American International Group, Inc.
Summary
- ■■ American International Group (AIG), headquartered in New York is composed of member companies that offer a range of commercial and personal insurance products through a variety of distribution channels in approximately 130 countries.
- ■■ For fiscal year 2003 AIG's revenues were $81,300 million, an increase of 20.5% on the previous year's results of $67,400 million. This increase was due to the growth of the company's general and life insurance premiums.
- ■■ AIG has had one of the better track records in the financial world; it enjoys superior financial strength, established global presence, and strong earnings growth prospects.
" ■■ Personal insurance has suffered from poor performance over the past several years largely due to higher catastrophe losses in populated areas, inflationary pressures, fraud, mould claims, and most of all, inadequate pricing caused by competition.
Overview
American International Group (AIG), headquartered in New York is composed of member companies that offer a range of commercial and personal insurance products through a variety of distribution channels in approximately 130 countries. The company operates domestic and foreign general insurance, domestic and foreign life insurance, financial services, and retirement services and asset management. The general insurance business includes underwriters of commercial and industrial insurance, an international property-casualty network, a personal lines business that concentrates on auto insurance and high-net-worth clients, and mortgage guaranty insurance activities.
AIG's life insurance group includes the company's AIG American General subsidiary in the United States, as well as other operations in around 70 countries. The company distributes its products through banks, retail stores, and the Internet. Other life insurance companies include AIG Edison Life Insurance and AIG Annuity Insurance.
The financial services business incorporates companies that operate in the fields of aircraft finance, capital markets, consumer finance, and insurance premium finance. The company's retirement services and asset management group consists of the AIG SunAmerica, AIG VALIC, and AIG Advisor Group businesses, which issue annuities within the US. Another group company, AIG Global Investment Group, is involved with third-party institutional, retail, and private fund assets, as well as AIG's insurance invested assets.
For fiscal year 2003 AIG's revenues were $81,300 million, an increase of 20.5% on the previous year's results of $67,400 million. This increase was due to the growth of the company's general and life insurance premiums. Net income for 2003 was $9,200 million, an increase of 68% compared with 2002.
History
AIG's history starts in 1919 in China when an American entrepreneur, Mr Starr, opened a small insurance agency called American Asiatic Underwriters (AAU). Not long after, Mr Starr set up Asia Life Insurance to market life insurance to the Chinese population. Within 10 years, the company had established offices and agencies across China and in Hong Kong, Indochina, Indonesia; Jakarta, Indonesia; Kuala Lumpur, Malaysia; and the Philippines. Starr made his first move into the U.S. market with the formation of American International Underwriters (AIU) in 1926. In the 1930s AIU established a regional headquarters in Havana. Offices in half a dozen Latin American countries followed in rapid succession, and by 1945, AIU's premium income in Latin America had surpassed that in Asia.
As political unrest spread in China and East Asia, Starr moved his companies' headquarters to New York in 1939. Two years later virtually the entire Far Eastern operation was brought to a halt by the Pacific war. Following the war, AIU entered Japan by invitation of the American military, initially to insure property of U.S. troops. By 1951, the ban on foreign companies underwriting general insurance was lifted and AIU in Japan began a period of significant growth. AIU was established in Germany in 1946 in much the same way.
In 1979, AIG was the first western insurance organisation to establish joint ventures with Hungary, Poland and Romania. In 1980, a joint venture with the People's Insurance Company of China marked the precursor of its return to China a decade later. The formation of AIG Financial Products and AIG Trading occurred in 1990, as well as that of International Lease Finance.
In January 2001, AIG announced that one of its subsidiaries had purchased the issued share capital of Norwich Union Holdings (Canada) Limited, itself a subsidiary of the UK-based CGNU (now Aviva), for approximately C$159 million in cash and special dividends. On May 14, 2001, AIG announced the purchase of American General for $23 billion in stock. Prudential dropped the lawsuit it filed in April 2001 against AIG that accused the New York insurer of interfering with its own contract to buy American General, violating securities laws and mischaracterising its offer.
In August 2003, AIG completed the acquisition of GE Edison Life Insurance in Japan. The group's existing life insurance businesses operated in the country through American Life Insurance (ALICO Japan), and AIG Star Life Insurance. AIG was the largest foreign property-casualty insurance organisation in Japan, operating through the Japanese branches of AIU Insurance (AIU) and American Home Assurance. In the same month, the company acquired GE's U.S.-based auto and home insurance business.
In March 2004 the company formed AIG Higher Education Risk Solutions, a division of the company's property and casualty insurance subsidiaries, to provide property-casualty insurance solutions that cover the liabilities of the higher education market.
