Why AIG was too big to fail

The American International Group, Inc. (AIG) is a global insurance organisation with headquarters in New York and London. It began in 1919 as American Asiatic Underwriters in Shanghai, China. Today, AIG’s companies provide property and casualty coverage, life insurance, retirement products, and other financial services in about 70 countries and jurisdictions. AIG’s common stock trades on the New York Stock Exchange.

2008 financial crisis

AIG has faced several major challenges throughout its history, including its near-collapse in 2008, which threatened the financial stability of the entire United States. During the crisis, the company became one of the institutions that received a government bailout because it was considered “too big to fail.”

What brought AIG to near insolvency?

Around 2008, a new financial product entered the market called a collateralized debt obligation, or CDO. The idea behind it was simple: combine different types of debt, known as tranches, into a single bundle and sell it to investors. Many large institutions created CDOs because they held large amounts of mortgage-backed securities. The problem was that many of these bundles included subprime loans, mortgages issued during the housing bubble to borrowers who could not afford to repay them.

AIG Financial Products (AIGFP), a division of AIG, sold insurance to protect investors from losses. The division expanded rapidly by insuring CDOs against default through a product called a credit default swap. At the time, AIGFP believed that defaults on these loans would be rare, so the risk of paying out large claims seemed minimal. This confidence ignored a crucial issue: many of the insured CDOs contained bundled mortgages, and the lowest-rated tranches were filled with subprime loans.

When the housing bubble burst and foreclosures surged to record levels, AIG had to honor its insurance commitments. AIG Financial Products suffered losses of about $25 billion from these payouts alone. The company then faced even more losses when its credit rating dropped, which forced AIG to post additional collateral for its bondholders.

Why was American International Group considered too big to fail?

AIG was considered too important to the global economy to allow it to fail. Many mutual funds, pension funds, and hedge funds were either insured by the company or had invested heavily in it. Investment banks also relied on AIG because their CDO holdings were insured by the firm, meaning they could lose billions if AIG collapsed. Goldman Sachs was one of the institutions at risk. Money market funds faced similar danger, since many of them held AIG bonds and would have suffered large losses if the company went under.

The U.S. government stepped in with a bailout to prevent the crisis from worsening. According to the U.S. Department of the Treasury, its total support for AIG during the financial crisis reached about $182 billion. This amount included nearly $70 billion from the TARP program and $112 billion from the Federal Reserve Bank of New York.

American International Group today

AIG has since moved on from the 2008 crisis and remains a major player in the insurance industry today.

AIG 4th quarter and full year 2022 results

According to an AIG press release on 15 February 2023, these are some notable results announced:

• AIG’s General Insurance division delivered its strongest underwriting results to date. Full-year 2022 underwriting income nearly doubled from the previous year, reaching $2.0 billion.

• In the fourth quarter, General Insurance improved its combined ratio by 2.5 points, bringing it down to 89.9%. For the full year, the combined ratio improved by 3.9 points to 91.9%.

• AIG repurchased $779 million of common stock and redeemed $1.8 billion of senior unsecured notes in the fourth quarter. Over the full year, the company returned more than $6.1 billion to shareholders. This included $5.1 billion in stock buybacks and $1.0 billion in dividends. By the end of 2022, the number of outstanding common shares was 10% lower than the previous year.

Fitch Ratings

On 27 February 2023, Fitch Ratings upgraded the Insurer Financial Strength (IFS) ratings of AIG’s rated property and casualty subsidiaries to A+ (Strong) from A (Strong). The agency also affirmed AIG’s Long-Term Issuer Default Rating (IDR) at A-. Corebridge Financial Inc.’s Long-Term IDR was affirmed at A-, and the IFS ratings of its life insurance subsidiaries remained at A+ (Strong).

Blackstone and AIG

A Bloomberg article published on February 2, 2023, reported that Blackstone Inc. agreed to buy AIG’s $3.6 billion in collateralized-loan obligation assets, according to people familiar with the deal. The purchase would make Blackstone the largest CLO manager in the $1.2 trillion global market that repackages leveraged loans into bonds. With AIG’s CLOs included, Blackstone would manage about $51 billion of these assets, slightly surpassing Carlyle Group Inc.

Technology initiatives

In 2021, the company spent $2.3 billion on ICT, with much of the budget directed toward hardware, software, and related services. It is focusing on emerging technologies such as blockchain, cloud computing, and big data to improve efficiency, streamline operations, and strengthen its product offerings. The company also uses advanced tools for data intelligence and predictive modelling to better assess and forecast risk.

American International Group Inc. (AIG) sports sponsorships

AIG is the title sponsor of the AIG Women’s Open, an internationally recognised championship that highlights exceptional women athletes. The company also serves as the official insurance sponsor of the PGA of America. Together, they work to grow the game of golf and support PGA Member professionals.

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