Presentation on AIG

Introduction :-
American International Group, Inc.
(AIG), is a major American insurance
corporation based at the American
International Building in New York City.
The British headquarters are located on
Fenchurch Street in London, continental
Europe operations are based in La
Défense, Paris, and its Asian HQ is in
Hong Kong. According to the 2008
Forbes Global 2000 list, AIG was the
18th-largest company in the world.
Company Background :-
• AIG's history dates back to 1919, when Cornelius
Vander Starr established an insurance agency in
Shanghai, China. Starr was the first Westerner in
Shanghai to sell insurance to the Chinese.
• In 1962, Starr gave management of the
company's less than successful U.S. holdings to
Maurice R. "Hank" Greenberg, who shifted the
company's U.S. focus from personal insurance to
high-margin corporate coverage.
• The company went public in 1969.
Business Journey of AIG :-
 Brief His to ry o f AIG line of
business:-
1919
AIG founded in Shanghai, China
1982
First hedge fund investment
Mid 1980s
Direct private equity investment teams formed in U.S. and
HongKong
1987
AIG Global Real Estate formed to invest in and manage real
estate for AIG
1988
Multi-Manager Hedge Fund Program begins
1989
Creation of first Dublin-domiciled UCITS (currently 33 funds)
1994
First sponsored private equity fund raised (AIG Asian Infrastructure
Fund, L.P.) US $1 billion committed capital
1996
Consolidation of AIG’s institutional asset management activities
into AIG Investments
1998
Purchase of majority interest in Brazos Capital Management, L.P.
(formerly John McStay Investment Counsel, L.P.)
1999
Acquisition of SunAmerica
2001
Acquisition of American General Investment Management
2005
Ranked 6th largest institutional asset manager by Pensions &
Investments
2007
Launch of Mutual Fund Business in India
 Company Profile :-
Founded : 1919 in Shanghai, China
Founder : Cornelius Vander Starr
Headquarters : American International
Building New York
City, New York
Area served : Worldwide
Key people : Robert B. Willumstad
(Outgoing CEO)
Edward M. Liddy
(Incoming CEO)
Industry : Insurance, financial services
Products : Insurance annuities, mutual
funds
Market cap : US $ 7.23 billion (As of
September 18, 2008, close)
Revenue : US $ 110.064 billion (2007)
Operating income: US $ 8.943 billion (2007)
Net income : US $ 5.36 billion (2nd
Quarter 2008)
Total assets : US $ 1.050 trillion
( 2nd Quarter 2008)
Total equity : US $ 78.09 billion (2nd
Quarter 2008)
Employees : 116,000 (2008)
Website : WWW.AIG.COM
Asset Holding of AIG
Some International Holdings of AIG :-
Australia :
AIG Life (Australia) underwrites over one million life
insurance policies in Australia held through industry pension plans.
The general insurance arm offers mainly corporate insurance and is
among the top 10 insurers in Australia.
China :
AIG owns 19.8% of People's Insurance Company of
China (PICC) through direct and indirect holdings. PICC P&C is
China's largest insurer of casualty insurance.
Hong Kong :
AIG's American International Assurance operations
include 2.2 million policy holders.
India :
AIG is the minority partner with the Tata Group in two
insurance companies in India, holding 26 percent each in Tata
AIG Life Insurance Co Ltd and Tata AIG General Insurance Co
Ltd.
Singapore
AIA Singapore is a wholly owned subsidiary of AIG in
Singapore. It has more than two million policies in force, more than
3,800 financial services consultants and 800 employees in Singapore
offices. General manager Mark O'Dell resigned on September 18, 2008
in response to policy holders queuing up to cash in their policies in the
face of concern of the future of AIG.

