American International Group

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"AIG" redirects here. For other uses, see AIG (disambiguation).
American International Group, Inc.

Public (NYSE: AIG

Type
)
Founded 1919 in Shanghai, China
Founder Cornelius Vander Starr
American International Building
Headquarters
New York City, New York
Area served Worldwide
Robert B. Willumstad
(Outgoing CEO)
Key people
Edward M. Liddy
(Incoming CEO)

Industry Insurance, financial services

Products Insurance annuities, mutual funds
US$6.26 billion (As of October 10, 2008,
Market cap
close)
Revenue US$110.064 billion (2007)
Operating income US$8.943 billion (2007)
Net income US$5.36 billion (2nd Quarter 2008)
Total assets US$1.050 trillion ( 2nd Quarter 2008)
Total equity US$78.09 billion (2nd Quarter 2008)
Employees 116,000 (2008)
AIG.com
Website
American International Group, Inc. (AIG) (NYSE: AIG

) is a major American insurance corporation based at the American International Building

in New York City. The British headquarters are located on Fenchurch Street in London,
continental Europe operations are based in La Défense, Paris, and its Asian HQ is in
Hong Kong. According to the 2008 Forbes Global 2000 list, AIG was the 18th-largest
company in the world. It was on the Dow Jones Industrial Average from April 8, 2004 to
September 22, 2008.

On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its
credit rating. The London unit of the world's largest insurer by assets sold credit
protection Credit default swap (CDS) on collateralized debt obligations (CDOs) that
declined in value. [1] The United States Federal Reserve loaned money to AIG at AIG's
request, to prevent the company's collapse, in order for AIG to meet its obligations to post
additional collateral to trading partners. The Federal Reserve announced the creation of a
credit facility of up to US$85 billion in exchange for warrants for a 79.9% equity stake
and the right to suspend dividends to previously issued common and preferred
stock.[2][3][4][5] AIG announced the same day that its board accepted the terms of the
Federal Reserve Bank's rescue package.[6] This was the largest government bailout of a
private company in U.S. history, though smaller than the bailout of Fannie Mae and
Freddie Mac a week earlier.[7][8]

On October 9, 2008, the company borrowed an additional $37.8 billion from the Federal
Reserve Bank of New York.

[edit] History

The American International Building in lower Manhattan

AIG's history dates back to 1919, when Cornelius Vander Starr established an insurance
agency in Shanghai, China. Starr was the first Westerner in Shanghai to sell insurance to
the Chinese. After his business became successful in Asia, he expanded to other markets,
including Latin America, Europe, and the Middle East.[citation needed] In 1962, Starr gave
management of the company's less than successful U.S. holdings to Maurice R. "Hank"
Greenberg, who shifted the company's U.S. focus from personal insurance to high-margin
corporate coverage. Greenberg focused on selling insurance through independent brokers
rather than agents to avoid selling insurance at prices which occasionally became too low
(to cover the future payouts) given marketplace competition. A company with agents
must pay their salaries even while selling little to no insurance. Instead, with brokers,
AIG could price insurance properly even if it suffered decreased sales of certain products
for great lengths of time with very little extra expense. In 1968, Starr named Greenberg
his successor. The company went public in 1969.[citation needed]

In the mid-2000s AIG became embroiled in a series of fraud investigations conducted by

the Securities and Exchange Commission, U.S. Justice Department, and New York State
Attorney General's Office. Greenberg was ousted amid an accounting scandal in February
2005. The New York Attorney General's investigation led to a $1.6 billion fine for AIG
and criminal charges for some of its executives. Greenberg was succeeded as CEO by
Martin J. Sullivan, who had begun his career at AIG as a clerk in its London office in
1970.[3]

On June 15, 2008, under intense pressure due to financial losses and a falling stock price,
Martin Sullivan resigned from the CEO position. He was replaced by Robert B.
Willumstad, who had served as Chairman of the Board of Directors of the Company since
2006. Willumstad was forced to step down and was replaced by Edward M. Liddy on
September 17, 2008.[citation needed]

[edit] Financial crisis

Further information: Subprime mortgage crisis, Financial crisis of 2007–
2008, and Liquidity crisis of September 2008

[edit] September 2008 concerns about stability

AIG's share prices fell over 95% to just $1.25 on September 16, 2008, from a 52-week
high of $70.13. The company reported over $13.2 billion in losses in the first six months
of the year.[9][10]. AIG's Financial Product division headed by Joseph Cassano had entered
into credit default swaps to insure $441 billion worth of securities originally rated AAA.
Of those securities, $57.8 billion were structured debt securities backed by subprime
loans.[11]

As Lehman Brothers (the largest bankruptcy in U.S. history) suffered a major decline in
share price, investors began comparing the types of securities held by AIG and Lehman,
and found that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7
to 2 times the rates used by Lehman.[9] On September 14, 2008, AIG announced it was
considering selling its aircraft leasing division, International Lease Finance Corporation,
in an effort to raise necessary capital for the company.[9] The Federal Reserve has hired
Morgan Stanley to determine if there are systemic risks to a failing AIG, and has asked
private entities to supply short-term bridge loans to the company. In the meantime, New
York regulators have approved AIG for $20 billion in borrowing from its
subsidiaries.[12][13]

On September 16, AIG's stock dropped 60 percent at the market's opening.[14] The Federal
Reserve continued to meet that day with major Wall Street investment firms to broker a
deal to create a $75 billion line of credit to the company.[15] Rating agencies Moody's and
Standard and Poor's downgraded their credit ratings on AIG's credit on concerns over
continuing losses on mortgage-backed securities, forcing the company to deliver
collateral of over $10 billion to certain creditors.[16][15] The New York Times later reported
that talks on Wall Street had broken down and AIG may file for bankruptcy protection on
Wednesday, September 17.[17] Just before the bailout by the US Federal Reserve, AIG
former CEO Maurice (Hank) Greenberg sent an impassioned letter to AIG CEO Robert
B. Willumstad offering his assistance in any way possible, ccing the Board of Directors.
His offer was rebuked.[18]

