American International
Group
Tom Olson
Tommy Yip
Gordon Tang
Michael Chiu
Paul’s Sugiarto
S
Agenda
S Industry Overview
S Regulations
S Company Overview
S Financial Statement
S Risk Factors and Management
Industry Overview
S
The Insurance Industry
S Insurance companies generally have two branches of
business
S Life & Health Insurance
S
Individual’s well being
S Property and Casualty Insurance
S
Protection against losses of a physical property, or its ability to
generate income
Global Insurance Market
S $3,671.7 billion in gross premiums in 2009
S Life insurance makes up approximately 57% of the insurance
industry
S Growth rate of 2.7% per year
Global Insurance Market
$bn
2005
3,301.4
-
2006
3,517.8
6.6
2007
3,676.1
4.5
2008
3,701.8
0.7
2009
3,671.8
(0.8)
CAGR,
2005–09
2.7
Total Gross Premium
$3,800
$3,700
$3,600
$ billion
Year
Growth
(%)
$3,500
$3,400
$3,300
$3,200
$3,100
2005
2006
2007
Year
2008
2009
Global Insurance Market
S Projected to have gross premiums of $5,082.7 billion in
2014
S Average growth rate of 6.7% per year, 38.4% up from 2009
Global Insurance Market
$bn
2009
3,671.1
(0.8)
2010
3,751.8
2.2
2011
3,989.5
6.3
2012
4,276.8
7.2
2013
4,654.2
8.8
2014
5,082.7
9.2
CAGR,
2009–14
6.7
Projected Total Gross Premium
$ Billion
Year
Growth
(%)
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
2009
2010
2011
2012
Year
2013
2014
Top 10 Global Insurance
Companies
Global Top 10 Insurance Companies
Market Share by Net Earned Premium:
2009
Company
Share (%)
AXA
3.2
Assicurazioni Generali
2.4
Allianz Group
2.3
American
International Group
1.8
Assicurazioni Generali
Munich Re Group
1.5
Allianz Group
Aviva Plc
1.4
Zurich Financial Services
1.3
CNP Assurances
1.2
ING Group
1.1
Prudential plc
0.9
Others
83.0
TOTAL
100.0
AXA
American International
Group
Munich Re Group
Aviva Plc
Zurich Financial Services
CNP Assurances
Performance for Top 5 Insurance
Companies, 2009
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
-20.00%
Operating Margin
Return on Average Assets
Return on Average Equity
AXA
Allianz
3.60%
0.50%
8.60%
4.70%
0.56%
11.64%
Assicurazioni
Generali
1.40%
0.30%
9.40%
American
International Group
-11.40%
-1.30%
-17.90%
Munich Re Group
4.70%
1.10%
11.80%
US Insurance Market, 2010
S $1.0 trillion of gross premiums
S 58% in Life & Health ($581 billion)
S 42% in Property and Casualty ($426 billion)
S 2,689 Property and Casualty insurance companies
S 1,061 Life & Health insurance companies
S The U.S. insurance industry employs 2.2 million people,
including insurers, brokers, agents, etc
Top 5 US Property and Casualty
Insurance Companies, 2010
Group
Revenues
Assets
Berkshire Hathaway
$136,185
$372,229
American International Group
$104,417
$683,443
State Farm Insurance Cos.
$63,177
$192,794
Liberty Mutual Insurance Group
$33,193
$112,350
Allstate
$31,400
$130,874
Regulations
S
Regulations
S The scope of regulation extends beyond the prudential
oversight of insurance companies and their capital adequacy
S Ensures policy holders (person buying the insurance) are
protected against
S bad faith claims
S premiums are not unduly high
S policies issued meet a minimum standard
Regulations
S Insurance companies (in US) are not subject to federal
regulation and only state level regulation exists for
insurance companies
S Therefore, regulation is different from state to state
S State agencies usually called Department of Insurance with
their head officials named Insurance Commissioner
S Insurance commissioners are members of NAIC
What is NAIC
S National Association of Insurance Commissioners
S Formed in 1871
S Non-profit organization which seeks to organize the
regulatory and supervisory efforts of the various state
insurance commissioners from around the United States
S Forum for the creation of model laws and regulations
S Is NOT a regulator!
