American International Group, Inc. (AIG) is the world’s largest multinational insurance company. Since the company’s near-collapse during the 2008 financial crisis, AIG has enjoyed a remarkable financial turnaround. Yet, as corporate executives look to the future, there are no guarantees for success. As such, the current report is intended to provide a comprehensive analysis of AIG. Based on the findings, three corporate-level strategies to maximize the long-term profitability of AIG will be formulated. Using a decision criteria matrix, a recommendation for the best corporate level strategy will be provided.
In the years preceding the financial crisis of 2008, AIG’s Financial Products subsidiary engaged in risky and questionable investment practices that ultimately left the company insolvent by the fall of 2008. Considered by policymakers as a company that was too big to fail in the fragile U.S. economy, policymakers in Washington bailed AIG out with a massive loan of $182 billion (BNY, 2013). Predictably, AIG stock values plummeted in the wake of the crisis. Thereafter, many economists and investors feared the worse – namely, that AIG would be unable to repay its loans to U.S. taxpayers. Just three years after its near-collapse, however, AIG repaid the government the entire $182 billion loan plus another $22.7 billion (BNY, 2013).
Despite AIG’s good faith in repaying its debt, the company’s sullied public reputation remains a key issue and challenge today. As most American citizens see it, AIG was profligate and irresponsible in its investment decisions in the years leading up to the company’s near-collapse in 2008. And what is more, even after getting bailed out by taxpayers, AIG continued dispensing hundreds of millions of dollars in bonuses to executives even while the company still owed American taxpayers billions. Thus, despite the company’s impressive return to profitability since the 2008 crisis, AIG executives face the difficult challenge of re-imaging the company as “the new AIG” (AIG, 2014a).
AIG is faced with a number of issues that must be addressed in order for the company to move forward with confidence and success. First of all, AIG has a high level of market exposure with respect to equity volatility and interest rates (BNY, 2013). While AIG does not have any short term answers to this challenge, continued strategic efforts to reduce investment risks can pay off for the company within 5 to 10 years. Secondly, risk management has been a big problem for the company in the past. Looking ahead to the future, AIG executives will need to shore up the company’s ability to identify, assess, and prioritize risks. Last, but not least, AIG still has significant “contingent liquidity exposure at its non-insurance subsidiaries” (BNY, 2013).
As for key characters in the AIG case study, in 2011, CEO of AIG, Robert H. Benmosche, hired Peter Juhas as Vice President, Head of Strategic Planning. Juhas was a federal lead advisor at the Federal Reserve Bank of New York who worked closely with AIG during the bail-out period. Over the past two years, Juhas has been instrumental in advancing AIG’s strategy of “pursuing more profitable lines of business and reducing risk” (Tracer & Buhayar, 2012). This latter fact is good news for a company that needs to reduce market exposures and investment risks.
AIG objectives: 1) focus on growth of higher value lines of business to increase profitability and grow assets under management, 2) ensure that at all times AIG maintains the liquidity necessary to meet all of its liabilities and to maximize returns on investment, and 3) support the profitability objective for all AIG segments to deliver stable and consistent earnings (AIG, 2014b).
As for AIG’s strategic posture, the company’s mission reads as follows: “To be the world’s first-choice provider of insurance and financial services. We will create unmatched value for our customers, colleagues, business partners and shareholders as we contribute to the growth of sustainable, prosperous communities” (AIG, 2014a). To support the company’s mission, AIG has specific strategies for each of its three segments:
AIG Property Casualty strategies include: i) grow high value lines and optimize business mix; ii) execute on technical underwriting, improve claims management and analytics; and iii) capitalize on global footprint - presence in over 90 countries. AIG Life and Retirement strategies include: i) maintain balanced portfolio of products and leverage scale advantage, ii) optimize spread management through new business pricing and active crediting rate management, and iii) deliver stable consistent earnings. Mortgage Guaranty strategies include: i) selectively underwrite based on multivariate model to achieve higher risk adjusted returns, and ii) actively manage legacy book (BNY, 2013).
