American International Group

An Economic Analysis of the

Insurance Industry using AIG as a
Case Study

Agenda

Industry Analysis
Firm Analysis
Forecasts, Projections, Recommendations
Economic Environment
Macro Impact on Firm & Industry

Industry Analysis
Economy & The Markets for
Insurance

Managing Risk: Life is Full of Gambles

Utility
Utility gain
from winning
$1,000

Utility loss
from losing
$1,000

Wealth
Copyright2004 South-Western

0
$1,000
loss

Current
wealth

$1,000
gain

Managing Risks
Individuals/corporations can reduce
risk by choosing any of the following:
Diversify
Accept a lower return on their
investments

Buy Insurance

Is that all Or,

The Markets for Insurance

One way to deal with risk is to buy
insurance.
The general feature of insurance
contracts is that a person facing a
risk pays a fee to an insurance
company, which in return agrees to
accept all or part of the risk.

Risk vs. Return

Principle #1: Tradeoffs
Amount of coverage vs. the
(perceived) probability of loss
High Risk Aversion will drive higher
coverage
And hence higher insurance premiums!

Role of Insurance Industry in the

Economy
NOT to eliminate Risk, BUT
To spread it around more efficiently

Example:
Fire Insurance
Owning fire insurance does not REDUCE the risk
of losing your home in fire
In case of the unlucky event, the insurance
company compensates you for the loss
Risk is spread between all the shareholders..
(e.g. 10,000)
Easy to bear 1/10,000th of risk

Problems in Spreading Risk

Adverse Selection
A high risk person/corporation
is more likely to apply for
insurance than a low-risk
person
Health Insurance healthy
people dont buy group
insurance

Moral Hazard
People have less incentive to be
careful about their risky
behavior
Fire Extinguishers to get the
discount, failure to maintain

Calm down Joe! Nothing can

happen I am well insured

Come on this is real reason why

Insurance is NEEDED!

Insurance Categories
Property & Casualty
Auto, Home etc.
Catastrophes

Life & Annuities, Disability

Health Medical, Dental, Vision
Workers Comp. Unemployment & Disability
Specialty
Medical Malpractice
Product/Professional Liability
Fraud

Babe Ruth:
Specialty Coverage Sickness Policy

Industry Size
Insurance Industry is typically categorized
under
Financial Services sector

Wall Street Journal tracks:

266 Insurance Companies (as of 3/1/05)
All of them are classified under:
Financials -> Insurance and various subcategories of Insurance

Dow Jones Insurance Index: 7 Companies

Top 6 Insurance by Market Cap

February 2005

Source - http://www.bigcharts.com & http://www.wsj.com

Leading Writers of P/C Insurance

2003 ($000)
Rank

Company/Group

State Farm Mutual Group

Direct premiums written (1)

Market share (percent)

$47,226,012

10.5%

American International Group

32,366,506

7.2

Allstate Insurance Co. Group

23,055,892

5.1

Liberty Mutual Group

15,209,080

3.4

Travelers Property Casualty Corp. & Affiliates

14,830,949

3.3

Farmers Insurance Group

13,731,118

3.0

Nationwide Group

13,429,281

3.0

Zurich Insurance Co. Group

12,750,912

2.8

Progressive Casualty Group

12,191,955

2.7

10

Continental Casualty Group (CNA)

11,462,591

2.5

(1) Before reinsurance transactions, excluding state funds.

Source: NAIC Annual Statement Database, via National Underwriter Insurance Data Services/Highline Data.

Leading Insurers by Revenues

2003 ($ 000s)
Rank

Group

American International Group

Revenues

Assets
$81,300

$677,000

Berkshire Hathaway

63,859

180,559

State Farm Insurance Cos.

56,065

136,441

Allstate

32,149

134,142

Hartford Financial Services

18,733

225,853

Liberty Mutual Insurance Group

16,914

64,422

Nationwide

16,803

147,674

Loews (CNA)

15,810

77,881

Travelers Property Casualty

15,139

64,872

10

Progressive

11,892

16,282

11

Chubb

11,394

38,361

12

USAA

10,593

41,044

13

St. Paul Cos.

8,958

39,563

14

Fidelity National Financial

7,715

7,312

15

Safeco

7,358

35,845

16

First American Corp.

