American International Group Inc.|Business Strategy|Case Study|Case Studies

American International Group Inc.

            
 
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Case Details:

Case Code : BSTR115
Case Length : 34 Pages
Period : 1875 - 2002
Organization : American International Group Inc.
Pub Date : 2002
Teaching Note :Not Available
Countries : USA
Industry : Financial Services

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"AIG shouldn't be all about Greenberg. The insurer's legendary 77-year-old CEO, is reluctant to name a successor, fostering the false notion that he's irreplaceable."

- BusinessWeek, May 2, 2002.

Introduction

With revenues of $62.402 billion in 2001, the US-based American International Group Incorporation (AIG) was the world's leading insurance and financial services company. It was the largest underwriter1 of commercial and industrial insurance, and the second largest life insurer in the US.

The company reported a net income of $7.67 billion and had assets worth $492.98 billion in 2001 (Refer Exhibit I). AIG was ranked 12th by Fortune magazine's list of America's 500 largest companies based on revenues in 2002. The company was ranked 2nd in the 'Insurance (Property and casualty)' section of Fortune's survey of 'America's Most Admired Companies. Founded in 1921, AIG's shares were listed on the New York Stock Exchange (NYSE) and on the stock exchanges of London, Paris, Switzerland and Tokyo. AIG served commercial, institutional and individual customers in more than 130 countries in the world. AIG's global businesses included insurance, financial services, retirement savings2 and asset management3. The company offered a wide variety of general and life insurance products to its customers.

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Its financial services businesses included leasing of aircraft, financial products, trading and market making4 and consumer finance.

AIG's expanding global network and its strong presence in commercial insurance, financial services and life insurance businesses made it one of the global leaders in insurance and financial services business. However, analysts said that in recent years, it had been facing problems. The September 11, 2001 attacks on the World Trade Centre in the US costed AIG more than $800 million in claims. The company also incurred losses of $69 million owing to the collapse of Enron.5 By early-2002, the share price of AIG had fallen by 30% from a 2000 high of $104 to $69, despite strong earnings. With so much going against AIG, industry observers expressed doubts about AIG's ability to perform well in the future. AIG had also been criticized as it lacked a succession plan.

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1] Underwriting is the process of selecting policyholders for issuing insurance policies by recognizing and evaluating hazards, establishing prices of premium, and determining policy terms and conditions. It also includes determining the insurer's selection criteria and the markets for the insurer's products and is crucial to the success of any insurance company.

2] Retirement savings plans are plans established by individuals to save for their retirement. They are tax-exempt, which means that the contributions are not taxed as part of income. The individual sets up an account as a trusted fund (held independently) with a bank, trust company or insurance company. The contributions that are made are put in an investment option chosen by the individual. Investment earnings inside the plan are not taxed, but must be used to purchase an annuity or retirement income fund at retirement.

3] The management of the financial assets of a company in order to maximize returns. Asset management can also be conducted through an account at a financial institution that includes checking services, credit cards, debit cards, margin loans, the automatic sweep of cash balances into a money market fund, as well as brokerage services.

4] The process of giving two way quotes (buy and sell) for a particular security. The market maker benefits through the spread (difference between the buy and sell quotes).

5] Enron was the 7th largest corporation in the US (16th largest in the world). The company collapsed under huge debts in late 2001. AIG held surety bonds, which guaranteed gas delivery deals signed by Enron. When Enron collapsed, AIG had to write down the value of its investments in Enron, worth about $57.2 million at the rate of $0.02 per share.

 

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