Collectively, AIG’s strategic posture is designed to help the organization leverage its strengths and advantages in order to remain the world’s largest multinational insurance company.
The policy umbrella for AIG is comprehensive and covers all of the following areas: Policy, AIG Anti-Corruption and Bribery Policy, AIG Insider Trading Policy, AIG Global, Anti-Money Laundering Policy, AIG Economic Sanctions Policy, AIG Global Anti-Boycott Policy, AIG Global Export Controls Policy, and AIG Social Media Policy. As a whole, the body of AIG policies takes aim at advancing corporate social responsibility and an ethos based on principles of honesty and integrity (AIG, n.d.). As such, AIG views its policy framework as a source of competitive advantage.
For the so-called new AIG, legal and ethical business practice is tantamount to business success. AIG applies its policy ethics framework to the broadest spectrum of stakeholders. AIG upholds the highest of professional standards with respect to employee speech and behavior. For example, the company does not allow its employees to criticize the products and services of other industry players. Internally, AIG has a zero-tolerance policy for any behaviors that might constitute unfair practice, intentional misrepresentation of facts, abuse of privileged information, and/or any other type of improper manipulation (AIG, n.d., p. 17).
In the global context, corruption and bribery have proven all too common for insurance companies like AIG. In seeking to be a leader in fighting these trends, AIG’s Anti-Corruption and Bribery Policy clamps down on illicit behaviors. AIG makes it clear that agents and/or independent contractors must never offer and/or accept gifts, benefits, and bribes of any kind. This policy directive is especially relevant in AIG’s dealings with government officials and state employees. In this respect, AIG is fully compliant with the entirety of the U.S. Foreign Corrupt Practices Act. In fact, any “employee who has knowledge of, or in good faith suspects, a violation of any of these laws, regulations, or Policies must report them promptly to the business unit compliance officer” (AIG, n.d., p. 28).
AIG takes the prospect of insider trading very seriously. Insider trading is the illegal practice of trading stock on the basis of the advantage gained from having access to private/confidential data. Many AIG employees and stakeholders have regular access to such information. However, in line with SEC rules and regulations, AIG enforces a zero-tolerance policy for insider trading. In fact, the AIG Insider Trading Policy says, “transacting in securities while in possession of material nonpublic information, or “tipping” this information to others, is against AIG policy and violates the law (AIG, n.d., p.25).
As a global multinational insurance company, AIG finds itself at risk of doing business with less than scrupulous individuals and/or entities. Money laundering (i.e., whereby illegally obtained funds are transformed into apparently legitimate funds) is a common problem in the insurance industry. AIG goes a step further than a simple zero-tolerance policy for any activities related to money laundering. In fact, AIG takes it upon itself to fully investigate any activities in its insurance network that may constitute non-compliance with Anti-Money Laundering laws. As such, the AIG Global Anti-Money Laundering Policy calls for employees to contact their manager “or the Business Unit compliance officer as soon as [they] have a concern that an activity might be unusual or suspicious” (AIG, n.d., p. 26).
The AIG Economics Sanctions Policy fundamentally supports U.S. government policies and regulations concerning the treatment of any persons or entities that may be involved in unlawful activities like terrorism, weapons distribution, and drugs/narcotics trafficking. In support of this policy component, the AIG Global Anti-Boycott Policy prohibits AIG employees from participating in any boycott related activities that are not supported and endorsed by the U.S. government (AIG, n.d., p. 26). AIG’s Social Media Policy governs the full spectrum of issues related to disclosure, privacy, unlawful transmission of information, and the use of unlawful “harassing, threatening, defamatory or discriminatory comments about the Company, its employees and/or customers” (AIG, n.d., p. 26). Summarily, AIG uses its policy framework to promote the company as the new AIG - a leader in the insurance industry that views corporate social responsibility as a source of sustainable competitive advantage.
