Why AIG was too big to fail

The American International Group, Inc. (AIG) is a global insurance organisation headquartered in New York and London. Founded in 1919 as American Asiatic Underwriters in Shanghai, China, today AIG member companies deliver a broad scope of property casualty solutions, life insurance, retirement solutions and other financial services to clients in some 70 countries and jurisdictions. AIG common stock is listed on the New York Stock Exchange.

2008 financial crisis

AIG has faced many challenges throughout its history, most notoriously its near collapse in 2008, threatening the financial stability of the entire US. In fact, AIG became one of the beneficiaries of a government bailout of various institutions considered “too big to fail”.

What brought AIG to near insolvency?

Around 2008, a new financial product hit the market, called collateralized debt obligation or CDO. The premise of this product was to combine different kinds of debt (regardless of risk) called tranches into one bundle which was then sold to investors. CDOs were created by a significant number of big institutions holding mortgage-backed securities. However, many were comprised of subprime loans, i.e., mortgages granted during the housing bubble to people who couldn’t afford to pay them back.

AIG Financial Products (AIGFP), a division of the company, sold insurance against investment losses. AIGFP went on to leverage the trend and insured CDOs against default using a product called the credit default swap. The assumption at the time was that paying out this insurance would be highly improbable as AIG considered that defaults on these loans were likely insignificant. This was despite a large portion of the insured CDOs being made up of bundled mortgages, with the lowest-rated tranches consisting of subprime loans.

As the housing bubble burst and foreclosure on home loans increased to unprecedented highs, AIG was forced to make good on its promise. As a result of record payouts, AIGFP incurred losses totalling approximately $25 billion. Further financial losses came about because of the company’s lowered credit rating, obliging AIG to post collateral for its bondholders.

Why was American International Group considered too big to fail?

AIG was considered too important to the global economy for several reasons to risk its closure. In particular, many different funds (mutual, pension, hedge) were either insured by the company and/or invested in it. In addition, CDOs held by investment banks that were insured by AIG stood to lose billions of dollars, for e.g., the Goldman Sachs Group, Inc. Further, money market funds were also under threat of incurring large losses if AIG collapsed as many had invested in AIG bonds.

As a result, the U.S. government stepped in to mitigate the situation through a bailout. According to the U.S. Department of Treasury, during the financial crisis, the government’s overall support for AIG totalled about $182 billion. That included nearly $70 billion that the Treasury committed through TARP and $112 billion committed by the Federal Reserve Bank of New York (FRBNY).

American International Group today

AIG has since moved on from the 2008 crisis and remains a major player in the insurance industry today.

AIG 4th quarter and full year 2022 results

According to an AIG press release on 15 February 2023, these are some notable results announced:

• General Insurance delivered the strongest underwriting profitability AIG has ever achieved as full-year 2022 underwriting income nearly doubled to $2.0 billion from the prior year.

• General Insurance 4th quarter combined ratio improved 2.5 points from the prior year quarter to 89.9%; full year combined ratio improved 3.9 points to 91.9%

• AIG repurchased $779 million of common stock and redeemed $1.8 billion of senior unsecured notes in the fourth quarter. For the full year, AIG returned over $6.1 billion to shareholders through $5.1 billion of common stock repurchases and $1.0 billion of dividends. Outstanding common shares at year-end 2022 were 10% lower than the prior year.

Fitch Ratings

On 27 February 2023, Fitch Ratings upgraded the Insurer Financial Strength (IFS) ratings of the rated property/casualty (P&C) insurance subsidiaries of American International Group, Inc. (AIG) to ‘A+’ (Strong) from ‘A’ (Strong). Fitch has also affirmed AIG’s Long-Term Issuer Default Rating (IDR) at ‘A-‘, Corebridge Financial Inc.’s Long-Term IDR at ‘A-, and the IFS ratings of its life insurance subsidiaries at ‘A+’ (Strong).

Blackstone and AIG

February 2, 2023, Bloomberg article reported that Blackstone Inc. agreed to acquire AIG’s $3.6 billion collateralized-loan obligation assets, according to people with knowledge of the matter. This purchase is said to make Blackstone the largest CLOs manager in the $1.2 trillion global market that repackages leveraged loans into bonds. Together with AIG’s CLOs, Blackstone will reportedly have around $51 billion of such assets under management, slightly edging past Carlyle Group Inc.

AIG technology initiatives

The company’s ICT spending in 2021 was reported at $2.3 billion, with a large part of this intended for the acquisition of hardware, software, and ICT services. The company is said to be focusing on emerging technologies like blockchain, cloud, and big data to enhance operational efficiencies, simplify operating processes and improve product offerings. This includes the use of advanced technologies for data intelligence and predictive modelling to predict risk.

American International Group Inc. (AIG) sports sponsorships

AIG is a title sponsor of the AIG Women’s Open, an internationally renowned women’s golf championship, with a focus on exceptional women athletes. The company is also the official insurance sponsor of the PGA of America, who together seek to grow the game of golf and support PGA Member professionals.

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