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American International Group

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. It was on the Dow Jones Industrial Average from April 8, 2004 to September 22, 2008.

On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. The United States Federal Reserve loaned money to AIG at AIG's request, to prevent the company's collapse, in order for AIG to meet its obligations to post additional collateral to trading partners. The Federal Reserve announced the creation of a credit facility of up to US$85 billion in exchange for warrants for a 79.9% equity stake and the right to suspend dividends to previously issued common and preferred stock. AIG announced the same day that its board accepted the terms of the Federal Reserve Bank's rescue package. This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier.

On October 9, 2008 the company borrowed an additional $37.8 billion from the Federal Reserve Bank of New York.

History

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. After his business became successful in Asia, he expanded to other markets, including Latin America, Europe, and the Middle East. 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. Greenberg focused on selling insurance through independent brokers rather than agents to avoid selling insurance at prices which occasionally became too low (to cover the future payouts) given marketplace competition. A company with agents must pay their salaries even while selling little to no insurance. Instead, with brokers, AIG could price insurance properly even if it suffered decreased sales of certain products for great lengths of time with very little extra expense. In 1968, Starr named Greenberg his successor. The company went public in 1969.

In the mid-2000s AIG became embroiled in a series of fraud investigations conducted by the Securities and Exchange Commission, U.S. Justice Department, and New York State Attorney General's Office. Greenberg was ousted amid an accounting scandal in February 2005. The New York Attorney General's investigation led to a $1.6 billion fine for AIG and criminal charges for some of its executives. Greenberg was succeeded as CEO by Martin J. Sullivan, who had begun his career at AIG as a clerk in its London office in 1970.

On June 15, 2008, under intense pressure due to financial losses and a falling stock price, Martin Sullivan resigned from the CEO position. He was replaced by Robert B. Willumstad, who had served as Chairman of the Board of Directors of the Company since 2006. Willumstad was forced to step down and was replaced by Edward M. Liddy on September 17, 2008.

Financial crisis

September 2008 concerns about stability

AIG's share prices fell over 95% to just $1.25 on September 16, 2008, from a 52-week high of $70.13. The company reported over $13.2 billion in losses in the first six months of the year.

As Lehman Brothers (the largest bankruptcy in U.S. history) suffered a major decline in share price, investors began comparing the types of securities held by AIG and Lehman, and found that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the rates used by Lehman. On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, in an effort to raise necessary capital for the company. The Federal Reserve has hired Morgan Stanley to determine if there are systemic risks to a failing AIG, and has asked private entities to supply short-term bridge loans to the company. In the meantime, New York regulators have approved AIG for $20 billion in borrowing from its subsidiaries.

On September 16, AIG's stock dropped 60 percent at the market's opening. The Federal Reserve continued to meet that day with major Wall Street investment firms to broker a deal to create a $75 billion line of credit to the company. Rating agencies Moody's and Standard and Poor's downgraded their credit ratings on AIG's credit on concerns over continuing losses on mortgage-backed securities, forcing the company to deliver collateral of over $10 billion to certain creditors. The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17. Just before the bailout by the US Federal Reserve, AIG former CEO Maurice (Hank) Greenberg sent an impassioned letter to AIG CEO Robert B. Willumstad offering his assistance in any way possible, ccing the Board of Directors. His offer was rebuked.

Federal Reserve bailout

On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG may draw up to $85 billion. The loan is collateralized by the assets of AIG, including its non-regulated subsidiaries and the stock of "substantially all" its regulated subsidiaries, and has an interest rate of 850 basis points over the three-month London Interbank Offered Rate (LIBOR) (i.e., LIBOR plus 8.5%). In exchange for the credit facility, the U.S. government will receive warrants for a 79.9 percent equity stake in AIG, and has the right to suspend the payment of dividends to AIG common and preferred shareholders. The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act. AIG's board of directors announced approval of the loan transaction in a press release the same day. The announcement did not comment on the issuance of a warrant for 79.9% of AIG's equity, but the AIG 8-K filing of September 18, 2008, reporting the transaction to the Securities and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued to the Board of Governors of the Federal Reserve. AIG drew down US$ 28 billion of the credit-liquidity facility on September 17, 2008. On September 22, 2008, AIG was officially removed from the Dow Jones Industrial Average. On October 3, AIG announced that they had drawn a total of $61 billion from the emergency loan.

Maurice Greenberg, former CEO of AIG, has characterized the bailout as a nationalization of AIG.

The following week, AIG executives participated in a lavish California retreat which cost $444,000 and featured spa treatments, banquets and golf outings. The trip was planned long before the bailout, as a reward for top-performing life-insurance agents, not those involved in the firm's collapse. Less than 24 hours after the news of the party was first reported by the media, it was reported that the Federal Reserve had agreed to give AIG an additional loan of up to $37.8 billion.

Business

In the United States, AIG companies are the largest underwriters of commercial and industrial insurance and AIG American General is a top-ranked life insurer.

Insurance

Life insurance

AIG owns AIG American General, a life insurance company based in Houston, Texas.