[edit] Federal Reserve bailout

On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors
announced that the Federal Reserve Bank of New York had been authorized to create a
24-month credit-liquidity facility from which AIG may draw up to $85 billion. The loan
is collateralized by the assets of AIG, including its non-regulated subsidiaries and the
stock of "substantially all" its regulated subsidiaries, and has an interest rate of 850 basis
points over the three-month London Interbank Offered Rate (LIBOR) (i.e., LIBOR plus
8.5%). In exchange for the credit facility, the U.S. government will receive warrants for a
79.9 percent equity stake in AIG, and has the right to suspend the payment of dividends
to AIG common and preferred shareholders.[3][5] The credit facility was created under the
auspices of Section 13(3) of the Federal Reserve Act.[5][19][20] AIG's board of directors
announced approval of the loan transaction in a press release the same day. The
announcement did not comment on the issuance of a warrant for 79.9% of AIG's equity,
but the AIG 8-K filing of September 18, 2008, reporting the transaction to the Securities
and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued
to the Board of Governors of the Federal Reserve.[21][6][3] AIG drew down US$ 28 billion
of the credit-liquidity facility on September 17, 2008.[22] On September 22, 2008, AIG
was officially removed from the Dow Jones Industrial Average.[23] On October 3, AIG
announced that they had drawn a total of $61 billion from the emergency loan.[24]

Maurice Greenberg, former CEO of AIG, has characterized the bailout as a

nationalization of AIG.[25]

[edit] Lavish spending immediately after bailout

The following week, AIG executives participated in a lavish California retreat which cost
$444,000 and featured spa treatments, banquets, and golf outings.[26] The trip was planned
long before the bailout, as a reward for top-performing life-insurance agents, not those
involved in the firm's collapse.[27] Less than 24 hours after the news of the party was first
reported by the media, it was reported that the Federal Reserve had agreed to give AIG an
additional loan of up to $37.8 billion. [28]

[edit] Settlement of credit default swaps

On October 21, 2008, those creditors of Lehman Brothers who bought credit default
swaps to hedge them against Lehman bankruptcy will settle those accounts. The amount
of the settlement is estimated to be between $100 billion and $400 billion.[29]

[edit] Business

In the United States, AIG companies are the largest underwriters of commercial and
industrial insurance and AIG American General is a top-ranked life insurer.[citation needed]

[edit] Insurance

[edit] Life insurance

AIG owns AIG American General, a life insurance company based in Houston,
Texas.[citation needed]

[edit] Auto insurance

AIG sells auto insurance through AIG Direct. Policies include auto, motorcycle,
recreation vehicle and commercial vehicle insurance. AIG purchased the remaining 39%
that it did not own of online auto insurance specialist 21st Century Insurance in 2007 for
$749 million.[30]

[edit] International holdings

[edit] Australia

AIG Life (Australia) underwrites over one million life insurance policies in Australia
held through industry pension plans. The general insurance arm offers mainly corporate
insurance and is among the top 10 insurers in Australia.[31]

[edit] Pakistan

Selling automobile insurance in Pakistan since 1949. Principal office is in Karachi and
branch offices in Lahore, Islamabad and Faisalabad.
[edit] China

AIG owns 19.8% of People's Insurance Company of China (PICC) through direct and
indirect holdings. PICC P&C[clarify] is China's largest insurer of casualty insurance.[citation
needed]

[edit] Hong Kong

AIG's American International Assurance operations include 2.2 million policy holders.[32]

[edit] India

AIG is the minority partner with the Tata Group in two insurance companies in India,
holding 26 percent each in Tata AIG Life Insurance Co Ltd and Tata AIG General
Insurance Co Ltd.[33]

[edit] Philippines

AIG owns Philippine American Life and General Insurance Company (Philamlife), the
Philippines' biggest insurance company. It has a total asset of P170 billion ($3.6 billion).
Philamlife serves over a million customers and maintains the widest network of over 200
offices and sales agencies nationwide.[34]

Philamlife, on October 3, 2008, announced it is among the assets being sold by AID to
pay off debt to the U.S. government: "it had been identified for possible divestment along
with some of its affiliates." AIG identified Philamlife as one of "extremely valuable"
assets intended for sale. Philamlife president and CEO Jose Cuisia Jr. said in a statement:
"Philamlife remains to be (a) stable and strongly capitalized organization. Our policy
owners and clients can be assured that their interests are protected because of the
company's financial strength. A change of ownership will not in anyway diminish policy
owners' benefits and security. We will remain focused on daily execution of our business
and continue to provide our policy owners and clients with the highest levels of service.
Philamlife, the largest and most profitable insurance company in the country and the
undisputed market leader for over 60 years, is a crown jewel for AIG and will surely
attract local and international interest."[35] Cuisia said groups expressed interest to buy
Philamlife, including the Yuchengco family which owns Rizal Commercial Banking
Corporation. Another possible contender is the formidable Ayala Corporation that owns
Bank of the Philippine Islands, Globe Telecom, and Ayala Land among others. Philamlife
has total assets of 170 billion pesos ($3.6 billion), also has interests in banking, asset
management and outsourcing.[36] But contrary to the report, Philamlife doesn't have any
interest on AIG BPSI, an AIG owned outsourcing company based in the Philippines, that
services other subsidiary companies of AIG like American General and others.
[edit] Singapore

AIA Singapore is a wholly owned subsidiary of AIG in Singapore. It has more than two
million policies in force, more than 3,800 financial services consultants and 800
employees in its Singapore offices. General manager Mark O'Dell resigned on September
18, 2008 in response to policy holders queuing up to cash in their policies in the face of
concern of the future of AIG.[37]

[edit] United Kingdom

AIG operates in the UK with the brands AIG UK, AIG Life and AIG Direct. It has about
3,000 employees, and sponsors the Manchester United football club.[38]

In response to redemption demands, AIG Life (UK) suspended redemptions of its AIG
Premier Bond money market fund on September 19, 2008 in order to provide an orderly
withdrawal of assets.[39]