Despite AIG’s return to profitability, the company faces some significant challenges for the future. Foremost, AIG has a “sizable contingent liquidity exposure at its non-insurance subsidiaries” (BNY, 2013). Also, the company faces constant threats in terms of the changing regulatory environment; the company has a poor track record in risk management (i.e., ability to assess and prioritize); the company is vulnerable to economic downturns and cycles.
This section of the current report provides an external analysis. Major topics include i) societal environment, ii) industry environment.
The following subsection provides a PEST analysis: political and legal climate (P), economic climate (E), socio-demographic changes (S), and technological changes (T).
Political and Legal Climate. As a multinational company, the political and legal climate for AIG is characterized by multiple layers of international, federal (U.S.), and state regulations. Additionally, AIG’s broad presence in the insurance industry (i.e., three business segments: property/casualty, life/retirement, and mortgage guaranty) expose the company to many different “types of regulatory authorities, including insurance, securities, derivatives, investment advisory, [and] banking and thrift regulators in the United States and abroad” (AIG, 2014b, p. 23). Finally, the political and legal climate is characterized by tight regulatory oversight that will continue to intensify in the near and foreseeable future.
With respect to U.S. federal regulation, primary regulators and related bodies include Board of Governors of the Federal Reserve System (FRB), Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), and Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). FRB is responsible for regulatory oversight of financial institutions. These financial institutions include “non-bank systemically important financial institutions (SIFIs), bank holding companies and savings and loan holding companies [SLHCs] (AIG, 2014b, p. 10). AIG is subject to FRB regulatory requirements for financial reporting which require transparency of all business and financial activities. OCC is an independent bureau operating within the U.S. Department of Treasury. OCC is responsible for regulating and supervising national banks and federal savings institutions. AIG’s Federal Savings Bank and federal savings association subsidiaries fall under the supervision and regulation of OCC (AIG, 2014b, p. 10). The SEC is, of course, the most formidable regulatory body that impacts AIG. The SEC oversees and regulates literally everything under the umbrella of U.S. securities and related markets. With respect to SEC operations and oversight, AIG’s Life and Retirement is the most heavily scrutinized segment of the company. Finally, CFTC oversees and regulates the U.S. swap, commodities and futures markets (AIG, 2014b, p. 10). With AIG’s shift away from risky financial products, the organization currently falls under moderate CFTC oversight.
The Dodd-Frank Wall Street Reform and Consumer Protection Act represents one of the most important legislative reforms to ever impact the insurance industry. It subjects a company like AIG to the following:
• minimum capital requirements for SLHCs and insured depository institutions;
• enhanced prudential standards for SIFIs (including minimum leverage and risk-based capital requirements, stress tests and an early remediation regime process);
• prohibitions on proprietary trading; and
• increased regulation and restrictions on derivatives markets and transactions. (AIG, 2014b, p. 23)
Summarily, the Dodd-Frank Wall Street Reform and Consumer Protection Act has exacted comprehensive reforms in the regulation and oversight of financial services in the United States. The reforms not only apply to bank holding companies and SLHCs but also to insurance depository institutions like AIG Federal Savings Bank.
As for U.S. state regulation, AIG contends with U.S. state regulators and the National Association of Insurance Commissioners (NAIC) standards. Most state insurance regulators oversee insurance companies like AIG in terms of issues like financial requirements for operating, corporate social responsibility and conduct, and market interaction. Also, “the NAIC, state insurance regulators establish standards and best practices, conduct peer review and coordinate regulatory” (AIG, 2014b, p. 24).
With respect to foreign regulation, primary regulators and bodies include the Financial Stability Board (FSB), International Association of Insurance Supervisors (IAIS), and the European Union (EU). Technically, FSB is not a regulator. In fact, FSB “coordinates the work of national financial authorities and international standard-setting bodies and develops and promotes implementation of regulatory, supervisory and other financial policies” (AIG, 2014b, p. 24). In this way, FSB functions as a key designer of the global financial regulatory landscape. As for IAIS, this global organization regulates and oversees the insurance industry in more than 140 countries worldwide. IAIS defines standards related to capital, systemic risk, corporate governance, and more. Finally, AIG is subject to EU regulatory standards and requirements for risks, financial reporting, and derivatives activities (AIG, 2014b, p. 24).
