Transcript AIG - Rajeev Dhawan

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
Copyright©2004 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 don’t 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
Worker’s 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
1
State Farm Mutual Group
2
Direct premiums written (1)
Market share (percent)
$47,226,012
10.5%
American International Group
32,366,506
7.2
3
Allstate Insurance Co. Group
23,055,892
5.1
4
Liberty Mutual Group
15,209,080
3.4
5
Travelers Property Casualty Corp. & Affiliates
14,830,949
3.3
6
Farmers Insurance Group
13,731,118
3.0
7
Nationwide Group
13,429,281
3.0
8
Zurich Insurance Co. Group
12,750,912
2.8
9
Progressive Casualty Group
12,191,955
2.7
10
Continental Casualty Group (CNA)
11,462,591
2.5
(1) Before reinsurance transactions, excluding state funds.
Source: NAIC Annual Statement Database, via National Underwriter Insurance Data Services/Highline Data.
Leading Insurers by Revenues
2003 ($ 000s)
Rank
Group
1
American International Group
2
Revenues
Assets
$81,300
$677,000
Berkshire Hathaway
63,859
180,559
3
State Farm Insurance Cos.
56,065
136,441
4
Allstate
32,149
134,142
5
Hartford Financial Services
18,733
225,853
6
Liberty Mutual Insurance Group
16,914
64,422
7
Nationwide
16,803
147,674
8
Loews (CNA)
15,810
77,881
9
Travelers Property Casualty
15,139
64,872
10
Progressive
11,892
16,282
11
Chubb
11,394
38,361
12
USAA
10,593
41,044
13
St. Paul Cos.
8,958
39,563
14
Fidelity National Financial
7,715
7,312
15
Safeco
7,358
35,845
16
First American Corp.
6,214
4,892
17
American Family Insurance Group
5,895
12,239
18
Erie Insurance Group
4,717
11,860
19
Auto-Owners Insurance
4,211
9,425
W.R. Berkley
3,630
9,335
20
TOP TWENTY U.S. PROPERTY/CASUALTY COMPANIES, BY REVENUES, 2003
Source: Fortune.,
($ millions)
Demand Factors
 Risk Aversion
 Most companies & people are Risk Averse!
 Employee Benefits & Worker’s 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 Owner’s 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 can’t 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
7
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
 [email protected]
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 $)
Percentage of total Industry Current
Dollars
1998
1999
2000
2001
2002
2003
276053
289468
311464
321499
330000
359602
102474
112098
116539
120010
126356
136143
1.91
1.89
1.88
1.93
1.95
2.03
0.71
0.73
0.71
0.72
0.75
0.77
14433957 15350018 16526171 16635124 16909522 17696205
Commercial Lines Net Written
Premium as % of GDP
Commercial insurance premiums
as a % of GDP fell 35% between
1988 and 2000 and remains far
below late 1980’s levels
2.4%
2.3%
2.2%
2.1%
2.1%
2.0%
2.0%
1.9%
1.9%
1.9%
1.8%
1.8%
1.8%
1.7%
1.6%
1.6%
1.5%
1.4%
1.6%
1.5%1.5%
More Cover for Less Money:
Terms & conditions broadened
significantly during the soft
market, even as prices fell
1.2%
1.0%
88
89
90
91
92
93
94
95
96
97
98
99
00
01 02E
Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and
A.M. Best data.
P/C Financial Asset Distribution
1998-2003($ 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
1987–2003F
20%
15%
10%
5%
0%
-5%
There is an enormous gap between
the p/c industry’s 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 ¼ 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
They’ve 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 industry’s 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
What’s 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
Dollars (Millions)
AIG: Operating Income
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
General Insurance
Operating Income
Life insurance
Operating Income
Financial Services
Operating income
Retirement Services
Operating Income
3 94 96 95 97 98 99 00 01 02 03 04
9
19 19 19 19 19 19 19 20 20 20 20 20
Source – AIG Annual Report
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
0.0%
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
Dollars (Millions)
8000
Underwriting Profit (Loss)
6000
General Insurance Operating
Income
4000
Net Income
2000
0
93 9 94 9 96 9 95 9 97 9 98 9 99 0 00 0 01 0 02 0 03 0 04
9
-20001
1
1
1
1
1
1
2
2
2
2
2
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
Dollars(Millions)
16000
14000
12000
General Insurance Net
Investment Income
10000
8000
Life insurance Net Investment
Income
6000
4000
2000
0
93 994 996 995 997 998 999 000 001 002 003 004
9
1
1
1
1
1
1
1
2
2
2
2
2
Source – AIG Annual Report
AIG: Return on Equity
90000
20
18
16
14
12
10
8
6
4
2
0
Dollars (millions)
80000
70000
60000
50000
40000
30000
20000
10000
0
93 9 94 9 96 9 95 9 97 9 98 9 99 0 00 0 01 0 02 0 03 0 04
9
1
1
1
1
1
1
1
2
2
2
2
2
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 People’s 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.
World’s 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 Worker’s 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
•Worker’s 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
 China’s 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
•Worker’s 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
•Worker’s 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 Nation’s 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 Nation’s 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