[edit] Insurance holdings by state

[edit] California

AIG owns more than two dozen companies licensed to offer insurance in California,
according to the California Insurance Commissioner. They include 21st Century Casualty
Co.; 21st Century Insurance Co.; AIG Casualty Co.; AIG Centennial Insurance Co.; AIG
Premier Insurance Co.; AIU Insurance Co.; American General Indemnity Co.; American
Home Assurance Co.; American International Insurance Co. of California Inc.;
Birmingham Fire Insurance Co. of Pennsylvania; Commerce And Industry Insurance Co.;
GE Auto & Home Assurance Co.; GE Indemnity Insurance Co.; Granite State Insurance
Co.; Hartford Steam Boiler Inspection and Insurance Co.; Insurance Co. of the State of
Pennsylvania; Landmark Insurance Co.; National Union Fire Insurance Co. of Pittsburgh,
Pa; New Hampshire Insurance Co.; Pacific Assurance; Putnam Reinsurance Co.;
Transatlantic Reinsurance Co.; United Guaranty Commercial Insurance Co. of North
Carolina; United Guaranty Credit Insurance Co.; United Guaranty Residential Insurance
Co.; and Yosemite Insurance Co.[40]

[edit] Pennsylvania

Twenty AIG subsidiaries are licensed to do business in Pennsylvania, including National

Union Fire Insurance Co. in Pittsburgh, believed to be the second largest AIG underwriter
in the nation. Other subsidiaries include New Hampshire Insurance, Insurance Company
of the State of Pennsylvania, Granite State Insurance and New Hampshire Indemnity.[41]
[edit] West Virginia

AIG writes property and casualty insurance, life and annuity, and workers' compensation
insurance in West Virginia. It has 4.7% of the life insurance market and 2.7% of the
property and casualty market, as of the end of 2007.[42].

[edit] Holdings

[edit] Mortgage lending

Since 2001 AIG has owned American General Finance Inc., an Evansville, Indiana firm
with $29 billion of mortgage backed assets and more than 1,500 branches
nationwide.[43][44]

[edit] Aerospace

AIG Tower in Hong Kong

AIG owns International Lease Finance Corporation (ILFC) , the world's largest aircraft
leasing company, with hundreds of aircraft including the full range of Boeing and Airbus
jetliners, as well as the McDonnell Douglas MD-11 and MD-80 Series. Total assets under
lease are $55 billion as of June 30, 2008. Estimates of its value range from $5 billion to
$14 billion based on a comparison with rivals.[45][46]

AIG is one of the owners of London City Airport, along with GE and Credit Suisse; it
was purchased for £750m in 2006.[citation needed]

[edit] Real estate

AIG/Lincoln was established in 1997 as a strategic partnership between AIG Global Real
Estate Investment Corporation, New York, a subsidiary of AIG - American International
Group, New York, and Lincoln Property Company, a Dallas based commercial real estate
manager.[47].[48]. It has developed or is currently developing over 2.2 million square meters
of real estate in Poland, Hungary, Romania, Czech Republic, Germany, Italy, Spain,
Switzerland, Austria and Russia.[citation needed]

[edit] Telecommunications

As of August 2007, AIG Investments (through its member company AIG Capital
Partners, Inc.) acquired a 90% stake in Bulgarian Telecommunications Company (BTC)
from Viva Ventures Holding GmbH and certain minority shareholders. At the time, the
estimated value of BTC was 1.7 billion euros ($2.3 billion).[49]

[edit] Ports

As of March 16, 2007, AIG Investments, a division of AIG, completed the purchase of
100% of the stock of P&O Ports North America from Dubai-based Dubai Ports World. At
the time, the estimated price was $700m, though AIG did not disclose the exact figure
because the number was too low to be deemed significant to the company's asset base.[50]

On July 2, 2007, Marine Terminals Corporation became part of the AIG Global
Investment Group through its acquisition by AIG Highstar Capital. MTC provides the
shipping community with a comprehensive network of stevedoring, terminal operating
and related cargo handling services. Terms were not disclosed.[51]

[edit] Skiing

AIG owns Stowe Mountain Resort. AIG's connection to Stowe started when C.V. Starr,
the company's founder, invested in the resort in 1946. It is AIG's sole ski business. A
$300m, 10 year expansion was started in 2005.[52]

[edit] Other holdings

AIG owns Ocean Finance[53] a United Kingdom based company providing home owner
loans, mortgages and remortgages.[54]

AIG is the principal sponsor of English football team Manchester United and the Japan
Open Tennis Championships.[citation needed]

[edit] Subsidiary Holdings

• AIG American General Life Companies

• AIG Annuity Insurance Company
• AIG UK Limited
• AIG Financial Products Corp.
• AIG Hawaii Insurance Company, Inc.
 • AIG Investments
o Utilities, Inc.
• AIG Retirement Services, Inc.
o AIG SunAmerica Life Assurance Company
o The Variable Annuity Life Insurance Company
• American General Finance Corporation
• American Life Insurance Company
• Brazos Capital Management, L.P., a mutual fund manager[55]
• HSB Group, Inc., a specialty insurance company[56]
• International Lease Finance Corporation
• Lexington Insurance Company
• SunAmerica Ventures, Inc.
o AIG Financial Advisors
• Transatlantic Holdings, Inc.
o Transatlantic Re (Brasil) Ltda.
o Transatlantic Reinsurance Company (NYSE: TRH), 58% owned by AIG[57]
• United Guaranty Corporation

In November 2004, AIG reached US$126 million settlement with the U.S. Securities and
Exchange Commission and the Justice Department partly resolving a number of
regulatory matters, but the company still must cooperate with investigators continuing to
probe the sale of a non-traditional insurance product[58].

On June 11, 2008, three stockholders, collectively owning 4% of the outstanding stock of
AIG, delivered a letter to the Board of Directors of AIG seeking to oust CEO Martin
Sullivan and make certain other management and Board of Directors changes. This letter
was the latest volley in what the Wall Street Journal deemed a "public spat" between the
Company's Board and management, on the one hand, and its key stockholders, and
former CEO Maurice "Hank" Greenberg on the other hand. [59]

[edit] Accounting fraud claims

On October 14, 2004 the New York State Office of Attorney General Eliot Spitzer
announced that it had commenced a civil action against Marsh & McLennan Companies
for steering clients to preferred insurers with whom the company maintained lucrative
payoff agreements, and for soliciting rigged bids for insurance contracts from the
insurers. The Attorney General announced in a release that two AIG executives pleaded
guilty to criminal charges in connection with this illegal course of conduct. In early May
2005, AIG restated its financial position and issued a reduction in book value of USD
$2.7 billion, a 3.3 percent reduction in net worth.