NAIC
S Acts at the national level to advance laws and policies
supported by state insurance regulators
S Responsible for creating the Statutory Accounting
Principles (SAP), which is required accounting for
insurance companies, in addition to the state GAAP
S SAP is notable for its very conservative valuation
methods—aiming to keep reserve high in order and keeping
the insurance companies solvent
Company Overview
S
AIG
S American International Group, Inc. (AIG) is a leading
American multinational insurance organization serving
customers in more than 130 countries
S In 2000, AIG was the 29th-largest public company in
the world; listed on the DOWJONES (2004-2008)
S AIG common stock is listed on the New York Stock
Exchange, as well as the stock exchanges in Ireland and
Tokyo
Businesses
S Chartis Insurance
S International Lease Finance Corporation
S AIG Bank
S AIG Direct
S SunAmerica Financial Group
S United Guaranty Corporation
Chartis Insurance
S World leading property-casualty and general insurance
organization
S Provides the following insurances:
S
S
S
S
S
S
Executive Liability
Environmental
Alternative Risk and Collateral
Travelling
Workers' Compensation
Property
Global Marine and Energy
S Casualty
S Accident and Health
S Specialty
S
International Lease Finance Corporation
S The world's largest aircraft lessor by value
S Leases Boeing and Airbus aircraft to major airlines
worldwide such as American Airlines, Alaska Airlines,
Emirates Airlines, Air Canada, Cathay Pacific, Lufthansa
and other airlines
S September 2, 2011 - AIG filled with the SEC to make an
IPO
AIG Bank
S Offers service on mortgages for refinance and
purchase, home equity lines of credit, money market
savings, & certificates of deposit
S Provides specialized Federal Deposit Insurance
Corporation insured deposit products, loan products,
and banking services to the core customer groups
nationwide
S Serving consumers, small businesses, AIG
policyholders and AIG employees
AIG Direct
S Marketing name: Matrix Direct
S Provides reliable and affordable term life insurance
S Offers customized, personalized life insurance
SunAmerica Financial Group
S A group of companies that consist of financial advisors and
insurance agents
S The members:
United Guaranty Corporation
S Provides mortgage insurance products and services to
mortgage lenders and credit unions of all sizes.
S United Guaranty Residential Insurance Company
S United Guaranty Residential Insurance Company of North
Carolina and United Guaranty Credit Insurance Company
S United Guaranty Commercial Insurance Company of North
Carolina
S United Guaranty Services, Inc.
S United Guaranty Mortgage Indemnity Company
AIG Stock Info as of November 4, 2011
AIG Stock Info – Last 5 years.
The AIG Crisis and Bailout
S AIG Financial Products Corp. (AIGFP)
S September 2008: Credit ratings downgraded below "AA"
levels
S The US Federal Reserve Bank created an $85 billion credit
facility
S The US Government would be entitled to 79.9% equity
ownership of AIG (preferred stock)
The AIG Crisis and Bailout – Cont.
S November 2008, came up with :
S Maiden Lane II (Lending Division)
S Maiden Lane III (Credit default swap Division)
S The US Treasury purchased $40 billion of newly issued
AIG perpetual preferred shares through TARP
S By 2009: $182.5 billion available financial support
S Sold a few subsidiaries and assets
Financial Statements
S
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet Derivatives
Balance Sheet Derivatives
Income Statement
Income Statement
Income Statement Derivatives
Non Hedging Derivatives
Net Realized Capital Gains
Cash Flow Hedging
Cash Flows Condensed
Cash Flows Operating
Cash Flows Financing
Cash Flow Investing
Risk Factors
S
Risk Factors
S Credit & Financial Strength Ratings
S Market Conditions
S Investment Portfolio & Concentration of Investments
S Casualty Insurance
S Competition
S Guarantees with Variable Annuities
Risk Factors Cont.
S Adjustments of Deferred Policy Acquisition Cost
S Catastrophe Exposure
S Reinsurance
S Indemnity Obligations
S Regulation
S Change in Control
Risk Factors Cont.
S Foreign Operations
S Legal Proceedings
S Use of Estimates
S Aircraft Leasing Business
S Liquidity
Risk Factors Cont.