6,214

4,892

17

American Family Insurance Group

5,895

12,239

18

Erie Insurance Group

4,717

11,860

19

Auto-Owners Insurance

4,211

9,425

W.R. Berkley

3,630

9,335

20

TOP TWENTY U.S. PROPERTY/CASUALTY COMPANIES, BY REVENUES, 2003

Source: Fortune.,
($ millions)

Demand Factors
Risk Aversion
Most companies & people are Risk Averse!
Employee Benefits & Workers Compensation
Life, Dental, Vision + Short & Long Term Disability
Natural Disasters
Florida, Gulf-coast: Hurricanes
South Asian Tsunami Crisis
Fires, Earthquakes, Volcanoes, Floods
Man-made
Terrorism, 9/11
Re-insurance

Demand Factor:
Rising Employee Benefits Costs

Source - http://stats.bls.gov/news.release/pdf/eci.pdf

Demand Factors:
Weather, Global Warming

Demand Factors:
Hurricane Season!

The Economy & Demand Factors

Low interest rates and strong housing
market
Home Owners Insurance!

Consumer spending spree & auto

discounts
Auto Insurance

New Private Housing Starts

(Millions of Units)
New Private Housing Starts

2.0

Housing market remain

relatively strong despite rising
mortgage rates

1.9
1.8

Exposure outlook for HO

insurers in still good in 2004

1.7
1.6

1.62 1.64 1.57

1.70

1.70

1.60

1.35

1.4

1.29

1.3

YTD (Jan-May) homebuilding is

running well ahead of forecasts
as people rush to beat rising
rates and economy improves

1.20

1.19
1.01

1.1
1.0

1.85

1.48 1.47

1.46

1.5

1.2

1.96

90

91

92

93

94 95

96

97 98

99

00

01

02 03 04E 04F

Source: US Department of Commerce; Insurance Information Institute;

2004 estimates based on actual data for Jan-May. Blue Chip Economic Indicators 6/04 for forecast.

U.S. Homeownership Rate,

1990 to 2003
Homeownership is at a record high.
Because you cant buy a home without
insurance, insurance is clearly
available and affordable, including to
millions of Americans of modest
means and all ethnic groups.
65.4%

90

64.1%

92

67.8% 67.9%
67.4%
66.8%
66.3%
65.7%

64.7%

64.5%
63.9%

68.3%

64.0%

93

94

Source: U.S. Census Bureau

95

96

97

98

99

00

01

02

03

Average Expenditures on
Homeowners Ins.: US
Average HO expenditures are
expected to rise by 8-10% in 2003

55
3

$600

60
3

$650

51
2

50
0

41
8

$450

45
5

44
0

48
1

$500

48
8

$550

2*

3*
200

*III Estimates
Source: NAIC, Insurance Information Institute

200

1*
200

9
199

0*

8
199

200

6
199

199

5
199

$400

Homeowners Insurance Expenditure

as a % of Median Home Price

$139,000

$133,300

$128,400

0.36%

$121,800

$125,000

$115,800

$150,000

$110,500

The cost of
homeowners
insurance relative to
the price of a typical
home has fallen!

$147,800

0.37% 0.37% 0.37%

0.40%

$157,800

0.38% 0.38%
$175,000

$107,200

Median Home Sales Price

0.39%

Median Sales Price of Existing Homes

HO Insurance Expenditure as a % of Sales Price

0.38%

0.35%
0.35% 0.35%

0.33%

$100,000

0.30%
94

95

96

97

98

99

00

01

02

HO Expenditure as % of Sales Price

$200,000

*As of January 2003.

Source: Insurance Information Institute calculations based on data from National Association of
Realtors, NAIC.

Motor Vehicle Retail Sales

(Millions of Units)
18.0

YTD (Jan-May) auto sales

are running well ahead of
forecasts

17.8
17.4

17.5

17.2

17.3
17.1 17.0

17.0

17.1
16.7

17.2

16.8 16.9

16.5
16.0
16.0

New Motor Vehicle Sales

15.5

Sales of automobiles remained relatively strong

despite the weak economy in recent years. Economic
recovery, incentives, low rates & demographics will
keep exposure picture bright for auto insurers

15.5
15.5
15.0

96

97

98

99

00

01

02

03 04E 05F 06F 07F 08F 09F

Source: US Department of Commerce; Insurance Information Institute;

2004 estimates based on actual data for Jan-May. Blue Chip Economic Indicators 12/03 forecasts thereafter.