On February 9, 2006, AIG and the New York State Attorney General's office agreed to a
settlement in which AIG would pay a fine of $1.6 billion.[60]

There is an ongoing fraud investigation that has been launched by the FBI after the
collapse in stock price[61]
[edit] Corporate governance

[edit] Board of directors

• Ed Liddy – Chairman of the Board of Directors and Chief Executive Officer

(American International Group)
• Stephen F. Bollenback – Former Co-Chairman and CEO, Hilton Hotels
Corporation
• Martin S. Feldstein – Professor of Economics, Harvard University
• George L. Miles – President and Chief Executive Officer, WQED Multimedia
• Morris W. Offit – Chairman, Offit Capital Advisors LLC
• Michael H. Sutton – Consultant
• Fred H. Langhammer – Chairman, Global Affairs, and former CEO of The Estee
Lauder Companies, Inc.
• Virginia M. Rometty – Senior Vice President, Global Business Services, IBM
Corporation
• James F. Orr, III – Chairman of the Board of Trustees, The Rockefeller
Foundation
• Edmund S.W. Tse – Senior Vice Chairman, Life Insurance, American
International Group
• Suzanne Nora Johnson –

AIG successfully obtains revolving credit of $ 85 billion

Mumbai, 18/09/08: The recent developments in the global financial markets have been truly
extraordinary. As the US financial crises goes through some challenging times, we wish to
assure you that this does not have any immediate material impact on Tata AIG Life.

Tata AIG Life is well capitalized and is subject to stringent local regulatory and capital
requirements. The Tata Group holds majority stake (74%) in the company and AIG and/or its
affiliates hold a minority stake (26%)


The company is governed by the Insurance Regulatory and Development Authority and our
local solvency margin as at the end of August 2008 stood at over 300% compared to the
regulatory minimum of 150%.

The company continues to operate in the normal course to meet its obligations to our clients
and policyholders.
The Indian business is robust and growing – Tata AIG Life’s branch distribution network
expanded from only 80 offices to nearly 400 offices during the past 18 months, advisor
strength has moved up from approximate 26,000 to 78,000 over the same period. Total
revenues stand at Rs.2339 crores for the 07-08 fiscal.

Recent development at AIG:

The Federal Reserve Bank of New York is providing a two-year $85 billion secured revolving
credit facility to AIG that will ensure that the company can meet its immediate liquidity
needs. AIG is a solid company with over $1 trillion in assets and substantial equity. AIG
believes that the loan, which is backed by profitable, well-capitalized operating subsidiaries,
with substantial value, will protect all AIG policyholders and give sufficient time to conduct
asset sales to repay the loan and enable AIG’s businesses to continue as substantial
participants in their respective markets. AIG has strong well-positioned businesses in diverse
markets around the world and a deep asset base.

INTRODUCTION T O INSUR EANC E

WHAT IS INSURANC E

1. The busi ness of ins ura nce is rela ted to the

pro tect io n of the econ omic valu es of ass ets.
Every asset ha s a value. The asse t would ha ve bee n
cre ated thr ough the effor ts of the owner. The asse t
is valu able to the own er, becaus e he expects to get
some benef its fr om it. The benef it may be an
income or some thi ng else. It is a be nef it bec ause
it meets some of his needs. In the case of a fac tor y
or a cow, the product gener ated by is sold and
income gene rat ed. In th e case of a mot or car, it
pro vi des comfo rt and co nve nie nce in
tr ansp ort ati on. There is no di rect i ncome.
2. Eve ry asse t is expect ed to last for a cert ai n
per iod of time dur ing wh ich it will perfo rm . After
th at, the ben efi t may not be av ail able. There is a
lif e time fo r a machi ne in a facto ry or a cow or a
mot or car. N one of them will last fr o ever. The
owner is aw are of th is and he can so man age hi s
af fai rs th at by the end of tha t peri od or lif e time,
a su bst itut e is made av ail able. Thus, he makes sure
th at the value or income is not lost. Howev er, the
as set may get los t earl ier. An acciden t or some
other unf ort una te eve nt may destr oy it or make it
non- funct io nal. In tha t case, the ow ner and those
der iv ing benef its there fr om , wo uld be depri ved of
the benef it and the planned subst itu te would not
ha ve bee n ready. There is an ad verse or unpleas ant
situa ti on. Insu rance is a mechan ism tha t helps to
reduce the effect of such adver se si tuat io ns.

BR IEF HISTORY OF INSUR EANC E

3. The busi ness of ins ura nce star ted wi th mari ne

bu si ness. Traders, who used to gat her i n the
Lloyd 's coffe e house in Lo ndon, agr eed to sh are
the losses to thei r goods while be in g carr ied by
sh ips. The los ses used to occur beca use of pi rat es
wh o ro bbed on the hig h seas or becaus e of bad
we ather spoil ing th e goods or si nki ng the sh ip/
the firs t ins ura nce policy was is sued in 1583 in
England. In Ind ia, in sura nce beg an i n 1870 w ith
lif e ins ura nce bei ng tr ans acted by an Engl ish
compa ny was th e A lbe rt. The first Indi an
insur ance compa ny was the Bomb ay Mutual
Assur ance Soc iet y Ltd, fo rmed in 1970. This was
foll owed by th e Orien tal Life Assuranc e Co.

4. Later, the Hi ndust an Co oper ati ve wa s formed i n

Calcu tta, the Un ited Ind ia in Madra s, th e Bomb ay
Li fe in Bomb ay, the Na ti on al in Calcu tta, the New
Ind ia in B ombay, the Jup iter in Bomba y and the
Lak shmi in New Delhi. These were all Ind ia n
compa nie s, st arted as a result of the swades hi
mov ement in the earl y 1900s. By the year 1956,
whe n the life insu ranc e busi ness was na ti on ali zed
and the Life Insur ance Co rpor ati on of Indi a (LIC)
wa s formed on 1st September 195 6, th ere were 170
compa nie s and 75 pro vide nt fund socie tie s
tr ans acti ng life insu rance busi ness in Ind ia. After
the amendments to the relev ant laws in 1999, the
L.I.C. did not ha ve the exclus iv e pri vilege of doi ng
lif e ins ura nce bus ines s in Ind ia. By 31/3/2002,
elev en new insu res had be en reg iste red and had
beg un to trans act lif e ins ura nce bus ines s in Ind ia.

