External Analysis for American International Group Inc.

(AIG)

Introduction

American International Group Inc. or simply AIG specializes in the insurance industry. It is engaged in a range of insurance related businesses in the United States and across the borders. It maintains and operates four main business segments: General Insurance, Domestic Life Insurance & Retirement Services, and Foreign Life Insurance & Retirement Services. AIG also offers financial services to its customers (one source, 2011). The company holds 11th position in the Forbes 1000 companies list (One source, 2011) and it is ranked at number 29 in the list of largest public company in the Forbes Global 2000 companies list (Forbes, 2011). SWOT Analysis SWOT Matrix The SWOT analysis of AIG group is: Strengths Brand equity y y y Restructuring y Business processes y Opportunities y y y Expense management Ownership of the company Use of resources to limit the risks y y y Government investment Threats Litigation Competition Economic conditions Debt requirement Weaknesses Liquidity burden

Strengths

American International Group is one of the renowned companies in the insurance industry around the world. The company holds 11th position in the Forbes 1000 companies list (One source, 2011) and it is listed at number 29 as the largest public company in the Forbes Global 2000 companies list (Forbes, 2011). It is worlds largest insurance company to date. It suffered financial crisis and took help from the governmental funding but still its subsidiaries have managed to provide revenue over general property, casualty insurance, life insurance and retirement services etc. from its individual customers in the US and more than 130 countries around the world (Hoovers, 2011). After taking governmental bailout, the company engaged in restructuring its business operations to support its financial condition and enhance the value of its business by meeting the capital requirements and repayment obligations (AIG, 2011). To meet its restructuring objectives it has formed four main priorities to amend its business processes. Weaknesses The year 2008 was not a favorable one for American International Group. As of September 2008, the company suffered huge financial setback in terms of downgrading credit ratings. The company had no choice but to liquidate. The Federal Reserve bank of United States came forward as a savior of AIG group and laid about $ 85 billion to the company to help it meet its credit requirements and to prevent the companys collapse. This credit was provided in exchange of companys 80% equity (Andrew et al, 2008; Kaiser, 2008; FRB, 2008). AIG started selling its assets in order to pay off some of its debt requirement to the government in 2008. The global industry for insurance has suffered huge setback in 2008 that weakened the financial position of the company further. The US government then decided to aid the company by more funding in order to stop it suffering from bankruptcy (Bansal, 2009). Opportunities

The situation seems very difficult for the American International Group. It has so far very efficiently managed to pay off some of its obligations to the government since 2008. To meet its obligations, AIG group is been selling its assets and subsidiaries in the markets to obtain money. Furthermore, AIG group restructured and remodeled its business operations to perform well to obtain better revenues. If it continued to pace with the current expense management techniques it is currently working with, soon American International Group will be able to buy back its equity which it had to give to the government to obtain credit in late 2008 (AIG, 2011). AIG group can further utilize its existing resources to maximize the effect of its business operations to generate more revenues that will help it to pay off its credit requirements. Threats Although, AIG has managed to pay off some of its settlements to United States Securities Exchange Commission (USSEC) and the Justice department on the number of issues but it still has to keep patience and cooperate with the other authorities investigating the matters related to the company. If the company failed to pay off its debts then it will likely suffer from state litigation requirements (Insurance Journal, 2004). The next level of threat faced by the American International Group is in the form of stiff competition in the domestic and international markets.The main competitors of AIG group are Allianz SE, AXA, and Zurich Financial Services AGZ (Hoovers, 2011). Another level of threat to the company is the recession in the United States Economy. The downfall in the US economy has touched all the levels of business and lives of people. It has severely affected the companies operating in the domestic markets and the demand of the customers. The demand is dependent on the demographics of the customers and the commercial requirements that affect their needs. The consumers are required to buy auto insurance and rental insurance by the government and lenders. If these economic conditions

continued to prevail, then AIG will likely to suffer huge losses in the coming years (USSEC, 2011).

