the help of such strong Business strategies AIG was able to achieve the below Key

Accomplishments as of 4th Quarter 2013-

Full year 2013 NPW(Net Premium Written) growth of 3.8% excluding FX compared to

year 2012

Optimizing Casualty line businesses

2013 Accident Year loss ratio as adjusted, improvement of 5.4 points since beginning of

2011

HSBC/PICC Joint Venture

12.9% of 2013 NPW from Growth economies

Diversified sources of net flows and earnings

Profitability enhanced through ongoing spread management actions

Approximately $0.8 billion - $1.4 billion in quarterly pre-tax operating income since

4Q11

Earnings reflect new business; 59% of net premiums earned in 4Q13 were from business

written after 2008

Delinquency Ratio of 5.9% at 4Q13, lowest since 4Q07


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Basic Financial Information about AIG

American International Group (AIG) went through a tough financial crisis in 2008, which

impacted all companies and individuals financially as well. AIG was gambling on mortgage

backed securities and large derivatives prior to 2008, which ultimately AIG to the brink of self-

destruction. Major Banks were becoming insolvent which caused AIG to quickly find

themselves in need of liquidity cash. However, AIG was considered "too large to fail" due to the

impact it would cause around the world if the company was to fail. As a result, the United

States Government stepped in and rescued AIG by providing the company a "Government

bailout" loan of $182 Billion. AIG went from being a company holding over $1 Trillion in Assets

to being in Debt for $182 Billion and struggling to prevent bankruptcy. Nevertheless, five years

later in December of 2012, AIG repurchased all of their outstanding warrants to the United

States Treasury. As a result AIG repaid the full $182 Billion to the government, plus an

additional $23 Billion in interest. Therefore, the United States Government no longer has a

stake in the company.

American International Group Inc's (AIG) basic financial information consists of various

important key statistics which can help indicate the current health of the company as well as

predict the future of the company. To know the total value of issued shares of AIG we had to

compute the Market Capitalization. AIG's market capitalization is $74.70 Billion. This is

calculated by computing the current stock price of $51.02 as of March 10, 2014 and then,

multiply it by the number of shares outstanding 1.46B. The amount of debt that a company has

is as equally important as this tells us how many expenses the company has. Currently, AIG has


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$41.69 Billion Dollars of Debt which consists of Bank Loans, Rent, Bonds issues to fixed income

investors, payroll etc. The Current stock price as of March 10th is $51.02 per share. We

compared the current stock price for the past six months against the S&P 500 to see where the

stock of AIG stands along with the rest of the national market.

According to the stock chart below from Yahoo Finance; comparing American

International Group Inc. (AIG) stock against the S&P 500 for the past 6 months we found that

the stock price of AIG has predominantly been fluctuating along with the U.S. Market. In the

month of October 2013, AIG stock was trading a bit higher than the S&P 500. At the end of

October and beginning of November 2013, AIG's stock took a dive compared to the S&P 500

below the average U.S. Market. According to Yahoo Finance, the drop in stock price was due to

market concerns regarding AIG's performance after they reported worse than expected fourth

quarter 2013 earnings of $1.1B along with their combined ratio of 104%. AIG's performance

has been impacted due to the expenses of AIG's Property and Casualty line of business as they

are investing heavily on Information Technology infrastructures. AIG is expecting to reduce

their expenses shortly which should benefit the companys margins, and its operations should

also start leveraging. In addition, AIG is in the process of re-pricing their products, focusing on

consumer business, and expanding its foreign business. As of, November 2013 AIG's stock price

has been trading below the national average (S&P 500); however, today AIG's stock has since

been fluctuating along with the National Average however, is still trading below average.

Below is a chart provided by Yahoo finance;

(http://finance.yahoo.com/echarts?s=AIG+Interactive#symbol=aig;range=1d;compare=^gspc;ind


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icator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;) depicting AIG's

stock performance compared to the national average of S&P500 for the past six months.