PU RPOSE & NEED O F INSU RACE

5. Assets ar e ins ured, becaus e they ar e likely to be
dest royed, thr ough acc iden tal occurr ences. Such
pos si ble occurre nces ar e called per ils. Fir e, flo ods,
br eakd owns, lig htn ing, ear thquak es, etc, ar e
per ils. If such perils ca b case damage it the as set,
we sa y that the asse t is expo sed to th at ri sk. Peril s
ar e the eve nts. Ris ks are the conseque nt ial losse s
or damages. The risk to an owner of a bu ildin g,
bec ause of the peril of an ea rthqua ke, may be a
few lakhs or a few crore s of rupees, depend ing on
the cost of the build ing and the cont ents in it.

6 . The r isk onl y means tha t there is a poss ib ili ty

of loss or damag e. The damage may or may not
happe n. Insur ance is done ag ai nst the co nti nge nce
th at it may happen. There has to be an unc erta in ty
abou t the ri sk. Insur ance is relev ant only if the re
ar e uncert ai nt ies. If there is no uncert ai nty about
the occurre nce of an event, it cann ot be insu red
ag ai nst. In the cas e of a human bei ng, death is
cert ai n, but the time of deat h is unce rta in. In the
case of a pers on who is term inally ill, the time of
ea rth is not unc erta in, th ough not exactly know n.
He cann ot be insu red.

7. Insur ance doe s not protect th e asset. It doe s not

pre vent its loss due to the per il. The per il cann ot
be avo ided thr ough insu rance. The peril ca n
some times be av oided, thr ough be tter safety and
damage contr ol manageme nt. Insur ance only tri es
to reduce the impac t of the risk on the ow ner of
the asset and those who depend on that asset. It
only compensa tes the los ses- and tha t to o, not
fully.

8 . Only eco nomic conseque nces can be insu red. If

the loss is not fi na nci al, insur ance may not be
pos si ble. Ex amples of no n- econ omic loss es are
lo ve and af fecti on of paren ts, leadersh ip of
man agers, sen timen tal att achment s to fam ily
he irlo oms, inn ov at ive and creat iv e ab ili tie s, etc.

9. The mecha nism of insu ranc e is ve ry simple.

Pe ople who are expos ed to the same risks come
togethe r and agr ee that, if any one of th em suf fers
a los s, the other s will sha re the loss and make
go od to the person who lost. All pe ople who send
go ods by sh ip are exposed to these r isks, whic h are
rela ted to water damag e, sh ip si nki ng, pir acy, etc.
Those own ing factor s are not expos ed to these
risks, but they are exposed to differ ent kinds of
risks li ke, fire, ha ilst orms, earthqu akes, ligh tn ing,
bu rglary, etc. Lik e this, di ffere nt ki nds of risks
can be iden ti fied and separ ate gr oups made,
includi ng thos e exposed to such ris ks. By th is
meth od, the heav y loss tha t any one of th em may
suff er (all of them may such losses at the same
time) is di vided int o bea rable s mall losse s by all.
In other words, the r isk is spread amo ng the
commun ity and the likely big imp act on one is
reduced to smaller manage able imp acts on all .

10. If a Jumbo Jet wit h more tha n 350 passe nger 's
cra shes, the loss would run into crores of rupees.
No a irli ne would be able to bear such a loss. It is
unl ikely th at many Ju mb o Jets will crash at the
same time. If 100 airl ine compani es flyi ng Jumbo
Jets, come to gethe r int o an insu rance pool,
whe nev er one of the Jumb o Jets i n the pool
cra shes, the loss to be b orne by each a irli ne wo uld
come dow n to a few lakhs of rupe es. T hus,
insur ance is a bus ine ss of "h ari ng".

11. There are certa in pr inciple s, wh ich make it

pos si ble for insur ance to remai n a fa ir
ar ran gement. The firs t is th at it is dif ficult for an y
one ind iv idu al to be ar the co nsequence s of the
risks th at he is exposed to. It will become be ara ble
whe n the communi ty sha res the burden. The
sec ond is th at the per il should occu r in an
acc ident al manner. Nob ody sho uld be in a posi ti on
to make the r isk happe n. In other words, no ne in
the group sho uld set fir e to hi s asset s and ask
others to shar e the costs of damage. This would be
ta ki ng unf air adva ntag e of an arra ngement put
int o p lace to prot ect people fr om the risk s they
ar e exposed to. The occur rence ha s to be random,
acc ident al, and not the delibe rat e creat io n of the
insur ed person.

12. The manner in wh ich the loss is to be shared

can be determi ned bef ore -ha nd. It may be
prop ort io nal to the ri sk tha t each pers on is
expo sed to. This would be ind ica ti ve of the benef it
he would recei ve if he the peril be fell him. The
sh are could be collected from the members af ter
the loss has occu rred or th e likely sh ares may be
collected in adv ance, at th e time of adm issi on to
the group. Insur ance compa nie s collect in adva nce
and create a fund from wh ich the losse s are pa id.

13. The collecti on to be made from each pers on in

ad vance is determ ined on assumpt io n. Wh ile it
may not be pos si ble to tell bef oreh and, which
pers on will suffer, it may be poss ible to tell , on
the bas is of pas t experi ences, ho w many pers on,
on an avera ge, may suff er losses.

Ins ura nce as a secur it y Tools

The Uni ted N ati on s Declara ti on of human Ri ghts

1948 prov ides th at "E ver yon e has a right to a
st anda rd of liv in g adequate for the he alth and
wellbe in g of himself and his family, includ ing
fo od, c lo thi ng, hous ing and medical care and
nece ssar y soci al ser vices and the right to securi ty
the event of unemploymen t, sickn ess, disa bil ity,
widow ho od or oth er lack of li vel iho od in
ci rcumsta nces bey ond the co ntr ol."