Average Expenditures on
Auto Insurance: US

$800

Countrywide auto insurance

expenditures are expected to rise
8-10% in 2003
72
3
68
7

68
3

70
4

70
6

66
8

$700

69
1

$750

78
4

$850

85
5

$900

$650

3*

0
200

200

9
199

2*

8
199

*Insurance Information Institute Estimates/Forecasts

Source: NAIC, Insurance Information Institute

200

7
199

1*

6
199

200

5
199

$600

Insurance is the Biggest Concern

of Small Business Owners
Labor Qlty.
9%

Labor Costs
5%

Inflation
4%

Credit/Int.
Rates
2%

Competition
9%

Insurance
20%

Regulations
11%

Poor Sales
19%

Taxes
19%

Source: National Federation of Independent Business (February 2003); Insurance Information Institute

Cost of Risk per $1,000 of

Revenues: 1990-2002E
$10

Cost of risk to
corporations fell 42%
between 1992 and
2000

$9
$8.30
$7.70
$7.30

$8
$7

$6.49

$6.40
$6.10

$5.70

$6
$5
$4

Estimated 15%
increase in 2001,
25% in 2002

$6.94

$5.71
$5.55
$5.25
$5.20$4.83

Cost of risk is still less than

it was a decade ago!
90

91

92

93

94

95

96

97

98

99

00 01E 02E

Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.

Insurance Industry: Critical Factors

Risk Assessment & Planning
What are the factors for insuring?
How to determine premiums?
Past is no longer predictive of the future
Analyzing & modeling past events is NOT
enough

Claims & Liability Management

Spread of Risk
Evaluating claims & disbursing funds

Underwriting, Capital & Asset Management

Risk Management: 3 Pillars

and Allocation of Capital
Common stock
accounts for
about 1/5 of
invested assets
Common Stock
21%

Underwriting
Other
5%

Cash & ST Secs.

6%

Real Est. & Mortgages

1%

Bonds
66%

Preferred Stock
1%

Capital
Management

Asset
Management

Source Swiss Re & http://www.iii.org, A.M. Best

Bond Holdings, by Type

Industrial & Misc.

32.5%

Special Revenue

30.5%

Governments

18.0%

States/Terr/Other

15.4%

Public Utilities

3.1%

Parents/Subs/Affiliates 0.5%

Comparing GDP to Insurance

Industry
Insurance Services are PART of the
Final Goods & Services that make up
GDP
Hence, it is difficult to compare it to the
size of the economy (GDP)

Next Chart shows

GDP by Industrial Sector & the size of
the Insurance Sector
Source: Bureau of Economic Analysis
gdpbyindustry@bea.gov

Size of Industry

Insurance
Carriers
Insurance Agencies, Brokerages & Related

2.50

400000

% Total Current $ (all Industries)

350000

Current Dollars

300000
250000
200000
150000
100000

2.00

1.50

1.00

0.50

50000
0
1998

1999

2000

2001

2002

2003

Year

0.00
1998

1999

2000

2001

2002

2003

Year

Current Dollars
IO Code
524100
524200

Description
Insurance carriers (Current $)
Insurance agencies, brokerages, and related (Current $)
Insurance carriers (% of Total)
Insurance agencies, brokerages, and related (% of Total )
Total ALL Industries (in Current $)

Percentage of total Industry Current

Dollars
1998
1999
2000
2001
2002
2003
276053
289468
311464
321499
330000
359602
102474
112098
116539
120010
126356
136143
1.91
1.89
1.88
1.93
1.95
2.03
0.71
0.73
0.71
0.72
0.75
0.77
14433957 15350018 16526171 16635124 16909522 17696205

Commercial Lines Net Written

Premium as % of GDP
Commercial insurance premiums
as a % of GDP fell 35% between
1988 and 2000 and remains far
below late 1980s levels

2.4%
2.3%

2.2%

2.1%

2.1%

2.0%

2.0%

1.9%

1.9%

1.9%

1.8%

1.8%

1.8%

1.7%
1.6%

1.6%

1.5%

1.4%

1.6%
1.5%1.5%

More Cover for Less Money:

Terms & conditions broadened
significantly during the soft
market, even as prices fell

1.2%
1.0%
88

89

90

91

92

93

94

95

96

97

98

99

00

01 02E

Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and
A.M. Best data.

P/C Financial Asset Distribution

1998-2003($ Billions)
1998
Total financial assets

1999

2000

2001

2002

2003

$876.4

$872.7

$862.0

$858.1

$918.8

$1,045.0

4.0

4.3

3.7

13.1

25.9

34.5

42.7

28.3

38.3

30.2

44.4

52.8

521.1

518.2

509.4

518.4

558.3

624.0

140.1

136.1

136.2

146.2

174.4

194.7

Treasury

70.4

60.6

52.1

52.0

61.2

68.4

Agency and GSE-backed securities

69.7

75.5

84.1

94.2

113.2

126.3

Municipal securities

208.1

199.0

184.1

173.8

183.0

204.6

Corporate and foreign bonds

171.1

181.1

187.5

196.4

198.9

222.7

2.0

1.9

1.6

1.9

2.0

2.1

Corporate equities

200.1

207.9

194.3

173.9

152.3

182.7

Trade receivables

61.5

63.6

64.6

69.9

74.8

79.3

Miscellaneous assets

47.0

50.6

51.8

52.6

63.1

71.7

Checkable deposits and cash

Security RPs (1)

Credit market instruments
U.S. government securities

Commercial mortgages

(1) RPs are repos (repurchase agreements).