S Special Purpose Vehicle Intercompany Loans
S Controlling Shareholder
S Employees
S Electronic Data Systems
S Regulatory Capital Credit Default Swap Portfolios
Credit & Financial Strength
Ratings
S Credit and Financial Strength ratings measure the ability of
the company to meet contract obligations
S Establishes the company’s position relative to other
companies
S If ratings drop
S Could limit new business
S Lose current customers/business
S Could require AIG to post additional collateral
Market Conditions
S Insurance business is highly dependent on the business
environment
S If markets return to what they were a few years ago AIG
could be affected by:
S Decline in value of investment portfolio
S Unrealized market valuation losses on investments
S Impairments of good-will and other long lived assets
S Increased liability from interest rate guarantees
S Increase in policy surrenders and cancellations
Investment Portfolios &
Concentration of Investments
S Investment portfolio’s value affected by interest rates:
S Can change from monetary policy changes, domestic and
international political issues, and other factors
S Concentration of investments:
S Ability to sell may be limited because of others trying to sell in
the same concentration
S Ex. AIG has a large exposure to residential mortgage-backed
securities, commercial mortgage-backed securities, and
commercial mortgage loans
Casualty Insurance
S Liabilities are difficult to predict
S could exceed current reserves
S Historical loss factors used to project future loss
development
S No guarantee that the future loss will follow the same pattern
Competition
S Highly competitive market both domestically and overseas
S Competing with insurance companies, banks, investment banks
S 1800 US life insurance co.
S 3300 other stock co. (competing with Chartis subsidiaries)
S Position affected by credit ratings
S Competing through: risk acceptance criteria, product
pricing, and terms and conditions
Guarantees with Variable
Annuities
S Certain policies offered guarantee customers:
S Guaranteed minimum death benefits, guaranteed minimum
income benefits, guaranteed minimum withdrawal benefits, and
guaranteed minimum account benefits
S AIG uses derivatives and reinsurance to hedge some of this
risk, not fully hedged
Adjustments of Deferred Policy
Acquisition Cost
S Interest rate changes, increased cancellations, increased
investment returns may lead to accelerated amortization of
deferred policy acquisition costs
S Higher interest rates and investment returns cause an increase
in the number of contracts surrendered
S
Forcing subsidiaries to accelerate the amortization of DACs
S
If this cost exceeds the cost of surrenders and withdrawals,
business could be negatively affected
Catastrophe Exposure
S Could cause widespread claim costs: property damage,
worker’s compensation, morality and morbidity claims
S Leads to a loss from declining value of investment assets
Reinsurance
S The company reinsuring may not be able or willing to pay
S Relying on a outside company
S Bear credit risk with respect to reinsurers
S If reinsurer can’t pay in time, AIG is still responsible to the
policy holder
Indemnity Obligations
S If indemnity claim is material:
S AIG will be forced to obliged these claims
S Will restrict cash flow, liquidity, and operations
Regulation
S July 21, 2010 – Dodd-Frank Wall St. Reform and Consumer
Protection Act
S
Can’t predict the requirements of the regulations that will be adopted and what
their effect on AIG will be
S
May become subject to enforcer/supervisor authority as a savings and loan
holding co.
S
May be forced to place financial activity in a intermediate holding co.
S Designated Financial Company
S Stress tests – whether or not AIG has necessary cap under
adverse economic conditions
Regulation Cont.
S If Designated Financial co. gave threat to US financial
stability
S Would be required to maintain a debt to equity ratio of no more than
15:1
S Limit the ability of AIG to merge, acquire, consolidate, or become
affiliated with other companies
S Restrictions on the financial products offered
S Required to terminate some current activities
S Could be forced to sell or transfer assets to unaffiliated entities
Regulation Cont.