Auto insurance

AIG sells auto insurance through AIG Direct. Policies include auto, motorcycle, recreation vehicle and commercial vehicle insurance. AIG purchased the remaining 39% that it did not own of online auto insurance specialist 21st Century Insurance in 2007 for $749 million.

International holdings

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.

Pakistan

Selling automobile insurance in Pakistan since 1949. Principal office is in Karachi and branch offices in Lahore, Islamabad and Faisalabad.

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.

Philippines

AIG owns Philippine American Life and General Insurance Company (Philamlife), the Philippines' biggest insurance company. It has a total asset of P170 billion ($3.6 billion). Philamlife serves over a million customers and maintains the widest network of over 200 offices and sales agencies nationwide.

Philamlife, on October 3, 2008, announced it is among the assets being sold by AID to pay off debt to the U.S. government: "it had been identified for possible divestment along with some of its affiliates." AIG identified Philamlife as one of "extremely valuable" assets intended for sale. Philamlife president and CEO Jose Cuisia Jr. said in a statement: "Philamlife remains to be (a) stable and strongly capitalized organization. Our policy owners and clients can be assured that their interests are protected because of the company's financial strength. A change of ownership will not in anyway diminish policy owners' benefits and security. We will remain focused on daily execution of our business and continue to provide our policy owners and clients with the highest levels of service. Philamlife, the largest and most profitable insurance company in the country and the undisputed market leader for over 60 years, is a crown jewel for AIG and will surely attract local and international interest. Cuisia said groups expressed interest to buy Philamlife, including the Yuchengco family which owns Rizal Commercial Banking Corporation. Another possible contender is the formidable Ayala Corporation that owns Bank of the Philippine Islands, Globe Telecom, and Ayala Land among others. Philamlife has total assets of 170 billion pesos ($3.6 billion), also has interests in banking, asset management and outsourcing. But contrary to the report, Philamlife doesn't have any interest on AIG BPSI, an AIG owned outsourcing company based in the Philippines, that services other subsidiary companies of AIG like American General and others.

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 its 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.

Insurance holdings by state

California

AIG owns more than two dozen companies licensed to offer insurance in California, according to the California Insurance Commissioner. They include 21st Century Casualty Co.; 21st Century Insurance Co.; AIG Casualty Co.; AIG Centennial Insurance Co.; AIG Premier Insurance Co.; AIU Insurance Co.; American General Indemnity Co.; American Home Assurance Co.; American International Insurance Co. of California Inc.; Birmingham Fire Insurance Co. of Pennsylvania; Commerce And Industry Insurance Co.; GE Auto & Home Assurance Co.; GE Indemnity Insurance Co.; Granite State Insurance Co.; Hartford Steam Boiler Inspection and Insurance Co.; Insurance Co. of the State of Pennsylvania; Landmark Insurance Co.; National Union Fire Insurance Co. of Pittsburgh, Pa; New Hampshire Insurance Co.; Pacific Assurance; Putnam Reinsurance Co.; Transatlantic Reinsurance Co.; United Guaranty Commercial Insurance Co. of North Carolina; United Guaranty Credit Insurance Co.; United Guaranty Residential Insurance Co.; and Yosemite Insurance Co.

Pennsylvania

Twenty AIG subsidiaries are licensed to do business in Pennsylvania, including National Union Fire Insurance Co. in Pittsburgh, believed to be the second largest AIG underwriter in the nation. Other subsidiaries include New Hampshire Insurance, Insurance Company of the State of Pennsylvania, Granite State Insurance and New Hampshire Indemnity.

West Virginia

AIG writes property and casualty insurance, life and annuity, and workers' compensation insurance in West Virginia. It has 4.7% of the life insurance market and 2.7% of the property and casualty market, as of the end of 2007..

Holdings

Mortgage lending

Since 2001 AIG has owned American General Finance Inc., an Evansville, Indiana firm with $29 billion of mortgage backed assets and more than 1,500 branches nationwide.

Aerospace

AIG owns International Lease Finance Corporation (ILFC) , the world's largest aircraft leasing company, with hundreds of aircraft including the full range of Boeing and Airbus jetliners, as well as the McDonnell Douglas MD-11 and MD-80 Series. Total assets under lease are $55 billion as of June 30, 2008. Estimates of its value range from $5 billion to $14 billion based on a comparison with rivals.

AIG is one of the owners of London City Airport, along with GE and Credit Suisse; it was purchased for £750m in 2006.

Real estate

AIG/Lincoln was established in 1997 as a strategic partnership between AIG Global Real Estate Investment Corporation, New York, a subsidiary of AIG - American International Group, New York, and Lincoln Property Company, a Dallas based commercial real estate manager... It has developed or is currently developing over 2.2 million square meters of real estate in Poland, Hungary, Romania, Czech Republic, Germany, Italy, Spain, Switzerland, Austria and Russia.

Telecommunications

As of August 2007, AIG Investments (through its member company AIG Capital Partners, Inc.) acquired a 90% stake in Bulgarian Telecommunications Company (BTC) from Viva Ventures Holding GmbH and certain minority shareholders. At the time, the estimated value of BTC was 1.7 billion euros ($2.3 billion).