Whe n the br ead wi nne r dies, to th at exte nt, the

fam ily's income dies. The eco nom ic condi ti on of
the family is affected, unles s othe r arr angemen ts
come into bei ng to res tor e the si tuat io n. Life
insur ance pr ov ides if this did not happen, ano ther
fam ily would be pushed int o the low er str ata
cre ates a cos t on socie ty. T he low er str ata cre ate a
cos t on soc iet y. Poo r people cost the nat io n by
wa y of sub sid ies and doles and so on. Po or people
als o cost by way of larger gr owth in popula ti on,
po or educat io n and vaga rie s in beha vi or of
ch ildren. Life insu rance tends to reduce such
cos ts. In thi s sense li fe in sura nce bus ine ss is
complement ary to the sta te's eff ort s in soci al
man agement.

Unde r a soc ial isti c system the resp ons ib ili ty of

full secur ity would be placed upon th e state to
find res ources for pro vid ing soci al securi ty. In the
cap ital ist ic soc iety, pro vi si ons of secur ity are
larg ely left to the ind iv iduals. The soci ety
pro vi des i nstrume nts, which can be used in
secur it y thi s aim. Insur ance is one of them. In a
cap ital ist ic soc iety too, the re is a te ndency to
pro vi de some soc ial secur it y by the st ate unde r
some schemes, whe re me mbe rs are required to
co ntr ibu te e.g . Soc ial Secur ity Schemes i n U.K.

Gl obal mar kets rema ined wob bly on Wed nesda y

ev en as the $85- bill ion U .S. gove rnment bail out of
Americ a's lar gest insur er by as sets, A mer ica n
In tern ati on al Gr oup ( AI G), calmed ner ves
some what. The U.S . Feder al Reserv e agreed to
exte nd a two -year lo an to th e trou bled AIG i n
exch ange fo r a 79.9 per cent equi ty sta ke in the
compa ny and a cha nge i n the top man agement.

Mark ets i n Hong K ong, Toky o, Singap ore and

other par ts of Asi a reco vered but ga ve up some or
all of the gai ns as wo rri es pers isted abou t the
he alth of the g lo bal fina nci al system. AIG has a
str ong footp ri nt i n Asia with mill ion s of
pol icyh olders i n south -east Asi a, Chin a and
Austr ali a. T he Toky o marke t closed 1.2 per cent
higher but oth ers such as Ho ng Ko ng slipped 3.6
per cent and Shang hai 2.9 per cen t.
Sent imen t in the Indi an marke t stay ed depressed
with the BSE Sens it ive Index closi ng dow n 1.89
per cent. ICIC I Ba nk fell a furthe r 5.25 per cent
dur ing the day closi ng at Rs. 560.30 on rumours
(subs equently stoutly denied by the ba nk) that top
man agers we re sellin g its sh ares in the mark et.
The stoc k shed almost 11 per cent in the last two
day s.

The rupee re bou nded from it s two -ye ar low of

Tuesda y versu s the dollar ga in in g 54 pais e to Rs.
46.34 as the Reser ve Ba nk of Indi a int erv ened to
pro vi de dollars to the marke t. The rupee has
deprec iat ed ove r 15 per cent ag ai nst the dolla r
since April th is ye ar.

Russ ia faced it s bigg est fina nci al cris is i n a decade

as inte r- ban k lendi ng wou nd down desp ite the
go ver nment inject ing fund s int o the sys tem.
Trad ing wa s suspended in it s two st ock excha nges
af ter one of them suffe red a 10 per cent fall in it s
index i n just an hour' s trad ing. The gove rnment
pro vi ded $44 bill io n to its thre e bigg est banks to
re assur e the market s.

Eu rope an marke t ind ices wer e margi nally up in

ea rly trad ing. Sent iment recei ved a bo ost as
Brit ai n's L lo yds TSB Gro up p lc was report ed to be
in talks to buy th e trou bled HBOS , the cou ntry 's
larg est mortg age lender. The spoke spers ons of the
tw o ba nks, howe ver, refu sed to co nfi rm or deny
the news.

Commod ity markets re bou nded wi th gold and

crude oil reg iste ri ng hands ome gai ns. Crude o il
wa s up $3.14 to $93.29 a barrel in morn ing tr ade
in New York as th e AIG ba ilou t was see n as a
rel ief fo r the glob al fin anc ial sys tem. Gold was up
just under on e per cent at $78 6.38 an ou nce.

Gov. Da vid A . Pate rso n of Ne w York said on

Mond ay tha t the sta te would allo w the America n
In tern ati on al Gr oup, a big insu rance company, to
lend itself $20 billi on to bolste r its capit al as it
face s poten ti ally dis astr ous cred it dow ngrade s.
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Add to Po rtf oli o

* A mer ica n Inter nat io nal Group

* Lehman Broth ers Holdi ngs Inc

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Sha res i n A .I.G. tumbled more th an 60 percen t on
Mond ay morn ing as in vest ors gre w concer ned tha t
the firm lacked cap ital to with sta nd cuts to its
deb t rat ing. But Mr. Pat ers on re iter ated the st ate 's
suppo rt of th e firm and declar ed A .I.G.
"f in anc ially sou nd."

The fi rm appr oach ed the stat e for help, Mr.

Paters on said, and go ver nment of fic ials worked
closely with the firm thr ough out th e weeke nd. He
vocally suppo rted A.I .G. 's effo rts to seek help
fr om the Federal Res erve.

A.I.G. has sough t a $40 b illi on br idge loa n from

the Federal Rese rve as a lifel ine, as the th ree- part
rescu e plan it had devi sed appear ed to crumble, a
pers on br ief ed on the mat ter sa id.

Mr. Pate rso n argued th at Ne w York taxpaye rs

would not be put at ri sk by the state 's
inv olvemen t.