Economic Climate. Over the past 12 months, the global economic climate has been a mixed story for AIG. Four of the most troublesome economic factors confronting the company include historically low interest rates, uncertainties in global markets due to the U.S. debt ceiling debate in Congress, the 2013 U.S. government shutdown, and continued slow growth of the U.S. economy (AIG, 2014b, p. 63). As for low-interest rates, AIG should not expect any significant improvement over the next 12 months. In fact, most economists predict only moderate interest rates increases, at best, for 2014. Washington has, of course, finalized an agreement to raise the debt ceiling for 2014. Yet, the nation’s $16 trillion national debt continues to represent a drag on the U.S. economy. The need to raise the debt ceiling may be an issue, once again, in 2015.
If any silver lining exists for AIG, key economic indicators appear to suggest that the U.S. economy is postured for moderate growth in 2014. As for unemployment, the labor market appears to have stabilized. Unemployment in the U.S. reached 10.2% in late 2009 but has declined steadily since that time to its current level of 6.7% (Bureau of Labor Statistics, 2014b). As for other positive economic indicators, initial jobless claims have fallen to normal levels in the last six months. Recent data further indicates that inflation is moderate to low. For example, the Consumer Price Index for All Urban Consumers (CPI-U) increased by just 0.3 percent in December while the all items index increased 1.5 percent for 2013 (Bureau of Labor Statistics, 2014a). Thus, overall, the U.S. economy appears to be fully recovered from the economic crisis of 2008.
Socio-demographic Changes. For the insurance industry, age distribution represents one of the most important socio-demographic variables. As such, a key trend is that members of the baby boomer generation are reaching retirement age. Further, Baby-boomers are expected to live longer in retirement while placing “less reliance on traditional pensions and government retirement benefits than previous generations” (AIG, 2014b, p. 67). As another key demographic trend, the middle class in the United States is getting smaller. To worsen matters, the average household income for middle-class households in America is falling. As no surprise, members of Gen X and members of the Baby-boomer generation are not highly optimistic about the future of America. Yet, research shows that members of the Millennial Generation are “confident, self-expressive, liberal, upbeat and open to change” (PewResearch, 2014). As for the gender factor, the rate of women entering the workforce has dropped marginally in the United States. Globally, however, more women are entering the global labor market than at any time in history. Racial and ethnic distributions in the United States are also changing with minorities projected to be more than half of the U.S. population by 2050 (U.S. Census Bureau, 2008).
Technological Changes. The world of technology is rapidly moving toward the new Cloud Computing paradigm and the Internet of Things (IoT). Cloud Computing refers to a distributed area environment using the Internet as a backbone. Business organizations and other institutions can use Cloud Services with plug-and-play facility. The concept of IoT refers to an Internet that is plugged into sensors and other data input devices. Insurance organizations like AIG will have greater access to real-time data at lower and lower prices. For example, the rapidly evolving field of telematics (interdisciplinary field combining communications, global tracking systems, and information processing) will soon support applications for in transit property tracking (Deloitte Center for Financial Services, 2014). This technology will literally revolutionize the personal insurance sector by allowing insurance companies to know the whereabouts of any property in transport or storage.
This section provides an industry environment analysis according to Porter’s Five Forces model.
Level of Potential Competitors (threat of new entrants). As for the level of potential competitors (i.e., the threat of new entrants), the insurance industry has significant barriers to entry. The regulatory environment alone is complex and prohibitive for new entrants. The government also has specific entry restrictions in the industry limiting, for instance, the number of insurance companies that can compete in specific areas (Marsh Risk Management Research, 2013). Also, competing in the insurance industry is a high capital investment proposition; however using Porter's Five Forces model was proven successful when applied to South Korea's Information and Technology Industry. Summarily, although it is possible that AIG would face the prospect of a new entrant in the insurance industry, overall the threat is low.