S Valker Rule
S If AIG continues to control AIG Federal Savings bank could
be subject to this rule
S Limits proprietary trading and the sponsorship/investment in
hedge, private equity or similar funds
S USA Patriot Act – 2001
S Requires companies to know certain information about their clients
and to monitor their transactions for suspicious activities
Change in Control
S Ability to utilize tax losses and credit carryforwards to offset
future taxable income may be limited under the Internal
Revenue Code
S Entities that experience ownership change generally subject to
annual limitation on its pre-ownership change tax losses and
credit carryforwards equal to the equity value of the
corporation multiplied by the long-term, tax exempt rate
S Ownership change could occur if Department of Treasury’s
position falls bellow 50% of the current shares
Foreign Operations
S Provides insurance, investment and other financial products
and services in over 130 countries
S Can be affected by regional economic downturns, foreign
exchange rate fluctuations, political upheaval, nationalism and
other restrictive government actions
S Licenses issued to AIG subsidiaries could be modified or
revoked
S
Insurance subsidiaries could be restricted from doing future
business in certain countries
Legal Proceedings
S Security class actions, and regulatory and government
investigations
S Unable to predict the maximum liability of these claims
S No precise damage claims, and the types of claims are
uncertain
Use of Estimates
S Generally Accepted Accounting Principles:
S Require some sections with significant degrees of
judgment/estimation
S Estimates could turn out to be inaccurate
Aircraft Leasing Business
S Aircraft business depends on lease payments
S Exposes AIG to several risks:
S Lessee non-performance
S Aircrafts become obsolete
S Decline in demand of product
Liquidity
S Need liquidity to pay operating expenses, interest on debt, to
meet capital requirements of AIG’s subsidiaries
S Payments to AIG Parent
S Require funs (dividends) from subsidiaries to fund payments due on
obligations
S Some investments by subsidiaries are illiquid or difficult to
sell
S AIG Parent may be unable to assist subsidiaries with unexpected cash
flow obligations – may be difficult for subsidiaries to generate liquidity
because of these assets
Special Purpose Vehicle
Intercompany Loans
S If AIG is unable to satisfy obligations made, secured parties
may have the right to foreclose upon and sell the assets that
secure the loans
S Would negatively affect the designated subsidiaries
Controlling Shareholder
S The Department of the Treasury is AIG’s controlling
shareholder with over 50% of current shares
S This gives them control over:
S
Approval of mergers or other business combinations
S
A sale of all or substantially all of AIG’s assets
S
Amendments to AIG Parents amended certificate of
incorporation
S
Other matters that might be favorable to the Department of the
Treasury but not other shareholders
Controlling Shareholder Cont.
S Department of the Treasury could transfer control to
another entity
S Department of the Treasury is granted registration rights
with respect to shares of common stock issued for
recapitalization
S
Right to participate in any registered offering of AIG common stock
S
Right to engage in at the market offerings
S
Right to approve the terms, conditions, and pricing of any registered offering
in which it participates until ownership falls bellow 33%
Employees
S President and Chief Executive Offers of AIG – Mr. Robert
Benmosche
S Diagnosed with cancer and may be unable to provide his services
S American Recovery and Reinvestment Act of 2009
S Restricts bonuses and other incentives payable to employees
S Risk of employee fraud, error, failure to document properly
or to obtain proper internal authorization, failure to comply
with regulatory restrictions
Electronic Data Systems
S Computer systems used to store, retrieve, evaluate, and utilize
customer and company data
S Systems rely on a 3rd party
S If the system fails and employees are unable to access the data –
business operations could be forced on hold until the system is
repaired
S Confidential information may be misused or mishandled leading
to legal liabilities
Regulatory Capital Credit
Default Swap Portfolio
S Deterioration in credit markets may cause AIG to
experience unrealized market valuation losses
S Could be required to post additional collateral
S Net of $38.1 Billion in credit default portfolio for providing
capital relief rather than for arbitrage purposes
Management of Risk
Factors
S
Major Risk Factors
S AIG identifies four major risk to which the corporation is
exposed to
S Credit Risk
S Market Risk
S Operation Risk
S Insurance Risk
Credit Risk
S Potential loss arising from an obligor’s inability or unwillingness
to meet its obligations to AIG.
S Direct and indirect credit exposures
S fixed income investments
S deposits
S corporate and consumer loans
S counterparty risk in derivatives activities
S cessions of insurance risk to reinsurers and customers
S credit risk assumed through credit derivatives written
Managing Credit Risk
S Managed at a corporate level by the AIG Credit Risk
Management (CRM) department, lead by the Chief Credit Officer
(CCO)
S delegated credit authorities among executives and officers
S manage the credit limits, program limits and credit
S administer portfolio credit reviews of all business units, and
recommend any corrective actions where required
S develop methodologies for quantification and assessment of credit
risks
S approve appropriate credit reserves and methodologies at the
business unit and enterprise levels
Managing Credit Risk
S Uses third-party guarantees, reinsurance recoverable, letters
of credit and trust accounts to minimize level of credit risk
S Also manages industry concentrations
S Current largest industry credit exposure is global financial
institutions sector
Managing Credit Risk
S AIG’s largest credit exposures as a percentage of total equity
Category
Investment Grade:
10 largest combined
Single largest financial institution
Single largest corporate
Single largest sovereign
Non-Investment Grade:
Single largest financial institution
Single largest corporate
Single largest sovereign
Risk Rating
of Total Equity (%)
A+
AAAAA
AAA
84.4%
4.8
2.9
21.3
BBBB
BB
0.3
0.6
0.1
Managing Credit Risk
S AIG’s largest credit exposures to the global financial
institution sector as a percentage of total equity
Industry
Money center / Global bank groups
European regional financial institutions
Global reinsurance companies
Global life insurance companies
North American based regional financial institutions
Global non-life insurance companies
Global securities companies
Supranational Banks
Credit Exposure as a
Percentage of Total Equity
54.90%
11.1
10.4
9.5
6.1
4.6
4.3
4.2
Market Risk
S Potential loss from fluctuations in interest rates, foreign currencies,
equity and commodity prices, and their levels of volatility, etc
S Managed by Market Risk Management and Independent Valuation
(MRMIV), and Insurance Risk Management function (IRM)
S AIG identifies the following factors as exposure to market risk
S Benchmark interest rates
S Credit spread or risk premium
S Equity and alternative investment prices
S Foreign currency exchange rates
Managing Market Risk
S Duration / key rate duration
S Scenario analysis.
