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The Rise and fall of AIG: AIG Is Back
When we hear the name AIG, we automatically think of bailouts, government, and failure; but, there is much more to AIG and its history. In 1919, an entrepreneur named Cornelius Vander Starr formed a small insurance agency in China. Starr did not stop there, “[In] 1926 Star [opened] a New York office under the name American International Underwriters” (American International Group, 2011). And from that point forward, Cornelius Starr worked on building a worldwide portfolio, and securing his place in American and world corporate history.
Sadly, Starr passed away in 1968, only one year after a major reorganization, forming what is now AIG. Shortly before Starr’s death, Maurice R. Greenberg took the place of president and CEO. AIG continued to grow and expand at an amazing rate, building a remarkable portfolio. In fact, AIG did not show a loss in profit until 1984, but, rectified this loss in 1985. In 1985, AIG posted a net income of $420 million, and by 1997 passed the $1 billion mark. AIG was making its mark across International Borders, and profits were showing remarkable gains (American International Group, 2011).
Unfortunately, AIG’s luck soon ran short; in the late 1980s AIG was slapped with the “largest arbitration award in world history” (American International Group, 2011). “Enron Corporation was awarded a $162 million claim from insurers for Peruvian properties that had been expropriated, and AIG was forced to pay nearly two-thirds of the judgment” (American International Group, 2011). But, Greenberg did not let this setback affect the momentum of the corporation. He continued to buy other businesses, and intertwine with others; this strategy worked, and soon AIG was back on top.
In 1992, Jeffrey Greenberg, the son of Maurice Greenberg, received negative press for what was conceived to be an ethical mishap. When hurricane Andrew ravaged the coast of Florida, Jeffrey sent a memo to staff suggesting that AIG take advantage of the situation and raise prices. Greenberg even added with enthusiasm, “Please get it moving today”; this in turn got activists like Ralph Nader, who accused Greenberg of starting a “cycle of price gouging”, to cause negative press for AIG. Greenberg’s father, Maurice, stood by his son, stating,”… that the contents of the memo were taken out of context and were part of a larger discussion of long-needed rate increases for commercial insurance” (American International Group, 2011). Again, AGI picked up the corporate pieces, and continued the fight for superior placement in the insurance industry.
By the mid 1990s, AIG was raking in net profits of over $114.35 billion. But, AIG’s problems were not over, they were just beginning. On September 11, 2001, America’s foundation was rocked by the sound of the Twin Towers falling to the ground beneath it; AIG heard another unsettling sound, the sound of $50 billion being paid out in insurance claims. Although this did not break the corporation, it took a large part of their capital; it would take time to recover. AIG is the leading insurance carrier because; they have a unique way of overcoming economical challenges (American International Group, 2011).
After years of leadership in the industry, and overcoming adversities, years 2007 and 2008 took its toll on AIG. Between the American and world economy issues, AIG’s plight was detrimental. On September 16, 2008, “the FRBNY extended to AIG a two-year emergency secured loan of up to $85 billion…Additionally, the U.S. Treasury would be entitled to 79.9 percent equity ownership of AIG through preferred stock” (September 2008: Initial, 2011). In all of AIG history, the corporation has been independent of government involvement; now the American Government owns over three-quarter of the corporation. But, AIG corporate management is determined to buy that stock back, regaining its independence once again (September 2008: Initial, 2008).
Not long after the government bailout, AIG was the leading corporation in the negative press category. Word leaked out that AIG was giving out large bonuses to executive staff members; this outraged the American tax payers and the government. AIG’s leader, Edward M. Liddy, stated in response to the anger, “The company promised before the government started bailing out the firm in September that employees would be awarded more than $400 million in retention pay this year and next” (Cho, D. Dennis, B., 2009). The American Government and tax payers believe that the corporation executives should not get the bonuses in light of their financial situation. If it were not for the bailout, none would have a job much less a bonus.
In the end, AIG top executives, including Liddy, “agreed to forgo their bonuses” for the year, and others took a cut as well (Cho, D. Dennis, B., 2009). But, the bitter taste was left in the mouths of Americans; although some bonuses were not given, an amazing $9.6 million was given to some staff members, with more to come in the future. In 2008, AIG reported a net loss for the fourth quarter at almost $62 billion, and a net loss of $5.3 billion in 2007; restructuring alone cost the corporation $6.7 billion. There were concerns throughout AIG governance that “AIG’s internal control over financial reporting [was lacking]” (AIG Reports Forth, 2009). This is a financial concept and strategy that is sure to fail, and will possibly bring the company to an abrupt end.
Retention pay is another concept that is in question, and this may be another downfall for AIG. It is important first to understand what retention pay is; the ability to keep and hold employees so they do not go elsewhere for better money. This may seem like a great strategy to keep staff members, especially in a big corporation like AIG, but, in times of financial plight, staff must be loyal, not greedy. There are other ways of insuring that company secrets stay within the fold; for instance, having confidentiality contracts with provisions made for departing employees is one way. Since the bailout fallout, AIG has changed their retention plan to pay bonuses based on profits, which puts the company in danger of losing some staff members (Cho, D. Dennis, B., 2009).
Based on the AIG recapitalization plan and the current repayment of almost $21 billion to the FRBNY in January 2011, this company seems to be gaining its renewed sense of independence. In addition, December 2010s quarter net income profits were reported as being $11.2 billion and AIG reported the twelve month earnings as $7.8 billion; this means that AIG is on the come-back and will likely succeed in their fight for economic independence. When joined, AIG’s total equity in December 2010 was $113.2 billion, compared to $98.1 the previous December. This is encouraging news for AIG executives and their consumers (AIG Reports Fourth, 2011).
There are a couple of ways that AIG can preserve the corporation and gain back their independence. First, selling off some assets and debt has proven in the past to be helpful in retaining AIG’s leading stand in the industry. It is important that this corporation pay the American tax payers back as quickly as possible. To keep its credibility, AIG must show the people that they are worthy of investment. Another way to gain back independence is to stop the employee retention payments all together. It would be more beneficial to the company, and less expensive to draw up confidentiality contracts instead. Because, someday the current money given will not be enough to keep some, and more money will be expected; some employees may even threaten to reveal trade secrets if not paid to stay. But the most beneficial way to get on track is by continuing to offer a fair service for a fair price; this keeps consumers loyal, and workers proud to be an employee (AIG Reports Fourth, 2011).
In conclusion, while AIG has had financial issues the company remains a leading competitor in the insurance industry. This major corporation started as one man’s dream and determination, and continues to thrive, even in the face of adversity. And although AIG is now government sponsored, the belief that this company will earn back its independence and respect is wide-spread. Finally, AIG has already made a real effort in repaying debts and retaining corporate independence; which in turn, will make them larger than ever before (AIG Reports Fourth, 2011).
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