AIG Insurance Company's rise, expansion, and financial scandals

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).

Exploration of AIG's major product

AIG served as the largest and most affluent sponsor of commercial, business and industrial insurance in the United States alone. It really established its foothold in the insurance realm after attaining acquisition of the American General Life Insurance Corporation in August, back in the year 2001 (Schneiderman et al., 2008). There are two formats of insurance coverage that AIG specializes in:

1. Auto Insurance

2. Travel Insurance

Auto insurance

The primary profits and insurance coverage offered by AIG for auto insurance services were through its subsidiary by the name of AIG Direct (can be accessed on aigdirect.com). The service package that they offered their clients included insurance for privately owned vehicles, motor bikes, commercially-owned vehicles and as well as the recreational transport (Schneiderman et al., 2008).

Some of the major subsidiaries of included the complete subsidization of the online auto insurance specialist called the 21st Century Insurance. This takeover took place in the year 2007 and cost AIG $749 million at purchase. This subsidiary proved to be the most beneficial move for AIG in the year 2008 where they experience the highest record of losses with the recession. They directed all of their business dealings towards the 21st Century Insurance. The following year, AIG sold the 21st Century Insurance subsidiary to the Farmers Insurance Group for a total of $1.9 billion, making a huge profit from the amount it had initially invested in the company (Schneiderman et al., 2008).

Travel Insurance

The main subsidiary that AIG utilizes to sell its travel insurance services and packages is the Travel Guard. The headquarters of the Travel Guard are in Stevens Point, Wisconsin, while it has outlets in different regions of the country (Schneiderman et al., 2008).

The company's growth

Its strongest point

The figure below illustrates the strongest show that the AIG stocks had in the most loss-prone year for them, i.e. 2008. This was definitely the turning point for the company to turn things around in the second half of the year after suffering tremendous loss for a majority of the first half of the year. The important aspect to note here is that, even though AIG stocks closed lower than their opening rate, the level of fluctuation was not as drastic as it should have been considering the humungous losses that the company was experiencing (Sjostrom, 2009).

Crisis (or weaknesses)

The year 2008 was definitely the biggest crises that AIG had to face. AIG had to sell out most of its subsidiaries and give up on its sponsors to cut down their losses. AIG did manage to come back in the second half of their most disastrous year but despite that when we compare the yearly output for the second half of 2008 to the second half of 2007, the difference can be very clearly seen (illustrated in the figure below) (Sjostrom, 2009):

The highest and the lowest peak in terms of growth

The figure below is an illustration of the overview of the highest and lowest points of the AIG stocks over the years. The figure is an average depiction of the performance of AIG in the industry and how it had grown into such a massive structure within the United States. Perhaps the highest point of growth came after the huge bailout explained earlier by the Federal Bank which allowed AIG to really expand its horizons with a guarantee of yearly loans and collaterals available against the many subsidiaries it owned (Sjostrom, 2009).

The rise of AIG

Its participation in government and President Obama

It is no secret that the Bush administration did give AIG a lot of leeway in terms of the loans that they could take through the introduction of the secured credit facility. However, the same hospitality was not give during the Obama administration that followed. The ironic aspect here is that President Obama voted in favor of the bailout as a senator. In response to the overall reimbursement proposed from AIG, the President said "It's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat?" he further added to that by saying "In the last six months, AIG has received substantial sums from the U.S. Treasury. I've asked Secretary Geithner to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole" (New York Times, 2009). It becomes obvious form these statements that AIG will not have the unparalleled and unquestioned support from the Obama administration as it did during Bush's reign.

The historical bailouts

1. The $70 billion bailout enacted in 2008 to assist the big banks regain control over finances benefitted AIG as the focus of this bailout was also on auto insurance which is one of AIG's primary services.

2. The Secured Credit Facility bailout of $85 billion that allowed AIG to regain financial balance by warranting the assets and stocks of its subsidiaries

3. The housing finance program from AIG anticpates another bailout amounting to $20 billion from the Treasury Department (New York Times, 2008b)

AIG's present status quo as of 2010

It is quite an obvious assessment to say that the bankruptcy and government pressures that AIG currently faces will not be something that it could recover from. In fact, this might actually be the end of the company's profile in the insurance industry. What I assess is that the AIG sticks will end up being part of the Hedge Funds machinery. The Hedge Funds will be the last straw for AIG as the money that AIG now has to pay back due to the losses it is facing is not being stored in escrow and will be stored in the Destsche Bank which is owned by Hedge

Funds. The following figure explains how and why this is the assessment I make.