American International Group Essay ⋆ Business Essay Examples ⋆ EssayEmpire

American International Group (AIG) is a financial services company that provides services in four distinct areas: General Insurance, Life Insurance, Financial Services, and Asset Management. Despite its name, AIG was founded in Shanghai, China, in 1919. Its first business area was selling insurance to Chinese customers. The business expanded throughout Asia, where the company maintains a very high profile throughout the region. AIG’s employees in Asia number 62,000, and are located there with offices in the Philippines, Australia, New Zealand, Hong Kong, India, Malaysia, Singapore, China, Japan, Indonesia, Thailand, and Vietnam. AIG also operates in Latin America, Europe, and the Middle East, with a presence in 130 countries.

In 2007 AIG was the 18th largest company in the world and the largest insurance company in the United States. Its revenues for that year totaled over $110 billion with a reported adjusted net income of $9.3 billion. AIG, with 116,000 employees and 700,000 agents, brokers, and sales representatives, serves 74 million customers worldwide.

Although it had lost $5 billion in the last quarter of 2007 and despite warnings of impending problems from AIG’s auditor (PricewaterhouseCoopers), Martin Sullivan, AIG’s CEO, predicted that 2008 would be a good year. The prediction proved to be inaccurate. AIG suffered a $7.8 billion loss in the first quarter. In May the company would suffer the first of two downgrades from Moody’s in that year. Sullivan resigned in June 2008.

Although several parts of the company were profitable, the London branch had been heavily involved in mortgage-backed securities and AIG, like many financial services groups (Lehman Brothers being one of the most visible examples) would suffer for its overextension in this area. The losses as reported by the London branch totaled $25 billion.

In September, the ratings agencies Standard and Poor’s and Moody’s notified AIG that it would be reviewed and its ratings downgraded again. AIG made attempts to raise capital and failed. The value of its shares would reach $1.25 from a 52-week high of $70.13. At this point, because it was believed that the impact of AIG’s bankruptcy on the international finance markets would be too great, the U.S. federal government intervened. It loaned the company money in what would be the largest bailout of a private company in U.S. history. In return for equity and the right to cancel payment of dividends, the United States made an initial loan of $85 billion. Two months later, the U.S. Treasury said that it would provide more funding for a total of $150 billion in assistance.

The financial problems had been preceded by investigations into AIG’s business practices. A federal investigation led to the payment of $126 million in fines to the U.S. Securities and Exchange Commission and the Department of Justice. In 2005 the U.S. federal government questioned some financial transactions that had the effect of improving the appearance, but not the substance, of the company’s earnings. This issue would be brought up three years later when there were questions about what AIG had done with the money that it had been loaned by the federal government. The following year AIG paid a fine of $1.6 million to the State of New York for being involved in a case in which insurance customers were being steered to AIG on the basis of payoffs.

In October 2008, shortly after AIG had received an additional loan of $37.8 billion, its executives went on a retreat in California that cost $444,000, followed by an executive English hunting trip costing $86,000. These reports were accompanied by estimates that AIG had already spent $90 billion of the first $123 billion. Executive pay and bonuses were another story that was emerging. Joseph Cassano, considered by many to be most responsible for placing AIG in such a poor position, was receiving a $1 million monthly consultant fee. Testifying before Congress, former CEOs Sullivan and Robert Willumstad stated that they would not have done anything differently when they had managed the company. AIG stated that there had been no wrongdoing, that its meetings had been mischaracterized and were necessary for its sales executives to remain competitive. In 2008 AIG was suffering a public relations fiasco along with its financial crisis.

Bibliography:

AIG, Annual Report 2007, ezodproxy.com/AIG/2008/AR2007/HTML2/aig_ar2007_0018. htm (cited March 2009);
AIG, www.aigcorporate.com/corpsite (cited March 2009);
Ronald Kent Shelp, Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG (Wiley, 2006);
Mary Williams Walsh, “A Question for A.I.G.: Where Did the Cash Go?” New York Times (October 30, 2008);
Peter Whoriskey, “AIG Spa Trip Fuels Fury on Hill,” Washington Post (October 8, 2008).

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