The red line on the chart is indicating the S&P500. The Blue line is an indication of AIG

Stock. This chart is intended to provide a visual of how AIG stock was trading compared to the

U.S. market and if it is relatively correlated. As you can see in October, 2013 AIG stock was

actually trading higher than the national average. However, in November, 2013 the stock price

once again took a dive. Since November, 2013 AIG stock has been fluctuating up and down

along with the rest of the U.S. market.


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Financial Performance of AIG

A company's performance cannot be looked at in isolation by an investor. The market

value and the performance of a company are impacted by financial market concerns. Investors

have to analyze and gain a strong understanding of the geopolitical conditions as well as the

current macroeconomic conditions of the American International Group both internationally

and nationally before making a valuable or costly decision to invest. Critical information

regarding the company is obtained through American International Groups financial

statements.

The price-to-earnings ratio is an equity valuation multiple. It is defined as market

price per share divided by annual earnings per share. According to the AIG P/E Ratio and stock

price charts below we found that the stock price of AIG has predominantly been fluctuating

along with the U.S. Market. Prior to January 2013, AIG P/E ratio was remaining steadily at

around 2. From the end of December 2012 and beginning of January 2013, AIG's P/E ratio

increased dramatically to more than 20 and reached the highest point at 36.49. The growth of

P/E ratio was due to the rising share prices and the fall of EPS. From the 2012 cash flow

statement of AIG, we found that the net income dropped from 20622.00 in 2011 to 3438.00 in

2012 which decreased by 83.32%. Its the main reason why AIGs P/E ratio increased

dramatically at the end of 2012.


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Price of American International Group, Inc. (AIG)

Source: http://finance.yahoo.com/echarts?s=AIG+Interactive#symbol=AIG;range=

American International PE Ratio (TTM)

Source: https://ycharts.com/companies/AIG/pe_ratio


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Return on equity (ROE) measures the rate of return on the ownership interest

(shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating

profits from every unit of shareholders' equity (also known as net assets or assets minus

liabilities). ROE shows how well a company uses investment funds to generate earnings growth.

ROEs between 15% and 20% are generally considered good.

According to the AIGs ROE chart below, we found that AIG has been performing

steadily since January 2011. It demonstrates AIGs ability to generate profits from shareholders

equity (also known as net assets or assets minus liabilities). Compared to industrys ROE, we

found that AIG had been doing well to use investment funds to generate growth.

American International Return on Equity (TTM)

Source: http://ycharts.com/companies/AIG/return_on_equity


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Customers

AIG Has Customers in two major part namely: -

Individuals

Business

Individuals

AIG is the worlds leading international insurance organization providing service and

insuring at an affordable rate in over 130 countries to millions of people and their families

around the world. American International Group organizations serve through one of the most

extensive worldwide property-casualty networks of any insurer in the world.

Firms

Businesses have a huge exposure of insuring. For example a Bullion dealer will insure

gold which is a costing commodity. To exporting or import gold American International Group

will insure the products and whatever else they the gold business is shipping for transport

around the world. Lets see why multinational corporations and big firms want to be insured by

American International Group: Below is a chart branching out AIG to its sectors of operations

and why businesses and people prefer AIG over other Insurance companies, such as overseas

operation, Global Insurance tracking, single point of contacts, and peace of mind as stated in

American International Group's Website.


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Why multinational organizations prefer to be insured by AIG?

Overseas operation

No matter how big the multinational corporation is, American International Group

insures them and any location as the insured's file claims, AIG employees will help out to take

care of and cover the loss of the insured. The insurance brokers also get a huge opportunity

and they may get clients of bigger markets and operations than what they actually thought of

and collect brokers compensation. It does not matter how big the operation is and where it is

located in the world. The claims AIG employee will handle it, manage and help settle the clients

loss to the limit of the insurance taken depending on its program structure and retention layer.

Peace of Mind

AIG

Overseas

operations

Single Point

of Contact

Global

Insurance

Tracking


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This means faster, more responsive claims service and local claims settlement with payments

going directly to the local company where the loss took place. It also means that AIG's clients

can also use our network to communicate consistent Risk Management information across their

operations. And you can use our network to deal directly with your clients in particular

countries.