Source: Board of Governors of the Federal Reserve System.

Employment in Insurance
1994-2003 (000s)
Insurance companies (1)

Year

Life, health and

medical

Property/ casualty

Insurance agencies,
brokerages and related
services (2)

Reinsurers

Total industry

1994

812.0

568.8

37.7

700.3

2,118.8

1995

807.4

552.0

36.3

712.6

2,108.3

1996

788.0

558.2

35.4

726.4

2,108.0

1997

797.4

566.9

35.1

744.1

2,143.5

1998

816.8

592.0

34.3

766.3

2,209.4

1999

815.3

603.9

33.5

783.4

2,236.1

2000

808.8

591.6

32.3

787.8

2,220.5

2001

807.7

591.3

31.4

803.2

2,233.6

2002

791.1

590.0

31.7

820.4

2,223.2

2003

792.3

606.2

30.6

837.0

2,266.1

(1) Described by the Bureau of Labor Statistics as direct insurers.

(2) Includes claims adjusters, third party administrators of insurance funds and other service personnel such as advisory and insurance ratemaking services.
Source: U.S. Department of Labor, Bureau of Labor Statistics.

Leading Causes of CEO Insomnia:

Profit Woes
Underwriting Performance
Reserving Issues
(In)Solvency Issue & Reinsurance Concerns
Pricing Discipline
Scarcity of Capital
Nightmare on Wall Street
Abuse of the Civil Justice System

INSURANCE CEO
Source Insurance Information Institure

P/C Net Income After Taxes

1991-2002 ($ Millions)
$40,000

2001 was the first year ever

with a full year net loss

$36,819

2002 ROE = 1.0%

$30,773

$30,000
$24,404
$20,598

$19,316

$20,000

$21,865$20,559

$14,178
$10,870

$10,000

$5,840
$2,903

$0
-$6,970

-$10,000
91

92

93

94

95

96

97

98

99

00

Sources: A.M. Best, ISO, Insurance Information Institute.

01

02

ROE: P/C vs. All Industries

19872003F
20%

15%

10%

5%

0%

-5%

There is an enormous gap between

the p/c industrys rate of return and
87 that
88 of
89 most
90
91major
92
93industry
94
95 96
97
98
groups
US P/C Insurers

99

00

All US Industries

Source: Insurance Information Institute; Fortune

01

02

03F

Underwriting Gain (Loss)

1975-2002
$10
$0

($20)
($30)
($40)
($50)

P-C insurers paid $30.5 billion more in

claims & expenses than they collected in
premiums in 2002

($60)

1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002

$ Billions

($10)

Source: A.M. Best, Insurance Information Institute

Terrorism:
Sept. 11 Industry Loss Estimates
($ Billions)

Property WTC 1 & 2

$3.5 (9%)
Other
Liability
$10.0 (25%)

Life
$2.7 (7%)

Aviation
Liability
$3.5 (9%)
Event
Cancellation
$1.0 (2%)

Workers
Comp
Aviation Hull
$2.0 (5%)
$0.5 (1%)

Property Other
$6.0 (15%)

Biz
Interruption
$11.0 (27%)

Consensus Insured Losses Estimate: $40.2B

Source: Insurance Information Institute

WC Reserve Deficiencies Rose

Through 2001, Dropped in 2002
$ Billions

Assuming losses are paid out in 30

years, implied discount rate is 4%

$25 Approximately of reserve deficiency

$20

is due to tabular reserves

$14.5

$15

$10.0

$10
$5

$20.0$21.0
18.3
$18.0

$0.5

$2.0

$4.6

$0
1994

1995

1996

1997

1998

1999

2000

2001

2002P

Loss & LAE Reserve Deficiency Through Year End

Difference between NCCI estimated ultimate losses and LAE as of 12/31/2002 and reported
Schedule P incurred losses and LAE
Source: NCCI

P/C Company Insolvency

Rates,
1993 to 2002
1.20%

1.33%

Insurer insolvencies are increasing

10-yr industry failure rate: 0.72%
Failure rating for B+ or better rating: 0.49%
Failure rate for D through B rating: 1.29%
10-yr Failure
Rate

1.02% 1.03%

0.79%

0.58% = 0.72%

0.60%

30
0.21%

1993

1994

1995

0.28%

1996

30

38

0.23%

1997

1998

Source: A.M. Best; Insurance Information Institute

1999

2000

2001

2002

Reason for P/C Insolvencies

(218 Insolvencies, 1993-2002)
Impaired Affiliate
3%
Unidentified
17%
CAT Losses
3%
Reinsurer Failure
0%