Ports

As of March 16, 2007, AIG Investments, a division of AIG, completed the purchase of 100% of the stock of P&O Ports North America from Dubai-based Dubai Ports World. At the time, the estimated price was $700m, though AIG did not disclose the exact figure because the number was too low to be deemed significant to the company's asset base.

On July 2, 2007, Marine Terminals Corporation became part of the AIG Global Investment Group through its acquisition by AIG Highstar Capital. MTC provides the shipping community with a comprehensive network of stevedoring, terminal operating and related cargo handling services. Terms were not disclosed.

Skiing

AIG owns Stowe Mountain Resort. AIG's connection to Stowe started when C.V. Starr, the company's founder, invested in the resort in 1946. It is AIG's sole ski business. A $300m, 10 year expansion was started in 2005.

Other holdings

AIG owns Ocean Finance a United Kingdom based company providing home owner loans, mortgages and remortgages.

AIG is the principal sponsor of English football team Manchester United and the Japan Open Tennis Championships.

Subsidiary Holdings

Utilities, Inc.

AIG Retirement Services, Inc.

American General Finance Corporation
American Life Insurance Company
Brazos Capital Management, L.P., a mutual fund manager
HSB Group, Inc., a specialty insurance company
International Lease Finance Corporation
Lexington Insurance Company
SunAmerica Ventures, Inc.

AIG Financial Advisors

Transatlantic Holdings, Inc.

Transatlantic Re (Brasil) Ltda.
Transatlantic Reinsurance Company (NYSE: TRH), 58% owned by AIG

United Guaranty Corporation

Litigation

In November 2004, AIG reached US$126 million settlement with the U.S. Securities and Exchange Commission and the Justice Department partly resolving a number of regulatory matters, but the company still must cooperate with investigators continuing to probe the sale of a non-traditional insurance product.

On June 11, 2008, three stockholders, collectively owning 4% of the outstanding stock of AIG, delivered a letter to the Board of Directors of AIG seeking to oust CEO Martin Sullivan and make certain other management and Board of Directors changes. This letter was the latest volley in what the Wall Street Journal deemed a "public spat" between the Company's Board and management, on the one hand, and its key stockholders, and former CEO Maurice "Hank" Greenberg on the other hand.

Accounting fraud claims

On October 14, 2004 the New York State Office of Attorney General Eliot Spitzer announced that it had commenced a civil action against Marsh & McLennan Companies for steering clients to preferred insurers with whom the company maintained lucrative payoff agreements, and for soliciting rigged bids for insurance contracts from the insurers. The Attorney General announced in a release that two AIG executives pleaded guilty to criminal charges in connection with this illegal course of conduct. In early May 2005, AIG restated its financial position and issued a reduction in book value of USD $2.7 billion, a 3.3 percent reduction in net worth.

On February 9, 2006, AIG and the New York State Attorney General's office agreed to a settlement in which AIG would pay a fine of $1.6 billion.

There is an ongoing fraud investigation that has been launched by the FBI after the collapse in stock price

Corporate governance

Board of directors

Ed Liddy – Chairman of the Board of Directors and Chief Executive Officer (American International Group)
Stephen F. Bollenback – Former Co-Chairman and CEO, Hilton Hotels Corporation
Marshall A. Cohen – Counsel: Cassels Brock & Blackwell
Martin S. Feldstein – Professor of Economics, Harvard University
Ellen V. Futter – President, American Museum of National History
Richard C. Holbrooke – Vice Chairman, Perseus LLC
George L. Miles – President and Chief Executive Officer, WQED Multimedia
Morris W. Offit – Chairman, Offit Capital Advisors LLC
Michael H. Sutton – Consultant
Frank G. Zarb – Senior Advisor and Managing Director, Hellman and Friedman LLC.
Stephen L. Hammerman – Retired Vice Chairman, Merrill Lynch and Co., Inc.
Fred H. Langhammer – Chairman, Global Affairs, and former CEO of The Estee Lauder Companies, Inc.
Virginia M. Rometty – Senior Vice President, Global Business Services, IBM Corporation
James F. Orr, III – Chairman of the Board of Trustees, The Rockefeller Foundation
Edmund S.W. Tse – Senior Vice Chairman, Life Insurance, American International Group

Notes

References and further reading

"An Insurance Giant, Brought Down". New York Times. Retrieved on 2008-09-27. (Graphic)
"Losses in Perspective" New York Times. September 17, 2008. (Graphic of AIG quarterly net profit & losses over five years, comparing Finance vs. Insurance activities.)

Marsh, Bill "A Tally of Federal Rescues". New York Times. Retrieved on 2008-09-28.
Schneiderman, R.M; Philip Caulfield, Celena Fang, Elisabeth Goodridge and Vikas Bajaj, "How a Market Crisis Unfolded: Some of the key events in the upheaval.". New York Times. Retrieved on 2008-09-17. (Graphic and interactive timeline.)