Single point of contact

Even if the company has operations overseas and here and worried about the insurance

in the oversea countries, we can insure ourselves from the risk that is foreseen from our local

office. One location of contact is more than enough to insure us all over the world. This is very

useful for the multinational corporations as they will have only one location or person to

contact who will take care of the transactions and details for the clients with efficiency and

consistency. This means that AIG has superb customer service and the insured can rest assured

that all else will be properly taken care of within AIG's business units.

Peace of mind

The top management or the owner is worried of how the risk is going to be taken care

and what measures are needed to be taken and all sort of complex questions comes into mind

with respect to the businesses they hold. With the enhancements of technology this procedure

of predicting risk and actually covering enough premiums for the loss is simplified by AIG and

brings peace of mind to the insured as they are consistent in providing coverage and they also

have the security of knowing which licensed AIG company is providing the insurance at each

location.


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Global premium tracking

As regulations increases all around the world the countries also bring in increased

regulations and it becomes difficult for tracking an accurate rate for insurance. Since AIG is an

international insurance company, one is able to track the premiums globally and make their

strategies and coverage of insurance accordingly. It also helps to avoid the clients from

unknown regulations and compliance obligations as AIG takes care of all those things since they

have in-depth knowledge and experience of local insurance and local regulations in the other

countries.

Competitors

According to Yahoo Finance, Reuters, Forbes, and Market Watch; AIG's top direct

competitors are in the Property and Casualty line of business. Their top three competitors are

Allianz SE, AXA Group, and Zurich Insurance Group AG. Zurich Insurance Group was founded in

1872. The company is one of the largest property and casualty and life insurance companies in

the world. They are currently providing services in approximately 170 countries; predominately

in North America and European markets. Allianz SE was founded in 1891 Munich Germany.

According to Forbes 2013, Allianz is ranked top eleven largest financial services company and

the largest insurance company in the world. Allianz provides services in over seventy countries

and has about seventy six million customers around the world. The company provides property

and casualty, life and health insurance services. AXA S.A. is an insurance company

headquartered in Paris France. AXA provides investment management, Health, and Life

insurance services. AXA was founded in 1817 and predominantly operates in Europe, North

America, Middle East and Asia.


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In terms of revenue, AIG $67.50 Billion is ranked fourth in comparison to its competitors

behind Zurich Insurance Group $70.41 Billion, Allianz SE $143.45 Billion, and AXA Group

$160.81 Billion. In terms of Net Income, AIG $9 Billion is ranked first in comparison to the

company's top competitors. Allianz SE is ranked second behind AIG with a net income of $7.76

Billion followed by AXA Group $5.75 Billion, and Zurich Insurance Group $3.88 Billion. In terms

of Market Capitalization, AIG $74.48 Billion is ranked second in comparison to their direct

competition. Allianz SE is ranked first with $77.22 Billion in Market Capitalization followed by

AXA Group $62.67 Billion. In terms of Stock price, AIG is ranked first compared to their

competitors as the stock is currently trading at $51.02. AXA Group is ranked second as their

stock price is currently trading for $25.97 per share. Allianz SE is currently trading for $17.13

cents per share which rank the company behind AXA Group and AIG. Below is a chart of direct

competitor comparisons to show more transparency of where the Industry is compared to AIG,

Allianz SE, Zurich Insurance Group, and AXA Group.

Direct Competitor Comparison

This table is intended to compare AIG, and its top three competitors against the rest of

the market. This will give you a better idea of how AIG is doing financially compared to their

competitors and the rest of the market. The data below was put together by researching

financial information provided by ( Source: yahoo finance;

http://finance.yahoo.com/q/co?s=AIG+Competitors)


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AIG AZSEY AXAHY Zurich Industry