Change in Business
3%

Deficient Loss
Reserves
51%

Reserve
deficiencies
account for
more than half
of all p/c
insurers
insolvencies

Discounted Ops
8%
Overstated Assets
2%
Alleged Fraud
3%

Rapid Growth
10%

Source: A.M. Best, Insurance Information Institute

Policyholder Surplus:
1975-2002
$45

$ Billions

$36

$27

$18

Surplus is a measure of
underwriting capacity. It is
analogous to Owners Equity
or Net Worth in noninsurance organizations

$9

$0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Source: A.M. Best, Insurance Information Institute

Net Investment Income

16%
14%
12%

Billions
(US$)

10%
8%

History

6%

1997 Peak = $41.5B

4%

2000 = $40.7B

2%

3-Month T-Bill

1-Yr. T-Bill

10-Year
T-Note
2001
= $37.7B

Source: A.M. Best, Insurance Information Institute

2003
*

2002

2001

2000

1999

2002 = $36.7B

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

0%

Interest Rates: Lower Than

Theyve Been in Decades
16%

1.

Historically low interest rates are the primary

driver behind lower investment yields.
Nevertheless, overall insurer investment
performance outpaces all major market indices
and almost every major category of mutual fund.
66% of the industrys invested assets are in bonds

14%
12%

2.

10%
8%
6%
4%
2%

3-Month T-Bill

1-Yr. T-Bill

10-Year T-Note
2003
*

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

0%

*As of April 21, 2003.

Source: Board of Governors, Federal Reserve System; Insurance Information Institute

TORT-ure

Asbestos
Toxic Mold
Medical Malpractice
Construction Defects
Lead
Fast/Fattening Foods & Obesity
Reality TV
Arsenic Treated Lumber
Guns
Genetically Modified Foods (Corn)
Pharmaceuticals & Medical Devices
Security exposures (workplace violence, post-9/11 issues)
Slavery
Whats Next?

Average Jury Awards

1994 vs. 2001
$7,000

1994

2001

$6,000

($000)

$5,000
3,902

$4,000
$3,000
$2,000
$1,000

2,288
1,744

1,727
1,365

1,185
789

419

187 323

333

Vehicular
Liability

Premises
Liability

1,140

759

$0
Overall

Business
Negligence*

Wrongful
Death

Medical
Malpractice

*Figure is for 2000 (latest available)

Source: Jury Verdict Research; Insurance Information Institute.

Products
Liability

Cost of U.S. Tort System

($ Billions)

$350
$300

Tort costs consumed 2.0% of GDP annually on average since

1990, expected to rise to 2.4% of GDP by 2005!

$298

$250
$205

$200
$150

$129 $130

$141 $144 $148

$159 $156 $156

$167 $169

$180

$100
$50
$0
90

91

92

93

94

95

96

97

Source: Tillinghast-Towers Perrin. 2005 forecasts from Tillinghast.

98

99

00

01

05F

Insurance Fraud in the U.S.

Costs Billions!
Health
$61.4 billion
64%

Total Fraud Costs = $96.2 Billion

Life
$11.8 billion
12%
Disability
$0.5 billion
1%
Prop./Casualty
$22.4 billion
23%

Source: Conning & Co.

Firm Analysis: AIG

Introduction to AIG

AIG

International Presence, multiple subsidiary companies

Services Commercial, Institutional & Individual Customers

Through Worldwide Property-Casualty (P/C) and Life Insurance

Networks on any insurer

In US AIG Companies underwriters of Commercial &

Industrial Insurance
AIG American General Life Insurance
Other Businesses:

Financial Services

Aircraft Leasing, Financial Products, Trading & Market Making

Consumer Finance

Retirement Services (AIG SunAmerica)

Asset Management (AIG VALIC)

AIG Performance
90
80

USD Billions

70
60

Premiums

50

Investment Income
Total Revenue

40

Losses Incurred

30

Net Income

20
10
0
2000

2001

2002

2003

AIG has demonstrated robust growth

AIG: 11 Year Performance

20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0

Source AIG Annual Report

04

20

03

20

02

20

01

20

00

20

99

19

98

19

97

19

95

19

96

19

19

94

General Insurance
Operating Income
Life insurance
Operating Income
Financial Services
Operating income
Retirement Services
Operating Income

93
19

Dollars (Millions)

AIG: Operating Income

Operating Income by Segments

Source AIG Annual Report

AIG 5 Year Stock Performance

2003 Assets, Revenue Details

Opportunity to Grow Globally

Source AIG Annual Report

AIG Performance

Dollars (Millions)

AIG: Revenue & Profits

120000

14.0%

100000

12.0%
10.0%

80000

8.0%
60000

Revenue
Net Income

6.0%
40000

4.0%

20000

2.0%

0.0%
1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004

Source AIG Annual Report

Net Profit

AIG vs. Industry

Dow Jones Insurance Industry Index
INF
Tracks 7 Companies

AIG vs. DJ Insurance Index (INF)

5 Year INF Index

AIG INF DJIA

Percentage Change Chart 5 Year

AIG dominates the INF index.

