International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CASE STUDY 8.1

The Demise of AIG

This case study accompanies Chapter 8 of International Corporate Finance.

They thought they were selling insurance, when in fact they were betting the company's soul in a high-stakes game of Russian roulette.

U.S. Congressman Christopher H. Shays

At its apogee in 2007, American International Group (AIG) had 74 million customers, employed 116,000 people worldwide, and generated $110 billion in revenue with an asset base of US$1 trillion. Approximately half of its revenue came from general insurance—primarily property and casualty—with the other half generated by life insurance, financial services, aircraft leasing, and asset management. AIG traced its roots to Shanghai (China), where Cornelius Vander Starr established a small insurance agency in 1919 under the name of American Asiatic Underwriters. Not long after, as he started to represent U.S. insurance companies in China, Starr opened an office in New York called American International Underwriters to directly underwrite U.S.-owned risks in Asia. The firm grew by leaps and bounds, first in Asia and later in Latin America and Europe, but it struggled in the United States until Starr hired Maurice “Hank” Greenberg in 1962. Over the next four decades Greenberg masterminded AIG's phenomenal growth into one of the global giants of the insurance industry.

AIG AND THE RISE OF AIG FINANCIAL PRODUCTS UNIT

The demise of AIG was probably seeded in the creation in 1987 of its Financial Products Unit dedicated ...