INSURANCE INDUSTRY

Analysis of Insurance Giant - AIG

Analysis of Insurance Giant - AIG

AIG - Strengths and Weaknesses

Strengths

Leadership positions in the US and global financial markets

AIG holds significant leadership positions in the US and global financial markets. The global P&C market is led by Chartis Inc, which is P & C insurance business unit of AIG. It is the largest US based P&C business in Europe. The company is the market leader energy, marine and aerospace, apart from financial lines. SunAmerica is the leader in domestic life insurance and offers inclusive set of services including accident and health, mutual funds, universal life, term life, fixed and variable annuities to around 18.2 million customers. AIG's aircraft leasing company the International Lease Finance Corporation is one of the leading aircraft leaser. United Guaranty Corporation, the group's mortgage guaranty insurance business, is also one of the leaders in its business line. Leadership positions in the US and global insurance markets provide revenue visibility to the group (Company Profile, 2011).

Improved Financial Strength

The group has taken several strategic actions since 2008 which have helped it improve its financial strength. AIG has successfully reduced its operating debt, since December 2008, by USD 67.2 billion and financial debt by around USD 44 billion including equity units and hybrid securities. It also initiated a large divesture program. AIG reduced its exposure to distress portfolios, terminating and transmitting around USD 41,100 of AIGFP's overdue trade positions and decreasing the notional amount of derivatives by around 85% between 2008 and 2011. The group also showed its ability to avail finance from diverse sources. It borrowed three-year and 364-day bank credit facilities of USD 3 billion, USD 2 billion as senior debt and the first public bond sale and a USD 500 million contingent liquidity capacity. The group is likely to see further strengthening of its financial position due to the ongoing strategic actions (Company Information, 2008).

Weaknesses

A high degree of execution risk remains in AIG's turnaround strategy

AIG has made significant progress since September 2008. However, there remains a high degree of execution risk remains in turnaround strategy. For instance, an unconfirmed report in Wall Street Journal indicates that Anastasia Kelly, the company's earlier general counsel, resigned from her position in a dispute over government induced pay caps.

Inability to curb declining cost efficiencies

AIG's subsidiaries have not been able to improve cost efficiencies over the last three years. Efficiency, as measured by combined ratio, of AIG's general insurance operations worsened in 2010 as compared to 2009 or 2008. For instance, the combined ratio of Chartis US deteriorated to 116.8 in 2010 from 108 in 2009 or 102.2 in 2008. Similarly, the combined ratio of Chartis International deteriorated to 103.5 in 2010 from 100.2 in 2009 or 92.7 in 2008 (Company Information, 2008).

Opportunities for AIG

Chartis likely to see higher revenue from Japan

AIG announced in January 2010 that, Fuji Fire and Marine Insurance Co., Ltd., a life and non-life insurance services, agreed to raise JPY13,500 million ($148 million) from Chartis Non-Life Holdings Company Japan, ...