United Kingdom
AIG operates in the UK with the brands AIG UK, AIG
Life and AIG Direct. It has about 3,000 employees, and sponsors the
Manchester United football club. In response to redemption demands,
AIG Life (UK) suspended redemptions of its AIG Premier Bond money
market fund on September 19, 2008 in order to provide an orderly
withdrawal of assets.
Diversified Business of AIG :-
AIG’s Diversified Business Holdings :-

Mortgage lending

Aerospace

Real estate

Telecommunications

SkiingPorts

Other holdings
AIG owns Ocean Finance a United Kingdom based company
providing home owner loans, mortgages and remortgages.
AIG Investments :-
A group of international companies which
provide investment advice and market asset management
products and services to clients around the world. AIG
Investments was formed in 1996 by consolidating the
investment divisions of various AIG subsidiaries worldwide.
The extensive network and resources of AIG,
which operates in 130 countries and jurisdictions, complement
AIG Investments’ network.
AIG Investments offers the widest range of
investment capabilities divided into five major groups –
Equity, Fixed Income, Real Estate, Private Equity,
Hedge funds and Other Alternate asset classes. It is also one
of the largest asset management firms in the world with
nearly US $758 billion in assets as of 30 June 2008.
 Investment Capabilities :-
AIG Investments provides investment
solutions to investors around the world through a
variety of vehicles including separately managed
accounts, mutual funds, commingled funds, and
funds-of-funds.
1) Equities
Global, Country and
Regional
Large, Mid and Small Cap
Emerging Markets
Indexed
2) Fixed Income

Global, Country and Regional

Investment Grade
Emerging Markets
Municipal Bond
High Yield/Leveraged Loans
Private Placement
Structured Products
Global Securities Lending

3) Real Estate

Global, Country and Regional

Acquisition, Development and Re-development
Core Plus, Value Added and Opportunistic
Office, Retail, Residential and Industrial
4) Hedge Funds

Hedge Funds-of-Funds
Relative Value
Long / Short
Macro / Commodity
Trading Advisor

5) Private Equity

Private Equity Funds-of-Funds

Venture Capital,
Leveraged Buy-Out,
Mezzanine, Secondary Sponsored Funds
Private Finance
 Investment Process :-
 Credit research based on fundamentals using a
bottom-up approach.
 Issuers selected on various parameters . size, ratings,
liquidity, etc.
 Internal Investment Committee comprising CEO, CIO .
Fixed Income, CIO . Equities, Head . Finance & Risk
Management and Head .Compliance to approve each
issuer.
 Investments will be made primarily in rated
instruments.
STARTING OF BAD
TIME
Why AIG is in Trouble & where it gone wrong :-