Level of Buyer Power. Generally speaking, the level of buyer power is low. However, in considering the overall state of the global economy, an insurance company like AIG does not have significant latitude to raise insurance prices in certain segments. Individual buyers have enough options in the insurance market to say no to anything more than a marginal price increase. However, group and/or corporate buyers have significantly higher buying power. A large corporation purchasing group life insurance, for instance, can use its high margin purchase to leverage and bargain better deals.
Level of Substitute Threats. As for the level of substitute threats, AIG faces a highly competitive marketplace. The top competitors include Allstate; AON; Allianz; AXA Group; Delphi Financial Group; MetLife; and New York Life Insurance. Consumers and group buyers have diverse options for purchasing life insurance, property insurance, mortgage insurance, and literally the entire host of AIG insurance and financial products. Other available substitute options exist for worker’s compensation, commercial automobile liability, insurance for human-caused and natural disasters, professional liability, supplemental health, personal accidental, universal life, and more. Summarily, the level of substitute threats is significant for AIG.
Level of Supplier Power. In terms of the level of supplier power, the insurance industry is capital intensive. Suppliers, (i.e., those who supply capital) can exert a significant influence on a company like AIG in many potential ways. In the war for talent, for example, a well-capitalized company can attract the best human resource talent in the industry. A well-capitalized competitor could also establish investment advantages in technology and resources that provide a competitive edge. Thus, investors and other insurance companies (i.e., suppliers) sometimes have the power to control sources of competitive advantage.
Industry Rivalry (Competition). AIG operates in a fiercely competitive global environment. Although AIG’s principal competitors are large multinational insurance organizations, the company also faces competition from banks and other non-bank financial institutions (AIG, 2014b, p. 30). As many as 14 other major insurance companies represent AIG peer group organizations. Within each of AIG’s three major segments of operation (i.e., property/casualty, life/retirement and mortgage guaranty), the company literally competes with thousands of other organizations including stock companies, underwriting organizations, specialty insurance organizations, and life insurance providers.
This section of the current report provides an internal analysis. Major topics include i) competitive advantages, ii) financial status.
The following subsection provides a discussion of AIG competitive advantages. Subtopics include corporate structure and culture, corporate resources, and competitive advantage.
Corporate Structure and Culture. AIG consists of three segments: property/casualty, life/retirement, and mortgage guaranty. Business descriptions read as follows:
AIG Property Casualty - provides insurance products for the following: commercial, institutional and protection, investment and income solutions for individual customers; AIG Life and Retirement - provides protection, investment, and income solutions for financial and retirement security; AIG Mortgage Guaranty - provides private residential mortgage guaranty insurance. (AIG, 2014b, p. 3)
In addressing the question of whether consistency exists between the AIG corporate structure and the company’s current mission and objectives, the short answer is yes. Again, AIG’s mission takes aim at making the company the world’s leading insurance and financial services provider. AIG’s expanded corporate structure makes the company a major player in all key industry segments. Further, by breaking the company into three segments, AIG is able to channel the company’s abundant corporate resources with precision in its business strategy.
AIG is fundamentally committed to supporting a learning culture. A learning culture is characterized by systems thinking, knowledge sharing, and synergism. AIG’s emphasis and leadership in the use of technology are supported by a culture committed to world-class research and development within the company. AIG is pushing for the advancement of a scientifically-based approach to all the major business functions in the organization ranging from fundamental underwriting to product development and marketing. Thus, the overall culture of AIG is one characterized by a constant commitment to innovation (AIG, 2014a).