S Value-at-Risk (VaR)
S Stress testing
Operational Risk
S Potential loss resulting from inadequate or failed internal
processes, people, and systems, or from external events
S Each business unit is responsible for its operational risk
S pro-actively address potential operational risk issues
S assign ownership and accountability for addressing identified
issues.
Insurance Risks
S Of all the insurance risks, liquidity risk is the
fundamental risk for insurance companies.
S Potential loss resulting from inadequate premiums,
insufficient reserves and catastrophic exposures.
S Main contributors to solvency issues.
How AIG Manages
Liquidity Risk
S Compliance with financial reporting and capital and
solvency targets.
S Extensive use of reinsurance, both internal and third-
party.
S Review and establishment of reserves.
Insurance Risks
S Specific types of risks to these areas of
insurance
S Life Insurance
S Property and Casualty Insurance
Life Insurance Risk
S Potential loss resulting from experience deviating from
expectations for mortality, morbidity and termination
rates in the insurance-oriented products and
insufficient cash flows to cover contract liabilities in the
retirement savings products.
S SunAmerica has life insurance risks
Primary Risks
of SunAmerica
S Pricing risk
S Investment risk
S Interest rate risk
S Equity market risk
Ways to Manage
Life Insurance Risks
S Appropriate product design
S Sound medical underwriting
S Active management of the asset-liability relationship
S External reinsurance programs
S SunAmerica generally limit their maximum
underwriting exposure on life insurance of a single life
to $15 million
Property and Casualty
Insurance Risks
S Chartis and Mortgage Guaranty have P&C risks
S The mortgage insurance business (Mortgage Guaranty) manages
risks through:
S
geographic location of the insured properties
S
the relative economic conditions in the local housing markets
S
credit attributes of the borrowers
S
the loan amount relative to the value of the respective collateral
Property and Casualty
Insurance Risks
S Chartis are exposed to different risks:
S climate change
S wind
S flood
S earthquake
S terrorism
S environmental damage
Property and Casualty
Insurance Risks
S Terrorism and environmental damage are managed
differently than wind, flood, and earthquake, which are
natural disasters.
S Exposure to loss from terrorism is controlled by
limiting the total insurance that is underwritten within
a location.
S Typically exclude or significantly limit coverage for
pollution or related environmental damage.
Property and Casualty
Insurance Risks
S Risks from catastrophes like hurricanes and
earthquakes are managed using a combination
of techniques:
S setting aggregate limits in key business units
S monitoring and modeling accumulated
exposures
S purchasing catastrophe reinsurance
Property and Casualty
Insurance Risks
Modelling of Real Disaster Scenarios:
Managing Risks with
Reinsurance
S AIG uses reinsurance programs for its insurance
risks as follow:
S Facultative agreements to cover large individual
exposures
S Quota share treaties to cover specific books of
business
S Excess-of-loss treaties to cover large losses
Managing Risks with
Reinsurance cont.
S AIG uses reinsurance programs for its insurance
risks as follow:
S Excess or surplus automatic treaties to cover
individual life risks in excess of stated per-life
retention limits
S Catastrophe treaties to cover specific catastrophes,
including earthquake, windstorm and flood
Risk Management
Recommendations
S
Risk Management
Recommendations
S Credit Risk
S Market Risk
S Operation Risk
S Insurance Risk
Questions?
S