PESTEL Analysis Political American International group has its operations in various countries around the globe. It operations are subject to the policies and governmental regulations drawn by the state, national and local governments on the areas it operates in. it has to comply with the rules devised by the authorities regarding insurance, securities, investments, banking etc. in United States and abroad (USSEC, 2011).As everyone knows, American International Group took government bailout in its crucial times in the year 2008. This life saving action made American International Group more vulnerable to the political risks than ever before. The recent article in Wall Street Journal noted that the bonuses earned by the AIG group are likely to be the target of political controversies. AIG will have no option but to comply with the political leaders demands because of its vulnerability (Bremmer and West, 2009). Like all the other companies operating in the American markets, AIG has also formed its political action committee, called PAC, which makes contributions to political parties and candidates. AIG group is effectively contributing in the state and national level political parties. It has so far contributed more than200,000 US dollars to the house of republicans and democratic. The main recipient of its contributions is house of republicans which has received far more political funding than democratic parties (open secrets org, 2010). The contributions by American International Group were more aggressive after receiving government bailout in late

2008. The media people regarded these contributions way too political to push the legislators away from their way i-e mortgage markets etc. (Coutts and Protess, 2008). Economic American International Group was profoundly and adversely hit by the market breakdown in late 2008. Its business had huge impact of that market turmoil. The industry showed the signs of recovery in the mid of 2009 through 2010 respectively. The AIG group strategically installed its re-structuring process to combat with the industrial turmoil. Although it managed to somehow cope with the industrial bankruptcy, its business processes and operations are still subject to varying economic risk factors (USSEC, 2010). AIG has to comply with the Insurer Financial Strength (IFS) ratings. This rating standard plays vital role in determining the market position and competitiveness of a company. If AIG loses on this rating scale, it will likely to suffer from lack of trust and confidence in the companys products and services by the contract holders and policy makers. Furthermore, the negative or low ratings will lead AIG to provide additional collateral and thus resulting in the termination of various transactions.

The economic conditions of a country are main driver of the insurance business. AIGs business is highly depended on the economic conditions of the country. The global financial crisis in late 2008 through 2009 resulted in the serious issues pertaining to the liquidity, financial stability, volatile markets, decreased value of assets, lack of public confidence etc. this economic turmoil further impacted the rate of employment in the country. To meet the business obligations many companies had to downsize their employees which resulted in the high rate of unemployment in United States and abroad. The recent report launched by Government Accountability Office, the financial position of American International Group remained stable

over the period of time and showed great improvements and recovery in its financial conditions (Greenwald and Souter, 2010). Social American International Group is keen to adopt the good governance practices to facilitate the local people and communities. It effectively participates in the mentoring of its people by investing in them in terms of training, education and other benefits like competitive pay and adons. American International Group has started enhanced internal career navigation website since 2008 to track down the level of involvement of its employees in their work. Moreover it was ranked in the 50 best internship providers list by Business Week in 2008 for offering career advancement opportunities to young graduates (AIG, 2008). According to the annual report by AIG, it had more than 63000 employees working in its main company and subsidiaries by the end of year 2010. The recent limitations imposed by the American Recovery and Reinvestment Act of 2009, some restrictions were placed on the rate of compensation paid by the company to its specific employee, like the executives of the company that are highest paid employees of the company. Due to American International Groups agreement with the Department of Treasury, called the Master Transaction Agreement, AIG will adversely get affected by this new act and will fail to attract the talented and retain and motivate the highest performing employees to work at American International Group (USSEC, 2011). Technological The technological advancement is vital to the success of a company in todays competitive environment where large numbers of counterparts are ready to snatch the market share of a company. The likelihood of success of American International Groups business

operations and their processes are dependent on the latest technology that is used to store, retrieve, evaluate and utilize the data available on the customer profiles and the information present in the company databases. American International Groups business is highly dependent on these information based IT systems. They access these third party systems to access, utilize the business functions information, offer and provide insurance quotes to the customers, calculate and process the insurance payment premiums, and making changes in the companys existing policies and procedures (USSEC, 2011).