The AIG corporate culture is most aptly described as profit-oriented. In fact, the common objective of all three segments is to deliver stable and consistent earnings. Further, the company is known for encouraging significant risk - one of the reasons, in fact, for the near-collapse of AIG in 2008. Corporate executives at AIG exert significant top-down pressures in the company. In many cases, employee and business unit performance evaluations are tied to bottom-line results. Summarily, AIG’s structure and culture support the company’s current mission and objectives by focusing on business activities and stakeholder behaviors at the goal of maximizing bottom-line profits.
Corporate Resources. AIG is committed to the HR recruitment and hiring function. As an employee-centric organization, AIG understands the importance of providing training and personal growth and development opportunities. Employees are more motivated when they have opportunities to advance their skills and careers. Higher motivation, in turn, leads to improvements in performance and productivity. AIG also believes in the power of diversity. In this respect, AIG’s conceptualization of diversity goes far beyond the recognition of race and ethnicity. In fact, diversity within AIG refers to the panoply of skills, preferences and other individual differences among stakeholders and employees. For the most part, AIG is “continually growing [its] internal infrastructure for diversity and inclusion—to enhance employee engagement, mentoring, collaboration and networking” (AIG, 2014a.). For these reasons, diversity is considered a source of competitive advantage for AIG. AIG’s key corporate resource is the company’s talent pool. The human resource element is, in fact, supportive of the company's strategic goal of providing the best products and services in the industry. The company has also invested heavily in computer and communications technology. As a result, AIG information resources are almost unmatched by any industry competitors. Finally, AIG is resource-rich in terms of its global operations and presence in more than 90 countries worldwide (AIG, 2013, p. 3).
Competitive Advantage. At the corporate level, AIG sums up its competitive advantage in the following SEC filing document with a short statement:
We expect to continue to expand our comprehensive portfolio of products by developing superior, differentiated product solutions that meet consumer needs for financial and retirement security while incorporating volatility risk controls. Our scale and capital base provide competitive advantages that enable us to pursue market opportunities for growth. (AIG, 2014b, p. 68)
AIG’s 2013 annual report describes each segment’s competitive advantage as follows:
Property Casualty - distinguishes itself in the insurance industry primarily based on its well-established brand, global franchise, financial strength and large capital base, innovative products, expertise in providing specialized coverage and customer service. AIG Life and Retirement offers one of the industry's most extensive ranges of products and services, through its diversified, multichannel distribution network, benefiting from its strong capital position. AIG Mortgage guaranty - competitive edge equals achieving higher risk adjusted returns. (AIG, 2014b, p. 3)
Summarily, AIG’s competitive advantage is based on differentiating the company from its competitors in terms of scope/breadth of insurance/product offerings, the uniqueness of AIG product/service offerings, and expert customer service.
(Financial Statusdiagramomitted for preview. Available via download)
Return on Investment (ROI) definition: (gain from investment - cost of investment/cost of investment). AIG’s 6.32 percent ROI suggests that the company is performing well but less than optimal. As shown above, the industry ROI average is, in fact, 7.60 percent - a 1.28 percent differential. To bridge the gap, AIG needs to increase revenues and/or decrease costs.
Return on Equity (ROE) definition: (return on equity = net income / shareholder equity). AIG’s 3.7 percent ROE is a relatively low figure. The industry ROE average is, in fact, more than double AIG’s ROE. A low ROE generally indicates the need to widen margins by increasing return on sales. AIG’s 13.23 percent NPM) is, however, 3.35 percent above the industry average of 13.23 percent. Conclusively, AIG needs to improve the company’s cost control strategies and mechanisms.
Return on Assets (ROA) definition: (net income / total assets). AIG’s 0.8 percent ROA suggests that the company is struggling to convert assets to net income. The industry average is, in fact, more than three times higher at 2.7 percent. As a component of ROE, AIG’s low ROA further emphasizes the need for improving cost control strategies and mechanisms. Pre-Tax Margin refers to earnings as a percentage of total revenues (i.e., before taxes). Summarily, the profitability of a company is directly related to the pre-tax profit margin. AIG’s 13.64 percent pre-tax helps explain the company’s recent return to profitability. Yet, AIG remains 1.44 percent behind the industry average of 15.08. To improve the pre-tax margin, the company needs to increase sales and/or reduce costs.
