AIG's Business Overview and History
American International Group, Inc. (AIG) is a leading global insurance organization that has undergone a remarkable transformation in recent years. Founded in 1919, AIG has evolved from a traditional insurance conglomerate into a more focused and disciplined provider of commercial and personal insurance solutions worldwide.
AIG's origins can be traced back to 1919 when Cornelius Vander Starr established American Asiatic Underwriters, a general insurance agency, in Shanghai, China. Over the next few decades, the company expanded globally, establishing operations across Asia, Europe, and the Americas. In 1967, the company was renamed American International Group, Inc. and became a publicly traded entity.
During the 1970s and 1980s, AIG experienced rapid growth, becoming one of the largest insurance and financial services companies in the world. The company diversified into a wide range of insurance and financial products, including life insurance, property and casualty insurance, annuities, mutual funds, and financial services. AIG also made a number of strategic acquisitions during this period to expand its global reach and product offerings.
However, the company faced significant challenges during the 2008 financial crisis. AIG was one of the firms hit hardest by the crisis, requiring a massive $182 billion bailout from the U.S. government to avoid collapse. The company was forced to sell off numerous business units to repay the bailout funds and streamline its operations. This period was extremely difficult for AIG, which had to undertake a major restructuring and transformation to regain its financial footing.
In the years following the financial crisis, AIG has worked to rebuild and refocus its business. The company has divested non-core assets, reduced its debt load, and invested in technology and innovation to enhance its operations. AIG has also worked to strengthen its risk management practices and reposition itself as a leading global insurance and financial services provider.
Today, AIG operates in approximately 80 countries and jurisdictions, offering a diverse range of insurance products and services to commercial and individual customers. The company operates through two primary business segments: General Insurance and Other Operations.
The General Insurance segment is a leading provider of insurance products and services for commercial and personal insurance customers. It includes one of the world's most far-reaching property casualty networks. This segment offers a broad range of products to customers through a diversified, multichannel distribution network and consists of two main operating segments:
1. North America: This includes insurance businesses in the United States, Canada, and Bermuda. Key product lines include Property, Liability, Financial Lines, Specialty, Accident & Health, and Personal Lines.
2. International: This includes regional insurance businesses in Japan, the United Kingdom, Europe, Middle East and Africa (EMEA) region, Asia Pacific, Latin America and Caribbean, and China. Key product lines are similar to those offered in North America, including Talbot Underwriting Ltd. and AIG's Global Specialty business.
The Other Operations segment primarily consists of income and expenses from assets, including AIG's ownership of Corebridge, held by AIG Parent and other corporate subsidiaries, deferred tax assets related to tax attributes, corporate expenses and intercompany eliminations, results of AIG's consolidated investment entities, General Insurance portfolios in run-off, as well as the historical results of AIG's legacy insurance lines ceded to Fortitude Reinsurance.
Financial Performance and Ratios
AIG's financial performance has shown steady improvement in recent years. For the fiscal year 2023, the company reported annual revenue of $47.25 billion and net income of $3.64 billion. The company's operating cash flow and free cash flow for the year were both $6.24 billion, indicating strong cash generation capabilities.
In the most recent quarter (Q3 2024), AIG reported revenue of $5.90 billion, representing a 7% year-over-year growth, and net income of $459 million. The company's General Insurance segment reported net premiums written of $6.93 billion in Q2 2024, down 8% year-over-year, and underwriting income of $430 million, down 28% year-over-year. The combined ratio for this segment was 92.5% in Q2 2024, up 1.6 points year-over-year, while the accident year combined ratio, as adjusted, was 87.6%, down 0.4 points year-over-year.
The Other Operations segment reported an adjusted pre-tax loss of $158 million in Q2 2024, down 43% year-over-year, and net investment income of $141 million, up 171% year-over-year.
