Presentation on AIG PRESENTED BY GROUP II (RMAT PART II) ROLL NO. 11-20
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 :- <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>The company went public in 1969. </li></ul>
Brief History of 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
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.
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
Investment Process :- <ul><li>Credit research based on fundamentals using a bottom-up approach. </li></ul><ul><li>Issuers selected on various parameters . size, ratings, liquidity, etc. </li></ul><ul><li>Internal Investment Committee comprising CEO, CIO . Fixed Income, CIO . Equities, Head . Finance & Risk Management and Head .Compliance to approve each issuer. </li></ul><ul><li>Investments will be made primarily in rated instruments. </li></ul>
Why AIG is in Trouble & where it gone wrong :- <ul><li>AIG auditor have questioned weather it properly valued it’s derivative portfolio or not & raised new questioned about accounting practice. </li></ul><ul><li>The disclosure sent AIG share by 11.33% </li></ul><ul><li>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. </li></ul><ul><li>Cut and the downgrade credit rating of AIG by the rating agencies such as S&P etc. </li></ul>
What is happening with AIG now:- <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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 hedge funds, could follow. </li></ul>
Consequences of the crisis :- <ul><li>Decrease in the market capitalization as share price went down from 52 week high of $70.8 to $1.65 </li></ul><ul><li>Loss to the goodwill </li></ul><ul><li>Loss to the Investors </li></ul><ul><li>Loss to the Employees </li></ul>
Effect on Indian economy & business :- <ul><li>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.. </li></ul><ul><li>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. </li></ul><ul><li>“ 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. </li></ul><ul><li>An NHB official, however, said that now they will have to wait and watch how the AIG crisis impacts the mortgage guarantee company plan. </li></ul>
<ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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%). </li></ul><ul><li>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. </li></ul>
Five Systemic Problems Highlighted by AIG Crisis :- <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>
<ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>