As for trends, key ratios like ROI and ROE have flatlined over the past 3 years near the five-year averages listed in the table above. Overall, the ratio trends and averages suggest that AIG has worked its way back into profitability (i.e., since the company’s near-collapse in 2008) by improving sales and controlling costs. Yet, AIG remains below the industry average in four of the five key ratios. Summarily, AIG can improve its performance by finding ways to expand sales and revenue. At the same time, the company needs to find ways to better control and/or reduce operating costs and expenses.
(SWOT Analysis diagram omitted for preview. Available via download)
AIG's main strength is the company's strong global financial position. The company operates in some 90 countries worldwide. Also, AIG is currently one of the world's largest insurance companies. Together, these two key factors put the company in an advantageous position over smaller competitors.
As for brand equity strength, AIG has a well-known brand name. Some might contend that the company's sullied public reputation diminishes brand equity. To a degree, this is true. However, customers are most interested in insurance security and fulfillment of promises. In this respect, consumers generally believe that well-known brand names are more trustworthy than unknown companies. Moreover, the short-term memory of the public is limited. People can overlook AIG's past financial problems in light of the fact that the company successfully navigated one of the most remarkable turnarounds in U.S. corporate history.
With respect to AIG being a diversified company operating in many industry segments, this fact makes it easier for the company to leverage preemptive strategies. With the U.S. economy improving in 2014, for instance, AIG can use its broad market presence to offer new products and services to increasingly optimistic consumers who have more money to spend. In this way, AIG can leverage its ability to insure virtually any type of property or asset. Further, AIG's immense human resource pool can support growth scenarios with the company providing excellent service and support.
Finally, the improving U.S. economy promises to offer new growth opportunities for insurance companies. AIG's Casualty Property and Life and Retirement segments are already highly profitable. By building upon AIG’s strength in technology, AIG is likely to outperform smaller and technologically less sophisticated competitors.
In elaborating on AIG's weaknesses, AIG's financial problems in 2008 were predictable. The company had engaged in risky investment activities in the derivatives market. Obviously, even the most rudimentary risk management practices would have at least provided the basis for AIG executives to understand the degree of associated risks. Yet, AIG brought itself to the brink of total collapse. The recent recovery of the company is not indicative of improvement in this area. In fact, AIG largely supported its financial recovery by reducing its financial products segment to a small fraction of the AIG revenue pie. Such a move does not represent improved risk management; it simply constitutes a short-term risk aversion tactics, at best.
As for AIG's sizeable contingent liquidity exposure, the company must accept certain factors as part of the insurance industry. Contingent equity agreements and other conditional liquidity mechanisms are necessary for risk dispersion. In some respects, AIG has failed to fully leverage the impact of its financial turnaround. Admittedly, AIG's public relations department has faced significant challenges in trying to restore the company's image. But the company could have been more effective in PR efforts and outcomes.
As a large company, AIG has opportunities under different types of market conditions. The company can, for instance, sell assets during difficult economic times, even while smaller competitors struggle to remain profitable. Such an approach is not sustainable over the long term, of course. Yet, AIG has significant opportunities in emerging foreign markets in India and China. Together, in fact, the combined populations of these two countries represent close to one-third of the world's total population. As a well-capitalized company, AIG also has the opportunity to pursue acquisitions, mergers, and partnerships. Such tactics have, in fact, helped AIG significantly expand the company's global reach over the past two decades. Last but not least, the global market will continue to diversity in 2014 and beyond. AIG has many opportunities to tap into diverse market niches.