Environmental Like all other companies currently operating in various industries, AIG is engaged in the activities to limit the environmental exposure of its operations. It is continuously striving to improve the environment, protect the customers and reward its shareholders by offering the products and technologies that can limit the risk and effects of environment and climate changes. In this espionage, American International Group offers climate risk and environmental solutions to its large customer base. It offers environmental insurance related products to various redevelopment projects and real estate related transactions and it has become a common risk reduction tool in the sectors like real estate and manufacturing from last ten years or so (Farer, 2009; AIG, 2007). Legal American International Group is liable to various legal rules and regulations pertaining to the securities, insurance and related things based on its business operations and functions. It is subject to numerous legal obligations that can adversely affect their business and financial conditions. These legal proceedings includes: class actions and regulatory and governmental investigations (USSEC, 2010). These legal proceedings are currently in pipeline. It is possible

that if these matters remain unresolved or the verdict is made against American International Group then it could have material impact on its financial stability and the market position in the domestic markets of United States and international markets abroad.

Porters Five Forces Analysis Rivalry among established competitions The level of competition among the existing competitors in the industry is very stiff. The main competitors of AIG group are Allianz SE, AXA, and Zurich Financial Services AGZ (Hoovers, 2011). The demand is dependent on the demographics of the customers and the commercial requirements that affect their needs. The consumers are required to buy auto insurance and rental insurance by the government and lenders. Bargaining power of suppliers The bargaining power of suppliers is derived by their power to demand the prices of their own choice. The suppliers power in the insurance industry is not a big threat to the companies operating in it. But the threat suppliers taking away human capital does exist in the industry. This industry is entirely based on the human capital.

The bargaining power of buyers The individual buyers do not have much power to influence the insurance industry at large. The large corporate clients like the airline and other related business pay large sums of money as insurance to these companies. These market players in the insurance industry long to get high margin corporate clients.

The threat of substitute products or services The threat of substitutes is very high in the insurance industry as there are plenty of substitutes available in the market. Many of the firms offer the services that are similar to that of large companies. There exists high level of competition on all the grounds whether it is auto insurance or health insurance. There are companies operating in the markets that offers unique products and services to their customers and have competitive advantage over their counterparts which depends on the size of their business segments.

The threat of the entry of new competitors

The industry imposes certain barriers to the entry of the new companies in the markets. This means that the level of threat of new entrants is relatively low in the industry. There are varying reasons to the low rate of entry. Among them is the entry barriers imposed by the industry. The new entrants will have to comply with the governmental regulations in order to make their entry in the markets. Then the existing players are protected by the number of barriers which makes it difficult for the new entrants to give hard time to them. Among them are: entry restrictions, tariff rates, high capital requirement, distribution channels etc. These barriers limit them to compete against the existing market players

Recommendations This study provided brief overview on the external environment analysis of American International Group Inc. The findings of the study suggested that American International Group (AIG) should focus on the following factors in order to excel its business and social image in the world:

1. The current strategic plan adopted by American International Group to restructure its business operations and functions in order to generate significant amount of money to meet its obligations is working well. It is suggested that it should continue to work on the same blue print in order to pay off its governmental obligations. 2. It can utilize its other assets and resources from its subsidiaries to minimize the risk factors associated with the litigation and other related facts. 3. It can use its brand equity and market position to successively elevate its market position further in order to attract large as well as small companies as their customers.