AIG vs Industry

Source AIG Annual Report

AIG: Combined Ratio

AIG: Combined Ratio
120
100

Ratios

80
Loss Ratio

60

Expense Ratio

40
20
0
1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004
Source AIG Annual Report

AIG: Expense Ratio

AIG: Expense Ratio
22
21.5
Expense Ratio

21
20.5
20
Expense Ratio

19.5
19
18.5
18
17.5
1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003 2004

Source AIG Annual Report

AIG: Underwriting Affects on Profits

12000
10000

Underwriting Profit (Loss)

6000

General Insurance Operating

Income

4000

Net Income

2000
0

19
93
19
94
19
96
19
95
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04

Dollars (Millions)

8000

-2000

Source AIG Annual Report

AIG: Assets & Reserves

AIG: Invested Assets & Reserves
600000

Dollars (Millions)

500000
400000
Total Invested Assets

300000

Total Reserves

200000
100000
0
1993 1994 1996 1995 1997 1998 1999 2000 2001 2002 2003

Source AIG Annual Report

AIG: Investment Income

AIG: Investment Income
18000
14000
12000

General Insurance Net

Investment Income

10000
8000

Life insurance Net Investment

Income

6000
4000
2000

20
04

20
03

20
02

20
01

20
00

19
99

19
98

19
97

19
95

19
96

19
94

0
19
93

Dollars(Millions)

16000

Source AIG Annual Report

AIG: Return on Equity

90000

20
18
16
14
12
10
8
6
4
2
0

70000
60000
50000
40000
30000
20000
10000
0
19
93
19
94
19
96
19
95
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04

Dollars (millions)

80000

Source AIG Annual Report

ROE(%)

AIG: Shareholders Equity

Shareholders Equity
ROE

Strengths

Global Presence

Founded in 1919 in Shanghai

Operations in 130 Countries
Market share in individual countries is often very small compared to local
competitors

Most extensive worldwide property-casualty and life insurance networks of

any insurer.

Agreement with the Peoples Insurance Company of China (PICC) to develop the
market for accident and health products in China
Largest foreign life insurer in China

Combined Ratio of 92.43

Operating efficiency

Underwriting results and tight expense control (combined ratio) have

consistently outperformed the industry.

Ample opportunity for continued growth

General Insurance expense ratio further improved to 19.10 from 20.19 a year ago.

Worlds most profitable insurance organization

Investments in technology

Weaknesses

Large complex entity

53 Direct Subsidiaries/204 Total Subsidiaries

Disclosing less than many regulators would like

Lacking tolerance for aggressive regulatory or litigant attacks

Prefers to contest claims and litigate

Lacks an Competitive Advantage

Depends largely on investment-market performance for earnings.

Constraints return on capital

vulnerable to price-cutting

Regulatory Scrutiny/investigations
Poor claims-payment reputation

A large proportion of business is life insurance,

Demands excess capital be set aside in low-risk, low return

manner
Insurance is commodity-like

AIG Strategy
Practices diversification & expansion
Example - Financial Services, Aircraft
Leasing
Helps to protect & cushions from exposure
to pure insurance markets

Forecasts, Projections & Recommendations

Improving Critical Drivers

Use of Technology
Risk Assessment
Controversies
DNA/Genome Analysis for Life & Health
Insurance

Improved claims-management process

Improving returns on Asset

Management
Assessing Weather & Climate Risks

Claims Management

Beyond claims management:

Avoiding Workers Compensation

Recommendations
Spreading risk between
Insureds, Insurers, Re-insurers & the State
(Appendix A)

Global Expansion
With Partners
AIG is clearly demonstrated its partnership
capabilities

Role of the State (Principle #7)

Any democratic state has the self-imposed
constitutional responsibility of ensuring public safety
and order. If it is unable to fulfill this duty in its
entirety, it must at least contribute to the ensuing
costs
Coverage bottlenecks can be eased by the state as a
member of the risk community. This increases the
overall capacity available, which in turn facilitates key
economic activities, such as granting mortgages.
Attacks, may only get bigger, the bigger the risk
community, the more effectively the economic
consequences of the next mega attack will be
cushioned

