AIG: From Wall Street’s Golden Goose to its Fall

American International Group(AIG), Inc provides property and life insurance as well as retirement solutions and other financial services for commercial, institutional, and individual customers across North America as well as internationally. It operates through three different segments: the General Insurance, Life and Retirement, and Other Operations. Its General Insurance segment consists of North America and International. Its Life and Retirement segment has four segments: Individual Retirement, Group Retirement, Life Insurance and Institutional Markets. Its North America and International segments comprise of two product categories: Commercial Lines, which consists of Liability, Financial Lines, Property and Global Specialty, and Personal Insurance, which includes Personal Lines, and Accident and Health.

The General Insurance segment offers commercial and industrial property insurance, including business interruption and package insurance that cover exposure to natural or man-made disasters. It also provides products that range from professional liability insurance to general liability, environmental, commercial automobile liability, workers’ reimbursement, excess casualty, and crisis management insurance products.

AIG is based in Manhattan and is a publicly traded finance and insurance corporation operating in over 80 countries and with over 50,000 employees worldwide. The company, like many others, was hurt by the coronavirus pandemic after policyholders filed claims for lost business. In March 2021, AIG’s retirement services branch introduced new facilities in its mobile app, specifically designed to help nonprofit and public service employees create plans to save for retirement.

AIG Fall History

The housing bubble and AIG’s fall from grace

American International Group (AIG) had to do a lot with the housing bubble of the early 2000s. In 2007, AIG was on top of its game. With $850 billion in assets, 100,000 employees and offices in 130 countries, it was the world’s largest insurance company.  More than 85% of the businesses on the Fortune 500 were customers of AIG, where they registered for general insurance, life insurance, retirement insurance, and several other products. But by mid-2023, the company had only half as many employees and with a much smaller market cap, at $43.34 billion. The reason for falling from its former glory was simply the financial crisis of 2007–2008 when the company almost collapsed.

AIG: “Too big to fail”

The company’s collapse could put at risk the entire global financial system which is why it had to be rescued by the US government. “Too big to fail”, AIG was once known as Wall Street’s “golden goose” because of its excellent credit rating. AIG had a superior rating in the 1980s: AAA as designated by Moody’s in 1986, and Standard & Poor’s in 1983. Its excellent rating allowed the firm to borrow at more competitive prices, invest at higher rates of return and very often in riskier securities and take profit from the spread.

The company was also allowed to go on with its business without much supervision because it was regarded as a safe and reliable company. For example, in 1998, AIG Financial Products, which was an AIG subsidiary, used the company’s AAA guarantee to conduct its business as an over-the-counter dealer of credit default swap. This type of insurance was not as regulated and didn’t require any collateral. By 2003, AIG’s credit default swaps on a senior-rated category of subprime mortgage-backed securities, known as collateralised debt obligations (CDOs), reached $2 billion. By 2005, this value had increased to $54 billion.

AIG and credit default swaps

AIG made billions of dollars selling these toxic subprime-credit default swaps to banks in Europe and the United States. AIG had sold $379 billion worth of credit default swaps up until 2007, inflating the housing bubble further. Financial’s operating income made up 30% of the firm’s total business and amounted to $4.4 billion.

These credit default swaps were meant to provide protection to investors against a default in mortgage-backed securities. But for banks these deals were gold, as they allowed them to lower their credit risk because of AIG’s excellent credit rating.

2005 Scandal

Soon, however, auditors would find out that the company had inflated its earnings by $3.9 billion. The company was criticised for fraudulent transactions and accounting irregularities, and its CEO Maurice “Hank” Greenberg was charged for his involvement in overseeing these inappropriate activities. Three credit ratings agencies, Fitch, Moody’s, and Standard & Poor’s, relegated AIG’s rating to AA+.

2007: The collapse

The market for mortgage-backed securities, like CDOs collapsed. The mortgage market was in a panic. On the 10th of July 2007, $5.2 billion worth of 431 subprime-backed securities were downgraded by credit ratings agencies. Following the downgrade of AIG, its counterparties had to face massive losses from their own subprime activities. With $21 billion AIG credit default swaps in its ownership, Goldman Sachs decided to send a margin call to AIG on $20 billion and an invoice for $1.8 billion in collateral.

In August 2007, AIG paid Goldman Sachs $450 million but soon others would demand their payments including Société Générale, which required $40 million and UBS which asked for $67 million.

While AIG claimed it had the resources to meet all these collateral calls, by February 2008, AIG posted a loss of $5.29 billion—with $2.6 billion from its CDOs.

By September 2008, AIG’s collateral calls reached $23.4 billion, while further downgrades followed.  AIG was basically on survival mode with just $9 billion in cash, enough to keep it going for a week.

The bailout

AIG’s collapse could throw the whole financial system into catastrophe since it traded so many products (lines of credit, derivatives, securities) with the biggest banks in the world. If AIG collapsed, then all these firms would also be at risk.

AIG was initially expected to be bailed out by the private sector. By 15 September, Lehman declared bankruptcy. Who would save AIG? Its stock had bottomed, and no one wanted to assume the risk of bailing out. Eventually, government intervention appeared to be the only possible solution. The Federal Reserve Board of Governors and Federal Reserve Bank of New York President Tim Geithner sent an initial loan of $85 billion and an additional $70 billion. Until 2012, AIG was under federal control, when the Treasury sold its last AIG shares amounting to $22.7 billion. AIG paid $205 billion of its debts, plus interest to the United States.

2024: Financial results AIG will report financial results for the fourth quarter and full year ended 31 December 2023, on 13 February 2024.  EPS is expected to go up from $1.61 previously to $1.65. Revenue is also expected to increase from $11.41 billion to $12.1 billion. From September to November 2023, AIG’s stock increased by 8.7%. According to Nasdaq’s 19 analyst recommendations for AIG, AIG is labelled as “strong buy.”  The average price target based on Nasdaq’s analysts offering 12 month price targets for AIG in the last 3 months is $75.94.

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