Fin 626-Team Project
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By,
Team Members
Andrey Skroznikov
Harsh Mehta
Kevin Matos
Mahaveer Jayanth
Ran Wei
Fin 626-Team Project
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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 4
th
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
