Term Paper on "AIG Insurance Company"

Term Paper 10 pages (2638 words) Sources: 6

[EXCERPT] . . . .

AIG Insurance Company

The history and rise of AIG

The initiation of the AIG phenomenon was back in the year 1919 under the guidance of Cornelius Vander Starr. He established the AIG insurance corporation first in Shanghai, China. Starr was the pioneer in China as he became the very first Westerner to establish insurance trade in China. It was only under the reign of Mao Zedong that Starr left China in 1949 because of the advent of the Communist People's Liberation Army in Shanghai. The move resulted in the AIG moving to New York City, where it currently operates from as well. The main expansion strategy used by AIG was the use of subsidiaries to move into other global markets like Asia, Europe and the Middle East (Marsh, 2008).

AIG initially focused on personal insurance but that shifted in 1962 when Maurice R. "Hank" Greenberg was given charge. Greenberg shifted the focus to high-margin company insurance and coverage. Another aspect that Greenberg brought into the company was the use of independent brokers to sell and market the insurance policies as opposed to hiring agents to do the same work. This helped in saving the costs that would go into the salaries of the agents. Furthermore, the use of independent brokers instead of hired agents led the company to be able to control the price of the insurance based on the profits they would make. This was a handy advantage to have because it would not leave a serious dent in the company's structure irrespective of decreased sales, losses, or cut even rates over a longer period of time. Pricing is an integral part of any sales strategy as the fact that AIG had complete control over it rendered them as one of the strongest corporate insurance companies in the region as well as on the global front. Plus, it also ensures that they can price their services flexibly and in accordance to the market trends of the economy that they are operating. This was one of primary aspects that contributed to the rise of AIG with the United States as well as on the global front. Soon in 1968, Greenberg was named the successor of Starr and the following year, AIG stepped into the public sector (Marsh, 2008). Below is a figure illustrating the market share of AIG as of 2007:

Fast forward to the year 2005, the AIG Corporation became part of the most popular and infamous fraud scandals and investigations. These investigations were headed by the collaboration of the U.S. Justice Department, Securities and Exchange Commission as well as the New York State Attorney General's Office. Greenberg too was overthrown following a financial fraud claim in the same year i.e. February 2005. Five years later, Greenberg is still buried under numerous civil fraud charges that the New York State is still conducting under strict surveillance. The financial balances and debts that followed these fraud claims were humungous and resulted in some of the biggest bailouts in the corporate history of the country. For example, the New York Attorney General's examination and pursuit of fraud claims resulted in a huge $1.6 billion financial penalty for the company. Some of the executives investigated with the fraud claims were also charged with criminal offenses. Martin J. Sullivan, who started work as a clerk in the company back in 1970, became Greenberg's successor as the CEO of AIG (New York Times, 2008a).

"On June 15, 2008, after disclosure of financial losses and subsequent to a falling stock price, Sullivan resigned and was replaced by Robert B. Willumstad, Chairman of the AIG Board of Directors since 2006. Willumstad was forced by the U.S. government to step down and was replaced by Edward M. Liddy on September 17, 2008" (Zuill, 1008).

Major events and the impacts of AIG

AIG's existence in the corporate world has not been a dull one. In fact it has been able to attain a lot of popularity with massive government support. For instance, it was the United States Federal Reserve Bank that came forward with the introduction of the secured credit facility that could go as high up as U.S.$85 billion. This was done so that AIG would not collapse and could meet up to its promises by delivering additional collateral for all of its credit default swap trading partners. The introduction of the secured credit facility allowed AIG to take annual loans up to U.S.$85 billion with the security and collateral of the assets and stocks that AIG had in its subsidiaries. This they also used in exchange for warrants for a high equity stake of 80%. Furthermore, this security credit allowed them the right to postpone or cancel the continuation of dividends to the stock that had been labeled as common or preferred in prior engagements. The AIG Corporation was quick to take up the offer of the security credit facility, announcing on the same day as the introduction of the facility that they accepted it as well as all the relevant terms of the package of secured credit facility given by the Federal Reserve Bank. This rescue is perhaps the most significant bailout of a private firm by the government in recent times; even though there have bailouts with bigger implications in the past like Fannie Mae and Freddie Mac bailout by the government that had been documented only a week before this particular bailout (New York Times, 2008a). The table below illustrates the total payments made to the AIG credit default counterparties:

"On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. Industry practice permits firms with the highest credit ratings to enter swaps without depositing collateral with their trading counter-parties. When its credit rating was downgraded, the company was required to post additional collateral with its trading counter-parties, and this led to an AIG liquidity crisis. AIG's London unit sold credit protection in the form of credit default swaps (CDSs) on collateralized debt obligations (CDOs) that had by that time declined in value" (Gretchen, 2008).

The year 2008 proved to be the biggest dip in the curve for AIG as its share prices fell a whopping 95% from the year high of $70.13 to amount to merely $1.25 by the second half of the year, more specifically September 16, 2008. Also, 2008 rendered the company helpless with over $13.2 billion financial loss records in the first half of the year only. "The AIG Financial Products division headed by Joseph Cassano, in London, had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. Of those securities, $57.8 billion were structured debt securities backed by subprime loans" (Mark, 2008). AIG was perhaps one of the biggest contributors for the extreme financial losses suffered by the United States in the year 2008 and hence CNN added Cassano's name in the list of the "Ten Most Wanted: Culprits" for the U.S. financial offenses and losses in the year 2008. The figure illustrates the fall in stock measures endured by AIG during their financial crises in 2008 (New York Times, 2008b).

Major people involved in AIG over time

The AIG Corporation has had quite a few influential people directly or indirectly involved in its structure over the years. The primary aim of the AIG managers has over the years been to make profits and establish the company as one the largest corporate and public insurance industries, not only in the United States but also on the global front. Of course, making consistent levels of profits is not an easy task to achieve in the cutthroat competitive market of insurance that exists today which is why the primary players in AIG history (listed below) always looked to employ new, innovative and flexible roundabout ways to decrease input costs and increase profits while maintaining control over the pricing strategies of their insurance for their clients and partners (Shelp, 2006). Some of the major players in the AIG Corporation, over the years have been:

Harvey Golub -- Former Chairman and Chief Executive Officer, American Express Company; Non-Executive Chairman of the Board of Directors, American International Group

Robert Benmosche -- President and CEO, American International Group

Arthur C. Martinez -- Former Chairman of the Board, President and Chief Executive Officer, Sears, Roebuck and Co.

Christopher S. Lynch -- Former Partner, KPMG LLP

Dennis D. Dammerman -- Former Vice Chairman of the Board, General Electric Company

Suzanne Nora Johnson -- Former Vice Chairman, The Goldman Sachs Group, Inc.

Laurette T. Koellner -- Former Senior Vice President, The Boeing Company

Morris W. Offit -- Chairman, Offit Capital Advisors LLC

Robert S. Miller -- Executive Chairman, Delphi Corporation

Douglas M. Steenland -- Former President and Chief Executive Officer, Northwest Airlines Corporation

George L. Miles, Jr. -- President and Chief Executive Officer, WQED Multimedia (Shelp, 2006)

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