Market Cap: 74.48B 77.22B 62.67B N/A 7.47B

Employees: 63,000 171,340 201,960 60,000 4.29K

Qtrly Rev Growth (yoy): -0.05 0.03 0.06 N/A 0.00

Revenue (ttm): 67.50B 143.45B 160.81B 70.41B 4.32B

Gross Margin (ttm): 0.23 0.09 0.13 N/A 0.31

EBITDA (ttm): 15.74B 14.43B 10.33B N/A 740.95M

Operating Margin (ttm): 0.16 0.09 0.06 N/A 0.15

Net Income (ttm): 9.00B 7.76B 5.75B 3.88B N/A

EPS (ttm): 6.14 1.69 2.27 N/A 3.67

P/E (ttm): 8.29 10.08 11.46 N/A 9.68

PEG (5 yr. expected): 1.03 0.12 0.77 N/A 1.28

P/S (ttm): 1.11 0.55 0.39 N/A 1.12

Note -

AZSEY = Allianz SE 17.13

AXAHY = AXA Group 25.97

Pvt1 = Zurich Insurance Group AG

Industry = Property & Casualty Insurance


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Recent Events of Interest

1) AIG sues NY regulator over probe of insurance marketing

According to the news (Samachar news; http://www.samachar.com/AIG-sues-

NY-regulator-over-probe-of-insurance-marketing-oeefNLfihjj.html) AIG sued one of the

top financial regulators in New York Benjamin Lawsky. According to law360.com;

Benjamin Lawsky claimed that AIG is over marketing abroad without a state license and

it is unconstitutional. American International Group therefore, counter argued this

statement and claimed that the state wide license is for specific states and not for all

around the world where it does apply. American International Group also claimed that

the New York state license was only for New York customers and New York does not

have the authority or any right to control the insurance business outside the jurisdiction

of New York State. This case is still going on and according to Bloomberg, the court

stated that AIG may not want to cooperate with the review but it is not above the law.

2) U.S. Senator Collins says bill would tweak capital rules for insurers

This article is intended to provide more flexibility and understanding in

regulating life and property casualty insurance. According to the press report;

(http://www.press-report.us.com/clanek-13517980-us-senator-collins-says-bill-would-

tweak-capital-rules-for-insurers) Senator Collin made amendments to the Dodd-Frank

law for the banking and insurance sectors by raising the minimum capital requirements

in 2010. Many insurance companies as well as American International Group also

criticized and counter argued by saying that their work of operations and structure were


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different from banking. American International group also stated that they were

meeting the state required minimum capital requirements for running their business.

Currently the Federal Reserve regulates insurance giants American International Group

and Prudential. Senator Collins also reported to the banking committee that the Federal

Reserve is ready to make the rules more flexible to help clear the confusion of Banking

and Non-Banking firms with respect to the minimum requirements.

References

http://www.aig.com/our-90-year-history_3171_437854.html

http://www.aig.com/Chartis/internet

http://www.voicesofseptember11.org

http://www.theguardian.com/business/2008/sep/17

http://seekingalpha.com/article

http://finance.yahoo.com/q

http://finance.yahoo.com

http://finance.yahoo.com/q?s=AIG

http://www.reuters.com/article/2014/02/27

http://finance.yahoo.com/q/ks?s=AIG

http://finance.yahoo.com/q/co?s=AIG+Competitors

http://www.bloomberg.com/news/2014-04-03/aig-sues-regulator-lawsky-over-probe-into-

unlicensed-insurance.html


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http://www.samachar.com/AIG-sues-NY-regulator-over-probe-of-insurance-marketing-

oeefNLfihjj.html

http://www.law360.com/articles/525083/aig-sues-ny-insurance-regulator-over-high-stakes-probe

https://www.tvs.vn/en/press-release/aig-sues-ny-regulator-over-probe-of-insurance-

marketing.html

http://www.reuters.com/article/2014/04/03/us-aig-dfs-idUSBREA322CZ20140403

http://online.wsj.com/news/articles/SB10001424052702304020104579433370630613890

http://www.press-report.us.com/clanek-13517980-us-senator-collins-says-bill-would-tweak-capital-

rules-for-insurers

http://www.reuters.com/article/2014/03/11/financial-regulation-insurance-

idUSL2N0M80WS20140311

http://www.aig.com/chartis/internet/uk/eni/AI432394-Multinational-Online-0113_tcm2538-

468314.pdf

Aig

Documents

history of aig page

aig stock

century aig

term project aig company

team project page

customers page

global insurance company

competitors page