AIG auditor have questioned weather it properly valued

it’s derivative portfolio or not & raised new questioned
about accounting practice.
The disclosure sent AIG share by 11.33%
Auditors conclude that AIG have material weakness in its
internal control over financial reporting relating to the fair
valuation of the credit default swap portfolio obligation of
AIG financial Product.
Cut and the downgrade credit rating of AIG by the rating
agencies such as S&P etc.
What is happening with AIG now:-
 A.I.G. was downgraded by the major credit rating
agencies This credit downgrade could require
A.I.G. to post billions of dollars of additional
collateral for its mortgage derivative contracts.
 If collateral A.I.G. does not have. There is
therefore a substantial possibility that A.I.G. will
be unable to meet its obligations and be forced
into liquidation. A side effect: Its collapse would
be as close to an extinction-level event as the
financial markets have seen since the Great
Depression.
 As a large hedge-fund investor, A.I.G. would
suddenly become a large redeemer from hedge
funds, forcing fund managers to sell positions
and probably driving down prices in the world’s
financial markets. More failures, particularly of
Consequences of the crisis :-
 Decrease in the market
capitalization as share
price went down from 52
week high of $70.8 to
$1.65
 Loss to the goodwill
 Loss to the Investors
 Loss to the Employees
Effect on Indian economy & business :-
 AIG has several businesses in India. These include joint ventures in
life and non-life insurance with the Tata Group, an NBFC called
Vivek Hire and Purchase, in which it has 75 per cent controlling
stake, a BPO, a private equity arm and an asset management
company named AIG Global AMC..
 Since the Indian insurance business was highly capital intensive due
to high solvency requirements stipulated by law, AIG may find it
difficult to pull on in Tata-AIG Life Insurance and Tata-AIG General
Insurance.
 “Life insurance requires continuous flow of capital. AIG’s capital
commitments for India will take a hit and will subsequently impact
their growth plans,” said Suresh Ganapathy, analyst, Deutsche
Equities. Insurance apart, AIG’s subsidiary United Guarantee
Corporation has entered into a joint venture with National Housing
Bank (NHB), International Finance Corporation and Asian
Development Bank to set up a mortgage guarantee company, and
even applied to the Reserve Bank of India for the same.
 An NHB official, however, said that now they will have to wait and
watch how the AIG crisis impacts the mortgage guarantee company
plan.
 The financial crisis at American International Group Inc (AIG) does not
pose any immediate threat to its Indian operations, but may have an
impact in a year’s time if there is a disruption in capital flow to the
insurer’s local joint ventures, says a top official at the nation’s insurance
regulator.
 AIG has partnered with the Tata group to launch insurance business in
India and holds 26%—the maximum a foreign partner can hold in Indian
insurance operations at present—in their joint ventures, Tata AIG Life
Insurance Co. Ltd and Tata AIG General Insurance Co. Ltd.
 According to BSE data, American International Group Inc has exposure
or more than 1% in 8 firms, namely Mindtree Ltd (3.27%), Sun Pharma
Advanced Research Company Ltd (2.39%), Gayatri Projects Ltd
(2.07%), Nucleus Software Exports Ltd (1,58%), Ipca Laboratories Ltd
(1.4), AIA Engineering Ltd (1.3%), Bharti Shipyard Ltd (1.14%) and
Federal Bank Ltd (1%).
 Tata AIG's agencies in India are Bates, which handles the creative, and
Madison Media, which manages the media spend. Reports in the media
have speculated that the advertising and promotional costs for Tata-AIG
will be rationalized , though that has not been confirmed or denied
officially by either the company or its agencies.
Fi ve Sys temi c Probl ems Hi ghl ighted by
AIG Cri si s :-
AIG's (AIG) sudden difficulties highlight five systemic problems in the
financial system that, if not corrected, will permit the financial crisis to
perpetuate itself indefinitely, with a domino effect eventually taking
down the whole system.
•Mark to market accounting -The difficulty here is that financial
statements no longer report management's best estimate of actual
results. What is reported is the markets' worst insinuation of what
possible catastrophes could befall the enterprise. When the short and
distort crew starts working on these numbers, nightmares can
become reality.
•Credit default swaps create moral hazard -Credit default swaps are
a form of unregulated insurance against bad debt. All regulated lines
of insurance come with a requirement of insurable interest – for the
simple reason that if it were possible to take out fire insurance on a
property in which the insured had no financial interest, moral hazard
would be created, leading to arson for profit. There is no requirement
of insurable interest on credit default swaps, so short-sellers take out
insurance and then commit the financial equivalent of arson. This
needs to be stopped before the entire village is burned down.
• Short-selling needs to be properly regulated - That would begin with
the enforcement of the rules against naked short selling and the
restoration of up-tick rule. Short-sellers generally have abused their
privilege of free speech and that will have to be curtailed.
• Credit ratings – the rating agencies destroyed their own credibility in
the process of creating the MBS crises. They are now in a knee-jerk
reaction mode, relying on the size of credit default swaps and the
effects of short-selling on stock prices for their guidance. The system
is broken, and for starters any contract which provides for legal
obligations based on a rating from one of the agencies needs to be
rewritten on a rational basis.
5. Availability of Liquidity – banks, after throwing money at anyone and
everyone in the run-up to the present debacle, are now hesitant to
provide credit to anyone who actually needs it. Logically, if the banks
will not perform their proper function, even when drenched in a torrent
of low cost liquidity by the Fed, the government has two options. The
first is jawboning. If that doesn't work, the government will have to set
up an assigned risk system. Banks will be required to establish a pool
of funds, and the government will tell them where to lend it.