Forecasts & Projections

Major Concern: Scandals & Probes

Economic Environment

The Industry Economic Model

Interest
Rates

Insurance Industry
Financial
Markets

+
Short-term Capital
for Underwriting

Stocks,
Treasuries, Bonds
Claim Events
Natural Disasters
Life Event
Loss of Property
Man-made: Terrorism

Home
Life
Health
Auto

Man-made &
Natural
Disasters
State
Regulations

Insurance Premiums
Property & Casualty

Employee Insurance

People
Corporations

Workers Comp

Financial Aid

Major Environment Changes:

1996-2000 vs. 2001-2005

GDP measurement changes 2003, to reduce large swings

caused by catastrophes such as 9/11
Rise of Terrorism
Global Warming, Increased Weather Disasters?
Is there something to it?
Aging Population
Health care for elderly, this is a GLOBAL problem
Social Security Privatization
US$ Devaluation!
Corporate Governance
Accounting & Financial Scandals

Fannie Mae, MCI, AIG, Mutual Fund Firms

SOX, More accountability

Declining Interest Rates

Macro Impact

Potential Macro Changes

Rising interest rates
Asset Management

Currency Exchange Rates

Euro vs. USD
Chinas Currency Devaluation

Catastrophic events

Interest Rates & Insurance Model

Rising Interest Rates
Interest
Rates

Insurance Industry
Financial
Markets Increasing Capital (remains Constant)
Returns

Stocks,
Treasuries, Bonds

Claim Events
Natural Disasters
Life Event
Loss of Property
Man-made: Terrorism

Home
Life
Health
Auto

More
Profits
For
Industry

Insurance Premiums
Property & Casualty

Employee Insurance

People
Corporations

Workers Comp

Catastrophic event
Interest
Rates

Financial
Markets

Insurance Industry

State

Stocks,
Treasuries, Bonds

CLAIMS

Home
Life
Health
Auto

INCREASE!

Insurance Premiums
Property & Casualty

Employee Insurance

People
Corporations

Workers Comp

Financial Aid

Wrap Up

Appendix A
The role of the State & Insurance
Industry

Country Specific Information

French Pool GAREAT- started on 1 January 2002, with

unlimited state guarantee in excess of the capacity provided by
the domestic insurance and international reinsurance markets.
Germany's Extremus Versicherungs-AG, started on 1
November 2002, with a government guarantee of 10 billion in
excess of 3 billion shared by the German insurance and the
international reinsurance community, to expire in 2005.
USA: Enactment of the Terrorism Risk Insurance Act (TRIA) on
26 November - a cost-sharing arrangement between the US
insurance industry and the federal government for losses
related to certified acts of terrorism.
Spain: The Consorcio de Compensacion de Seguros (CCS) is a
state insurance facility which guarantees cover for extraordinary risks such as earthquake, volcanoes, terrorism etc.
United Kingdow: Pool Re (insurance companies need to be
members)

Back Up Slides
AIG Facts & Figures

AIG Worldwide

AIG Facts

86,000 Employees
50 Million Customers
628,000 Sales Representatives
130 Countries & Jurisdictions

Source BEA:
GDP & Insurance Industry
How are insurance services measured in GDP?
In the 2003 comprehensive revision of the national income and product accounts, BEA adopted a new measure of insurance services. The
measure of insurance that is included in GDP is an estimate of the value of the services provided by the insurance company to its policyholders.
Insurance companies provide financial protection to policyholders through the pooling of risk, and they provide financial intermediation services
through the investment of reserves that are held to help cover extraordinary losses. After accounting for investment income, insurance companies
set premiums to cover the expected costs of providing the services, of settling claims, of maintaining reserves against future claims, and of
purchasing reinsurance.
Therefore, services of the property-casualty insurance industry are measured as direct premiums earned plus premium supplements -- that is,
the expected investment income earned from the investment of reserves that are directly attributable to policyholders because of prepayment of
premiums or accrual of benefits -- minus normal losses incurred and dividends paid to policyholders. The normal losses are calculated on the
basis of historical experience. Because the measurement of insurance services now uses normal losses rather than actual losses, the measure
no longer exhibits large swings when disasters take place. Additional information is available from the following articles:
How is GDP affected by a disaster?
GDP is a measure of the Nations current production of goods and services; as such, it is not directly
affected by the loss of property (structures and equipment) produced in previous periods. GDP may be
affected indirectly by the actions that consumers, businesses, and governments take in response to
disruptions in production or to the loss of property, but these responses are not amenable to precise
quantification; moreover, the responses may be spread out over a long period of time. For example:
Rebuilding activity, which may occur over many months following a disaster, will typically be reflected
in the regular source data used to estimate residential and nonresidential investment. There is no way
to disentangle the disaster-related rebuilding from other construction activity.
Tourism and other types of consumer spending may be canceled or postponed in the face of a
disaster; whether canceled or merely postponed, the effects will be embedded in the source data that
are used to estimate personal consumption expenditures. Again, there is no way to disentangle
disaster-related spending from other consumer spending.
As a measure of the Nations current production of goods and services, GDP includes the value of
insurance services produced for policyholders; under a new methodology adopted in the 2003
comprehensive revision, the value of insurance services is not directly affected by the payment of
benefits in the wake of a disaster. (See How are insurance services measured in GDP?)