AIG's financial ratios demonstrate its strong financial position. As of Q3 2024, the company's debt-to-equity ratio stood at 0.178, indicating a conservative leverage profile. Additionally, the company's current ratio of 1.050 and quick ratio of 1.678 suggest a healthy liquidity position. AIG Parent maintains a $4.5 billion committed revolving syndicated credit facility, further enhancing its financial flexibility.
In terms of profitability, AIG's gross profit margin was 60.2%, while its net profit margin was 11.6%. The company's return on equity (ROE) was 5.72%, reflecting its ongoing efforts to enhance its operational efficiency and capital management.
Operational Transformation and Innovation
Under the leadership of CEO Peter Zaffino, AIG has undergone a significant operational transformation to enhance its underwriting discipline, reduce volatility, and improve its overall financial performance.
One of the key initiatives is AIG Next, a company-wide program launched in 2024 to simplify the organization, streamline operations, and invest in core capabilities. This includes the implementation of advanced data and analytics, as well as the integration of generative AI to modernize the underwriting process. AIG expects to fully realize $500 million in savings from the AIG Next program in 2025, which will impact both the General Insurance and Other Operations segments.
According to Zaffino, AIG's early pilots with generative AI have already yielded impressive results, with data collection and accuracy rates within the underwriting process improving from 75% to over 90%, while significantly reducing processing times. This innovation is expected to drive greater operating leverage and allow underwriters to focus more on strategic risk selection and business development.
Furthermore, AIG has made substantial progress in managing its exposure to natural catastrophes, which have become increasingly frequent and severe in recent years. The property and casualty insurance industry has seen an increase in catastrophe losses and frequency of severe weather events, putting pressure on underwriting profitability. However, AIG has strategically optimized its reinsurance program, reducing its net retention and limiting its exposure to catastrophic events. As a result, AIG's catastrophe-related losses have declined dramatically, even as the industry has faced heightened insured losses.
Shareholder Returns and Capital Management
AIG has demonstrated a strong commitment to shareholder returns through its disciplined capital management strategy. The company has an active share repurchase program, having returned over $5.5 billion to shareholders through buybacks and dividends in the first nine months of 2024. AIG plans to continue executing on its $10 billion share repurchase authorization over 2024 and 2025, subject to market conditions.
Additionally, AIG has reduced its debt levels, with a debt-to-total-capital ratio of 17.9% as of Q3 2024, one of the lowest in the industry. The company expects to maintain this conservative debt leverage ratio going forward. This financial flexibility allows AIG to pursue strategic opportunities, both organically and through potential acquisitions, while maintaining a strong balance sheet.
Looking ahead, AIG is targeting a 10% core operating return on equity (ROE) for the full-year 2025, driven by its continued underwriting excellence, expense management, and capital optimization initiatives. The company's management is confident in its ability to achieve this target through the combination of disciplined capital management, sustained continued underwriting performance, and focus on expense management.
Geographic Performance
AIG operates globally, with significant business in North America, as well as the United Kingdom, Europe, Middle East, Africa, Asia Pacific, Latin America and the Caribbean. The company's diverse geographic footprint allows it to benefit from various market opportunities while mitigating risks associated with regional economic fluctuations.
Conclusion
AIG's transformation over the past several years has been nothing short of remarkable. By focusing on its core insurance operations, enhancing its underwriting discipline, and embracing technological innovation, the company has positioned itself as a global leader in the insurance industry.
With a strong balance sheet, disciplined capital management, and a relentless focus on operational efficiency, AIG is well-poised to navigate the complex and challenging landscape of the insurance market. The company's recent performance, including beating its own expectations with favorable prior year reserve development of $153 million and a calendar year combined ratio of 92.6%, demonstrates its ability to deliver outstanding results.
As AIG continues to execute on its strategic initiatives, including the AIG Next program and the integration of advanced technologies, investors can expect to see further improvements in its financial performance and shareholder value creation. With a clear path to achieving a 10% core operating ROE by 2025 and a commitment to maintaining a conservative financial position, AIG is well-positioned for sustainable growth and success in the years to come.