SWOT analysis
Strengths
Strong financials: AIG has had one of the better track records in the financial arena; it enjoys superior financial strength, established global presence, and strong earnings growth prospects. In 2003, its operating profits rose dramatically, driven by growth in its business insurance line and particularly from the recovery from the effects of 2001 World Trade Centre attacks and the global recession that followed. Such financial strength means that even in the times of economic slowdown, AIG is able to remain
competitive and achieve profitability. For fiscal year 2003 AIG's revenues were $81.3 billion, an increase of 20.5% on the previous year's results of $67.4 billion.
Global presence: AIG is a truly global company, it is the largest commercial and industrial underwriter in the United States and the leading domestic provider of property and casualty and specialty insurance. It also possesses the fifth-largest retail securities sales force in the United States. It holds considerable overseas operations, with 43.2% of revenues coming from its life insurance business and 24.4% coming from abroad, mainly Asia.
Wide and diverse product offering: AIG has a wide range of product and business lines, including motor, property and casualty, life, mortgage guaranty, annuities, trading, and aircraft leasing. It also has a growing presence in the financial services and asset management fields.
Foreign life assurance: the foreign life insurance business is AIG's most important and unique operation. Roughly two-thirds of AIG's worldwide life-insurance earnings originate from outside the United States, so this area is an important focus for investors. With a strong presence in many developing nations, AIG began cross-selling a range of financial products in those markets. In 1995 the company formed the Asian Infrastructure Fund, a mutual fund for individual investors. The following year AIG acquired SPC Credit, a consumer and commercial finance company with offices in the Philippines, Taiwan, and Thailand.
Weaknesses
Personal insurance: personal insurance has been suffering from poor performance over the past several years largely due to higher catastrophe losses in populated areas, inflationary pressures, fraud, mould claims, and, most of all, inadequate pricing caused by competition.
The group's increased level of disclosure: this has reinforced investor perceptions that the company is almost too vast and complex to accurately project its future growth potential. AIG is already the world's largest primary commercial property and casualty insurer, the largest U.S. life insurer in terms of premiums and deposits. AIG has a reputation of being difficult to understand due to its size and complexity and there are concerns that, as the company moves to increase transparency, investors, unaware of the extent of AIG’s portfolio, may discover that AIG is more than just a property and casualty insurer.
Opportunities
Expansion in Asian markets: the Asian life insurance market is one of the potential locations where AIG could expand its growth even further. Opportunities are considerable, as Japan is deregulating the insurance market, and China is experiencing strong economic growth. China itself offers AIG excellent prospects as the 500 million-strong Chinese middle-class population is largely untouched by the life insurance industry.
Industry consolidation: this has meant that AIG has faced reduced competition, especially in the domestic life insurance and wealth management markets. The reduction in competition will provide AIG with the opportunity to increase its sales and market share as competitors exit the market.
Expand electronic business offering: AIG Technologies is a leading supplier of information technology solutions, including applications geared to the insurance industry, data centre managed operations and consulting services. AIGT's data centre facilities combine to form an innovative, world-class infrastructure that affords clients with extensive, on-demand processing power, complete redundancy, disaster recovery and critical business contingency opportunities. In the current climate many companies are looking for ways to streamline their increasingly diverse insurance and financial offerings. The AIG group has also developed its own web-based facilities further, which will help to streamline processes while increasing the speed and accuracy of the company's reporting procedures.
Threats
Slow down in life insurance: AIG's life operation, including its retirement savings business, threatens to slow soon. Although earnings are strong in many of the individual project areas, the top line picture for AIG's life and annuity business is not nearly as bright as the earnings growth has been.
Government regulation: AIG's insurance business is subject to comprehensive regulation and supervision in all countries in which the company operates. Changes in existing insurance laws and regulations may affect the ways in which the group conducts its business and the products it may offer. In addition, changes in pension and employee benefit regulation, social security regulation, financial services regulation, taxation and the regulation of securities products and transactions may also adversely affect the company's ability to sell new policies or its claims exposure on existing policies.
Strong competition: AIG faces strong competition from industry rivals across many of the markets that it operates in. The company's main competitors include American International Group, Power Financial, Prudential, Sun Life Financial, Lincoln National, Nationwide Financial Services and Principle Financial Group. All of these companies could combine to take away sales and market share from AIG.
Market fluctuations: fluctuations in the securities markets have adversely affected and may continue to adversely affect AIG's profitability, as well as its sales of pension products, variable annuities and variable life insurance. The levels of volatility in the markets in which the company invests and the overall investment returns earned in those markets will also continue to threaten and affect profitability.