References AIG (2007) Climate Risk and Environmental Solutions, retrieved on July 7, 2011 from http://www.aig.com/aigweb/internet/en/files/2878_Climate%20Change%20Brochure_7.08_tcm2 0-108541.pdf (2008) Corporate Responsibility Report, retrieved on July 7, 2011 from http://www.socialfunds.com/shared/reports/1213718993_AIG_2007_Corporate_Responsi bility_Report.pdf (2011) Repayment, retrieved on July 6, 2011 from http://www.aigcorporate.com/restructuring/keyrestructuring.html (2011) Restructuring Process, retrieved on July 6, 2011 from http://www.aigcorporate.com/restructuring/keyrestructuring.html Andrews, E L., Michael J. and Walsh, M. W., (2008-09-16). Fed's $85 Billion Loan Rescues Insurer. New York times. Retrieved on July 6, 2011 from http://www.nytimes.com/2008/09/17/business/17insure.html?hp

Bansal, P. (2009). AIG may rethink asset sales in tough markets, Reuters UK, Retrieved on July 6, 2011 from http://uk.reuters.com/article/2009/02/24/us-aig-sales-idUKTRE51N6DW20090224 Bremmer, I. and West, S. (2009) AIG and Political Risk, Wall Street Journal, p. A15, retrieved on July 7, 2011 from http://online.wsj.com/article/SB123751279319191219.html

Coutts, S. and Protess, B. (2008) AIGs Campaign Contributions, retrieved on July 7, 2011 from http://www.propublica.org/article/aigs-campaign-contributions-1030 Farer, D. (2009) An Update on AIG Environmental and the Current Environmental Insurance Market, retrieved on July 7, 2011 from http://www.acoel.org/2009/01/articles/news-updates/anupdate-on-aig-environmental-and-the-current-environmental-insurance-market/

Forbes (2011) The Worlds Biggest Public Companies, retrieved on July 6, 2011 from http://www.forbes.com/global2000/ (2011) American International Group, retrieved on July 6, 2011 from http://www.forbes.com/companies/american-intl-group/ FRB (2008) Board of Governors of Federal Reserve System, Press Release, retrieved on July 6, 2011 from http://www.federalreserve.gov/newsevents/press/other/20080916a.htm (2009) U.S. Treasury and Federal Reserve Board Announce Participation in AIG Restructuring Plan, retrieved on July 6, 2011 from http://www.federalreserve.gov/newsevents/press/other/20090302a.htm

Greenwald, J and Souter, G. (2010) AIGs financial condition is stable, retrieved on July 7, 2011 from http://www.investmentnews.com/article/20100502/REG/305029986 Hoovers (2011) AIG Company Description, retrieved on July 6, 2011 from http://www.hoovers.com/company/American_International_Group_Inc/rffshi-1.html (2011) Competitive Landscape, retrieved on July 6, 2011 from http://www.hoovers.com/company/American_International_Group_Inc/rffshi-11njea3.html Insurance Journal (2004) AIG Forks Up $126 Million to SEC on PNC Deals, retrieved on July 6, 2011 from http://www.insurancejournal.com/news/national/2004/11/24/47993.htm Kaiser, E (2008-09-17). After AIG rescue, Fed may find more at its door. Reuters. Retrieved on July 6, 2011 from http://www.reuters.com/article/2008/09/17/uk-aig-fed-hazardidUKN1644235820080917 One Source (2011) American International Group Inc., Company Profile, retrieved on July 6, 2011 from http://www.onesource.com/free/American-International-GroupInc/Company/Profile/1620

(2011) Fortune 1000 Companies List, retrieved on July 6, 2011 from http://www.onesource.com/free/Company/FortuneList/Fortune/0 Open secrets org (2010) AIG 2010 cycles, retrieved on July 7, 2011 from http://www.opensecrets.org/orgs/recips.php?id=d000000123 Son, H. (2009) AIGs Trustees Shun Shadow Board, Seek Directors (Update2), Bloomberg, retrieved on July 6, 2011 from http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaog3i4yUopo&refer=us USSEC (2010) Employees, Form 10-k, retrieved on July 7, 2011 from http://www.aigcorporate.com/investors/2011_February/December_31,_2010_10-K_Final.pdf (2011) American Investment Group, Form 10-k, retrieved on July 6, 2011 from http://www.aigcorporate.com/investors/May_2011/March%2031,%202011%2010Q%20final.pdf