The an nou ncement appe ared to help ar rest the

decli ne in A .I.G.'s st ock. Tradi ng below $4 shortl y
be fore noo n, the shar es reco vered to ab out $6 in
the next half -ho ur — still a loss of almost 50
perce nt from the ir Fr ida y c lo se.
Ra ti ngs age ncies had thre atened to down grade th e
insur ance gian t's cred it ra ti ng by Mond ay
mor ni ng, all owi ng coun terpa rti es to withd raw
cap ital fr om thei r cont racts with th e company.
One pers on close to the fi rm said th at if such an
ev ent occu rred, A .I.G. might su rv ive for onl y 48
ho urs to 72 hours.

A.I.G. has alread y rai sed $20 billi on th is yea r. But

ev en tha t amoun t of cap ital ha s not aver ted a
cr isi s.

The fi rm's sickl y fin anc ial healt h was a pr omine nt

topic in weeke nd talks amo ng Wall Stree t
ch ieft ai ns who ga thered at the Feder al Reser ve
Bank of New Yo rk to discuss the potent ial collapse
of the in vestme nt ba nk Lehman Bro thers. A.I .G.
had become one of the bigges t underw rit ers of
complex debt secu ri tie s kno wn credi t default
sw aps, used as in sura nce for a wide ra nge of
prod ucts, includ ing the mortgage ins trument s that
ha ve bee n the bane of Wall Street fo r the past
ye ar and a half.

Er ic Dinall o, the New Yor k stat e ins ura nce

super in tende nt, has bee n deeply in vol ved in
di scussi on s ab out A.I.G.'s sur vi val, thi s perso n
sa id.
J. C. Flow ers & Compa ny, a buy out firm focused
on fin anc ial ser vic es firms, off ered $8 b illi on for a
st ake in the bus in ess tha t would ha ve gi ven it an
opt io n to buy all of A.I .G. dow n the ro ad.
Kohlbe rg Kr av is Ro bert s and TPG als o sa id they
would bid.

Bu t all three withdre w at the las t minut e, ci ti ng

anxi ousn ess o ver the compa ny' s precar iou s
fina nci al health.

A.I.G.'s extr aord in ary mo ve of re achi ng out to the

Fed fo r help may spur othe r non in vestme nt ba nks
to try a similar move. Compan ies rangi ng fr om
Ge ner al Electri c to G MAC ha ve been hurti ng
badly and wo uld despe rately love the liquid ity
th at the Fed wo uld prov ide.

It is not c lea r wheth er the Fed w ill acqu iesce to

A.I.G.'s request.

Be for e seeki ng a lif elin e, th e firm had ea rlie r been

rep orted to be i ntere sted i n selling its aircr aft
leas ing busi ness, the In tern at io nal Lease Fin ance
Co rpor at io n. Founded in 1973, the bus in ess has
ne arly 1,000 plane s in its fleet. But people bri efed
on the matte r said that un it bore spec ial tax
ad van tages that A.I.G. had decided would be lost
on any other owner.

In vest ors, afr aid that A.I.G. would hav e to absor b

fur ther wr ite -downs in it s alread y damaged
mort gage secu rit ies and collate ral ized deb t
oblig ati on s, have dr ive n down the company 's
sh ares in recen t days. The st ock closed Fr ida y at
$12.14 a share, a declin e of 46 percen t for the
wee k.

A.I.G.'s pro blems are no t new. The company los t

$13.2 billi on in the fi rst six months of 2008,
larg ely ow ing to declin ing values in mortg age-
rela ted secur it ies held in its inv estment portf oli o
and collater ali zed debt oblig at io ns it owns.

Bu t the compan y's outlo ok grew gr immer last

wee k when Sta ndard & Poo r's warned th at it was
co nside ri ng down grad ing the company 's debt as a
res ult of furt her wr ite -do wns it might ha ve to
ta ke.

As the cred it sto rm has raged in recen t months,

insur ance compa nie s like A.I.G. have been be tter
pos it io ned tha n the na ti on 's ba nks and brok erage
firms to we ather it bec ause acc ount ing rules do
not requ ire i nsure rs to mark the in vestme nts held
in the ir long -te rm po rtf oli os to mark et. Insur ance
compa nie s like A.I.G. ca n hold thei r i nves tments
un til the y mature, rid ing out the ups and downs in
the market fo r thos e asset s.

Bu t the moment it beg an try ing to ra ise cap ital,

A.I.G. had to open its boo ks to pot ent ial inve sto rs
wh o were li kely to take a sh arp pencil to the
compa ny's portf oli o value s, analys ts sai d. And
with Lehma n Bro thers last week pr ov idi ng
inve sto rs wi th a valu at io n for the same types of
as sets held by A.I.G., subp rime and A lt -A
mort gage secu rit ies, the in vestmen t ban k's mark s
can now be applied to the big insu rer 's bo oks.

As of the most recent q ua rter, fo r example, A.I.G.

had $20 bill ion of subpr ime mortg ages marked at
69 cent s on the dollar and $24 billi on in Alt- A
secur it ies valued at 67 cents on the dollar.

Bu t Lehman of fic ials on a conf erence call with

inve sto rs last wee k said it wa s valu ing simila r
su bprime mor tgage secu ri tie s to th ose held by
A.I.G. at 34 cents on the dollar; i ts mark on the
Alt- A hold ings was 39 cents. Those valua ti ons
sugge st almost a $14 bill io n decline in A.I .G.' s
hold ings, af ter tax es, an amou nt repres ent ing 18
perce nt of the company' s bo ok v alue.
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Add to Po rtf oli o

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Addit io nal wr ite -do wns may als o be requ ired i n

A.I.G.'s collate ral ized deb t obl igat io ns, whic h the
compa ny does mark to marke t becaus e they ar e
held i n a shor t- term accoun t kno wn as ava ila ble
fo r sale. The compa ny v alued $42 bill io n in high -
gr ade holdi ngs at 75 cen ts on th e dollar, while it
mark ed ano ther $16 billi on in lowe r- rated
oblig ati on s at 70 cents.

A spokesm an for A .I.G., Nich olas J. Ashoo h, said it

wa s in appropr ia te to compare the markd own s of
Lehma n Bro thers ' secur it ies with th ose at A .I.G.