Change in Cost of Homes vs. Change

in Cost of Homeowners Insurance
$10,000
$8,000
$6,000
$4,000

Recent increases in the cost of homeowners

$8,800
insurance are miniscule in comparison to the
soaring cost of homes
$6,600
$6,000
$5,700
$5,300
$4,900

$10,000

$3,300

$2,000
$0
-$2,000

$22

$15

$7

$26

$12

$12

$41

-$2
1995

1996

1997

1998

1999

2000

2001

2002*

Change in Cost of Median Existing Home

Change in Average Homeowners Insurance Expenditure
*August 2002
Source: Insurance Info. Inst. calculations based on data from Natl. Association of Realtors, NAIC.

Personal, Commercial &

Self (Un) Insured Tort Costs*
$180

Commercial Lines

Personal Lines

Total = $157.7 Billion

$160

$29.6

$140
Billions

Self (Un)Insured

Total = $120.2 Billion

$120
$20.1
$100

$70.9

$80

$51.0

$60

Total = $39.5 Billion

$40

$5.4
$17.1

$20
$0

$49.1

$57.2

1990

2000

$17.0
1980

*Excludes medical malpractice

Source: Tillinghast-Towers Perrin

Who Will Pay for the US Asbestos

Mess?
Estimated Total US Settlements & Expenses = $200 billion

Asbestos
Defendants
39%

US Insurers
30%
$78 billion

$60 billion

$62 billion

Foreign
Insurers
31%

Source: Tillinghast-Towers Perrin; Insurance Information Institute

Medical Malpractice:
Tort Cost Growth is Skyrocketing

$2.3

$1.9

$2

$1.5

$4

$1.2

$4.4

$6

$2.9
$3.6

$8.7

$7.9

$7.2

$7.1

$6.8

$7.0

$6.5

$8

$5.4

$10

$7.1

$12

$16.2

$14.6

$13.5

$14

$12.4

$16

Over the period from 1975 through 2000, medical

malpractice tort costs skyrocketed by 1,642% while
medical costs generally rose 449%, nearly 4 times as fast!

$11.6

$18

$10.8

$20.9

$19.4

$20

$9.4

$22

Over the period from 1990 through 2000, medical

malpractice tort costs rose 140%, more than double the
60% increase in medical costs generally over the same
period!

$17.6

$ Billions

$0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00

Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute

7.3%
7.4%

8.1%
7.6%

6.1%
5.7%

99

00

14.7%
12.0%

0.2%

1.3%

2.1%

5%

2.5%

5.1%

10%

6.4%

9.0%

8.0%

10.1%

15%

7.3%

Health care inflation is affecting the

cost of medical care, no matter what
system it is delivered through

11.2%
10.7%

Med Claim Costs Rising Sharply

-5%

92

93

-1.1%

-2.1%

0%

94

95

96

97

Health Benefit Costs

98

WC

Source: NCCI; William M. Mercer, Insurance Information Institute.

01

02

Industry Losses Under Proposed Federal

Backstop Using 9/11 Scenario
(as interpreted on date of enactment, Nov. 26, 2002)
$14.25B

Total Ind. Loss: $10.875B

$19.675B

$20

$1.75B
Industry
Co-Share

$0.925B
Industry
Co-Share

$10.575

$2.0B
Industry
Co-Share

$18.00

($ Billions)

$25

$15.75

$30

$15
$0.125B

$10 Industry $1.125

Co-Share

$5

$8.75

$18.75
$12.50

$0
Year 1
Industry Retention

Year 2
Surcharge Layer

Year 3
Co-Reinsurance Layer

Assumes $30B Commercial Prop & WC Loss, $125B At Risk Commercial DPE
Source: Insurance Information Institute.

Sources/Links

http://www.aig.com
http://www.aigcorporate.com
http://www.businessinsurance.com/cgi-bin/news.pl?newsId=4870
http://www.wsj.com
http://www.businessweek.com
http://www.iii.org
http://www.bls.gov
http://www.bea.gov
http://www.swissre.com
http://www.bigcharts.com
Principles of Economics, Third Edition, N. Gregory Mankiw, Thomson,
South-Western