The threat landscape for AIG is rather daunting. As a multinational corporation, operating in multiple countries means that AIG faces a complex web of laws and regulations. Natural and/or human-caused disasters are unpredictable in both frequency and magnitude. Lawsuits and litigation costs represent a constant potential drag on AIG margins. At the same time, the cyclical nature of the free-market global economy creates significant uncertainties and risks. Although AIG knows how to leverage information and communications technology, the world of high technology changes rapidly. The associated costs of network security, maintenance, and upgrades pose significant threats to the company.
(TOWS Matrixomitted for preview. Available via download)
In returning to AIG’s strategic posture, the company’s mission comports with findings of the TOWS matrix. The composite construct of AIG strengths, weaknesses, opportunities, and threats provide a realistic and workable context for helping AIG become “the world’s first-choice provider of insurance and financial services” through the creation of unmatched value for customers, colleagues, business partners, and shareholders (AIG, 2014a). In other words, despite the company’s main weaknesses (risk management, contingent liquidity exposure, sullied public reputation, inadequate public relations department, and equity volatility), AIG can leverage internal strengths to achieve business objectives in the constantly evolving, dynamic global marketplace.
The four TOWS matrix strategic intersections result in formulation of strategies that directly and/or indirectly support AIG’s three main corporate objectives: 1) focus on growth of higher value lines of business to increase profitability and grow assets under management, 2.) ensure that at all times AIG maintains the liquidity necessary to meet all of its liabilities and to maximize returns on investment, and 3) support the profitability objective for all AIG segments to deliver stable and consistent earnings (AIG, 2014a). Yet, for AIG to achieve these three objectives, alignment must be supported between general corporate strategies and the TOWS’ derivative strategies.
As covered in part 1 of the current report, AIG’s strategic posture is built on segment-specific strategies that support the overall corporate mission of being the top insurance provider in the industry. Previous analysis has shown, more exactly, that AIG Property Casualty strategies are all about growing high value lines and optimizing business mix. Further, AIG Property Casualty strategies take aim at executing technical underwriting, improving claims management and analytics. AIG Life and Retirement strategies focus on maintaining a balanced portfolio of products and leveraging AIG scale advantages. The AIG Property Casualty segment also calls for optimizing management to support strategic pricing and active crediting rate management. Finally, the Mortgage Guaranty segment holds a strategic focus on selective underwriting based on the multivariate model to support higher risk adjusted returns. Conclusively, AIG’s strategic posture is complementary in relation to the TOWS assessment findings. Lastly, the current AIG policy structure does not require any major changes according to the TOWS findings. AIG’s policy framework is, in fact, robust enough to accommodate the strategic changes derived from the TOWS matrix.
Most critically, in aligning the TOWS findings with AIG’s formidable business problem, the company faces some significant challenges for the future. Again, AIG has a “sizable contingent liquidity exposure at its non-insurance subsidiaries” (BNY, 2013). Also, the company faces constant threats in terms of the changing regulatory environment; the company has a poor track record in risk management (i.e., ability to assess and prioritize); the company is vulnerable to economic downturns and cycles. Three possible strategies include Strategy A: invest even more heavily in information and communication technology with high ROI; Strategy B: leverage brand equity against competition; Strategy C: prepare for intensified international and national regulation.
(Decision Criteria Matrixomitted for preview. Available via download)
(Qualitative Criteria diagram omitted for preview. Available via download)
Based on the application of the TOWS matrix and the decision criteria matrix, the best corporate level strategy is strategy A. Summarily, the strategy helps AIG improve operational efficiency and, thereby, reduce operational costs. Therefore, AIG has a great opportunity to improve key performance ratios: ROI, ROE, ROA, net profit margin, and pre-tax margin. By doing so, the company puts itself in a position to defend against challenges like the sizable contingent liquidity exposure at its non-insurance subsidiaries. Further, strategy A (with improved information flow and decision support) helps the company address the constant threats related to the changing regulatory environment. Improved information flow and decision support can also help AIG improve its less than perfect track record in risk management. Finally, operational efficiencies gained by technology implementations can make the company less vulnerable to economic downturns and cycles.
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