"W e don' t thi nk th at's valid, to look at someb ody

else 's portf oli o markd owns and then infe r what
A.I.G.'s might be, because there' s so many
vari able s," Mr. Asho oh sa id, "what kind of ris k is
in the por tfol io, wha t ki nd of collate ral ther e is,
and how the mar ks were calcula ted. We thi nk we
use a very th or ough and co nser vat iv e appro ach
th at i ncludes thi rd- party input and inpu t from the
ra ti ng ser vices."

A.I.G. , wh ich is based in New York, has als o been

unde r pressur e from the der iv ati ves contr acts th at
its Lond on -b ased fi nanc ial pr oducts un it sold in
co nnect io n wi th complex debt secur it ies. Those
co ntrac ts, called cred it defa ult swaps, acted as a
type of in sura nce on th e debt secur it ies, mak ing
them more attr acti ve to buyer s. The swaps also
ga ve speculat ors an oppo rtun ity to bet on the deb t
secur it ies ' ov erall cred itw orth ine ss, which ha s
decli ned in respon se to the turmoil in the housi ng
mark ets.

Whe n A .I.G.' s fin anc ial produc ts uni t sold the

cred it defaul t swaps, it effecti vely pr omised to
compens ate buyers of the debt securi tie s if the
mort gages underlyi ng them got int o tr ouble. At
the time, the secur iti es were rated AAA , so it
seemed at firs t that A.I.G. was no t tak ing on
ino rdin ate risk.
Bu t that picture changed as the hous ing cris is to ok
hold and homeow ners began to default. A.I.G.
wr ote do wn the value of its swap portf oli o by $25
billi on, tellin g in vest ors th at the markd own s did
not repres ent a cas h loss of th at magn itude. It
est imat ed possi ble cash pa yout s on the swaps of
be twee n $5 bill ion and $8 bill io n.

Bu t becau se the debt securi ti es cove red by the

sw aps are so complex and opaque, it has bee n hard
fo r in vest ors to ver ify A .I.G.'s numb ers on thei r
own, and i nves tor s have grow n impat ien t as A .I.G.
rep orted big loss es they did not expect in the las t
tw o quarte rs.

A.I.G. als o sa id recentl y that it might have to post

colla teral to its swap coun terpa rti es, heigh ten ing
co ncerns that the company wo uld have to ra ise
cap ital in ti ght marke ts. A .I.G. said in a fili ng
with the Securit ies and Excha nge Commis si on th at
if its own cred it were downgr aded on e notch by
Mood y's and Standa rd & Po or' s, its sw ap contr acts
would requir e it to post collat eral of abo ut $13
billi on.

In add it io n, A.I.G. said some of the con trac ts gav e

cou nterp art ies the opti on to termi nat e thei r
sw aps, which would cost A.I.G. be twee n $4 bill io n
and $5 bill ion. A.I.G. sa id th at it did not expect
all of its cou nterp art ies to exerci se that opti on,
ho wev er.

As a result, whe n S .& P. an nou nced a neg ati ve

ou tlo ok for A .I.G.'s cred it on Frid ay, in vest ors
unde rst ood the compa ny might soo n have to
prod uce up to $18 b illi on

AIG offers asset man agement serv ices thr ough AIG
In vestme nts, a group of in tern ati on al compan ies
wh ich pro vid e in vestmen t adv ice and mar ket ass et
man agement pr oducts and serv ices to c lients
ar ound the world. AIG In vestmen ts was formed in
1996 by cons olid ati ng the inv estment div is io ns of
vari ous AIG subs idi ar ies worldwid e. In its sh ort
hist ory, it has grow n bo th org an ically and by
acqu isi ti on.

AIG In ves tments is headqua rtered in Ne w York

and has a to tal of 46 inv estment offic es oper ati ng
in regi on al center s in Nor th A mer ica, Eur ope,
Sou th A mer ica, Afr ica and As ia and e mploy ing
over 2,100 pers ons as of 30 June 2008.
Addit io nally, the exte nsi ve ne two rk and re sourc es
of AIG, wh ich ope rate s in 130 count rie s and
jur isd icti ons, complement AIG Inves tments '
ne two rk.

AIG In ves tments of fers the wides t range of

inve stment cap ab ilit ies div ided i nto five major
gr oups – Equi ty, Fixed Inc ome, Re al Esta te,
Pr iv ate Equit y, Hedge funds and Other Altern ate
as set classes. It is also one of th e largest asset
man agement firms i n the world with ne arly US
$758 bill ion in ass ets as of 30 June 2008.

Our stre ngths lie in our glob ally in tegr ated

ope rat io ns and inv estment teams, our disc ipli ned
and esta blish ed in vestmen t process es, and the
kn owledge and expert ise of our di vers e group of
employee s.

With AIG as our par ent compa ny, we also enj oy

the benef its of a premie r ins ura nce and fi na nci al
ser vic es org an iz ati on with a dist ingu ish ed hist ory,
re now ned fi nanc ial leade rship and exten si ve
res ource s.

Gl obal Product Strateg ies

We offer inv estment soluti on s acro ss a full

spectr um of acti vely man aged str ateg ies in all
as set classes
Equ ity Lar ge, Mid and S mall Cap ital iz at io n

Gl obal, Cou ntr y and Reg ion al

Emerg ing Mar kets

Index ed
Fixed Income Gl obal, Cou ntr y and Reg ion al

In vestme nt Gr ade

Emerg ing Mar kets

Muni cip al Bond

High Yield/Leve raged Lo ans

Struc tured Pr oducts

Gl obal Secur it ies Lend ing

Pr iv ate Equit y Pr iv ate Equit y Funds -of -Fu nds

Ven ture Capit al, Le vera ged Buy -Out, Me zza ni ne,
Seco ndary

Spon sor ed Funds

Pr iv ate Fin ance

Hedge Funds Hedge Funds -o f- Funds

Lo ng / Sh ort

Event Dri ven

Macr o / Commod ity T rad ing A dv is or

Re al Esta te Gl obal, Cou ntr y and Reg ion al

Acquis it io n, Developme nt and Rede velopmen t

Co re Plus, Value Added and Opportu nis tic

Offic e, Ret ail, Res iden ti al and Indust ri al

Tot al Assets Under Man agemen t

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