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Aig Incomplete

In: Business and Management

Submitted By scarface06
Words 1258
Pages 6
Title: American Insurance Group (AIG)
Group Name:

Date:
Executive Summary:
Company Background
American International Group, Inc. (AIG) is a world leader in insurance and financial services. It is a holding company for a network of subsidiaries primarily engaged in insurance and insurance-related activities, including property, casualty, life, financial services, retirement savings products, asset management, and aircraft leasing. It is headquartered in New York City, and operates in more than 130 countries and jurisdictions. In 2006, AIG had sales of $113 billion and 116,000 employees (Saporito, 2009). According to the 2008 Forbes Global 2000 list, AIG was once the 18th-largest public company in the world. Its common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.
AIG faltered in America’s sub-prime mortgage crisis. It had traded heavily in credit default swaps and could not meet its obligations. In that case, United States government came to its rescue with an $85 billion bailout on September 16, 2008. As of March 2009, AIG has taken a major step toward cleaning up its image by reorganizing its insurance units under American International Underwriters. It is the foreign general insurance segment of AIG. AIU and its subsidiary brands are now distinct from AIG (National News, 2009). The holding company, itself, is currently undergoing rebranding that includes a new name, which is expected to be revealed in the near future. In the middle of 2011, it infused additional capital of P300 Million (US$7 million), making it a company with one of the highest paid-up capital in the non-life insurance industry. In addition, it already paid a total of P685 million (US$16 million) in claims in 2011. As of August 6, 2015, American International Group, Inc. announced that its mortgage insurance business United Guaranty Corporation (UGC) obtained $298.9 million of indemnity reinsurance from Bellemeade Re Ltd., a Bermuda-domiciled special purpose insurer, for a portfolio of mortgage insurance (MI) policies issued from 2009 through the first quarter of 2013.

Dagdagan if meron pa maidadagdag. ^_^

Introduction:

Anong bet nyo iintro? About similar cases with AIG? How good management works? Any suggestion?

This study will be a significant endeavor in promoting good standards of company as well as their employees. This study will also be beneficial to the students and professors in accounting synthesis, corporate governance and related areas when they employ effective learning in setting particularly in different concepts related to the management accounting. By understanding how a too-big-to-fail company like AIG had failed, the students and the professor would be aware on what it means of corrupted management. Moreover, this research will provide analyses and recommendations on how to evaluate the performance of a certain company in accordance to corporate management. It will also serve as a future reference for researchers on the subject of accounting.

Presentation of Data:

AIG Revenue
Quarterly Results (in millions) | 2009 | 2008 | 2007 | 1st Quarter | 20,458.0 | 14,031.0 | 30,645.0 | 2nd Quarter | N/A | 19,933.0 | 31,150.0 | 3rd Quarter | N/A | 898.0 | 29,836.0 | 4th Quarter | N/A | -23,758.0 | 18,433.0 | Total | 20,458.0 | 11,104.0 | 110,064.0 | from MSN Money, July 20, 2009

Analysis:
Many factors led to the ultimate takeover of American International Group (AIG) by the U.S. Federal Reserve in September 2008.

Credit Derivatives. AIG’s trouble began when its Financial Products (FP) unit started selling credit default swaps. AIG FP developed a portfolio of $2.7 trillion in credit derivatives (Leonard, 2008). During that time, it became liable for much more money than it could pay out if the portfolios were to default. In 2008, AIG FP piled up $40 billion in losses related to its dealings in complex mortgage bond derivatives.
Poor Regulatory Oversight. Regulators never imagined the extent of the looming defaults. AIG's uncollateralized insurance business was regulated by Washington's Office of Thrift Supervision, whose task is to watch over savings-and-loan companies, not a global insurer. But it resulted that it did not watching AIG.
No Collateral Requirements. AIGFP is known with its high credit rating but it wasn't required to stockpile reserves to cover potential losses. Once the company lost its top credit rating, still it did not stopped writing swaps and hedged, or reinsured.
Careless Risk Management. When it was initially writing all that CDS protection, AIG thought it wasn't possible to take any losses because its contracts were supporting such highly rated, highly protected slices. Because of that, it lost more than $10 billion in 2007 and $14.7 billion in the first six months of 2008.
Greed. By 2007, the CDS market had grown into a $70 trillion annual business. In selling CDS, AIG was receiving huge payments. AIG's FP unit was an endless money machine, adding $6 billion of riches to AIG's reserves from 1988 until 2005.
Dangerous Employee Incentives. In 1987, Howard Sosin founded AIG FP and remained there until 1993. When he was first hired, he was offered a 20 percent stake in the FP unit and 20 percent of its profits. While many hedge fund managers receive this type of incentive program, this a conflict of interest. This causes a manager to throw caution in order to make a profit.
Huge Bonus Payouts. After its bailout, AIG’s payout of retention bonuses, not to mention luxury trips and other perks, has caused AIG further failure in the form of a public relations fiasco.

Conclusion and Recommendation:

In the company like AIG, it has lots of work to do between the CDS and securities lending. The government’s burden of AIG will not go away anytime soon. In the businesses it wants to keep, like commercial insurance, competitors see an opportunity to grab market share.
During the down fall of AIG, the AIG bailout has helped stabilize the financial markets. It helped AIG redeem some of its derivatives contracts, getting them off its books and out of the system. Because of that, AIG’s insurance businesses became stable. If AIG had been forced to liquidate, it would have affected its insurance units and millions of policyholders. However, there are things that are not working in AIG that leads them to file Chapter 11 bankruptcy.
Some of those are giving bonuses to the people who brought down AIG is a perversion of justice. Officials at the Federal Reserve and the Treasury Dept. should have put terms into the original bailout agreement that prevented this; AIG has used much of its government aid money to refund money to big banks and other “counterparties,” to cash out some of those credit-default swaps and reduce AIG’s liabilities; and taxpayers keep learning the terms of the AIG bailout well after the release of facts.
Therefore, AIG and other companies who experienced this kind of crisis must be aware and inform on how the company works. They must retain the talent and reward properly. During downsizing and mergers, those employees who push a company forward are the most valuable. Also, transparency is essential. Without transparency, as in AIG's case, there is miscommunication, scandal and inefficiency, which ultimately impact the entire chain. Lastly, the companies must gain shareholder trust. It must be Open up more to the public, offer added value and education, and build trust. In having a business, it is not only about the company itself, but it also need to build rapport in both inside and outside the company.

References and Appendices:

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