Aig Financial Crisis

Institute of Management Technology, Nagpur

Subject: International Financial Management

Interim Review Industry – Insurance Company – AIG

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Submitted to: Dr. Gajavelli VS

Submitted by: Group 3

Shaan Vasavada Jinto Anthony Joseph Pragati Khatuwala

Table of Contents

1. Introduction

1. Objective of the study

1. Statement of the Problem

1. Presentation of Study and Findings

1. Managerial Applications/ Implications

1. Conclusions & Implementation

1. References

About the company

American International Group, Inc., also known as AIG, is an American multinational insurance corporation with more than 88 million customers in 130 countries. AIG employs over 64,000 people in 90 countries. The company operates through three businesses: AIG Property Casualty, AIG Life and Retirement and United Guaranty Corporation (UGC). AIG Property Casualty provides insurance products for commercial, institutional and individual customers. AIG Life and Retirement provides life insurance and retirement services in the United States. UGC focuses on mortgage guaranty insurance and mortgage insurance. AIG also focuses on global capital markets operations, direct investment and retained interests.

AIG was a central player in the financial crisis of 2008. It was bailed out by the federal government for $180 billion, and the government took control. The Financial Crisis Inquiry Commission (FCIC) of the US government concluded AIG failed primarily because it sold massive amounts of insurance without hedging its investment. Its enormous sales of credit default swaps were made without putting up initial collateral, setting aside capital reserves, or hedging its exposure — a profound failure in corporate governance, particularly its risk- management practices."

Mission & Vision for AIG:

"As a global financial services organization, we have committed our resources to developing products and services that address the needs of our clients as well as promote a corporate culture that values integrity, diversity, innovation and excellence."

Objective of the study

The objective of the study is multi-fold. As outlined in the proposal, our main purpose is to study and analyze the following:

1. Understanding AIG's decision to return $25 billion to shareholders over the next two years as Chief Executive Officer Peter Hancock divests assets.

• Improve cost management
• Increased volatility in Market

1. Being part of the insurance sector there are market risks associated, this will analyse the risk management of the company.

1. Analysis of the strategies of the CEO to increase volatility and decrease liquidity. Implementation of strategies to maximise the shareholder’s value.

1. Analysis of risks and uncertainties regarding fluctuations in the earnings, revenue and profits, and the company’s decision to hedge funds worth $ 11 Billion.

1. The strategies to be adopted by the company to silence its critics as the company is under scrutiny from activist investors.

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Presentation of Study & Findings

American International Group Inc. (AIG) plans to return $25 billion to shareholders over the next two years as Chief Executive Officer Peter Hancock divests assets and seeks to boost returns to protect his job amid criticism from activist investor Carl Icahn.

Hancock will offer a 19.9 percent stake in the mortgage insurer United Guaranty Corp. to the public in a step toward a complete exit of that business, AIG said Tuesday in a statement. The insurer also is reorganizing into “modular” business segments to create flexibility to sell or take public additional units if they underperform or draw attractive bids. Hancock’s vow on shareholder returns follows a total of about $12 billion in 2015, which included buybacks and dividends.

David Havens, a debt analyst at Imperial Capital, saidthat the $25 billion capital return is eye-catching to say the least. They are navigating a middle ground that preserves most of AIG as it is now, but offers the flexibility to spin off or sell units in the future.

Divestitures, Reinsurance

Profits from operating units and tax benefits will contribute up to $10 billion of that sum, AIG said in a slide show, while proceeds from divestitures will add as much as $7 billion. The company said reinsurance deals, in which other firms take on risks that were initiated by AIG on life contracts, could provide $4 billion or more. AIG also projected benefits from reducing leverage.

“We’re in the business of making large, long-term promises, and so we don’t expect all stakeholders to be as happy as others, but we think we’ve chosen a path here for sustainable value creation. There are plenty of financial intermediaries that would love a fire sale, and we don’t want to play into their hands at all. We want to have a thoughtful reshaping of the company.”- Hancock said

Legacy Portfolio

The CEO also announced the creation of a “legacy” portfolio of assets, encompassing about $22 billion of adjusted equity that he will sell or wind down. Hancock designated Charlie Shamieh, who oversaw life, health and disability operations, as legacy CEO.

Shamieh’s new portfolio includes shares in China’s PICC Property & Casualty Co. It also contains a so-called life-settlements book. In life settlements, AIG buys insurance policies from individuals and pays premiums until they die, when the company collects the pay-out. The arrangement becomes less profitable for AIG the longer the person survives, and the company has been burned by losses on the contracts in prior quarters.