Multinational corporation case study American International Group

Harmonizing to Dunning ( 1993 ) , a transnational corporation is ‘that engages in foreign direct investing and owns or controls value-adding activities in more than one state ‘ and the cardinal planning of MNE is done in headquarter. To cover with the operation in other states more efficiency and efficaciously, hence a few authorization determination devisings will be given to local subordinates ( Wall, et al. , 2010, pp. 29 ) . Recently, there are more than 35,000 transnational corporations in globally and commanding over 15,000 foreign subordinates ( Baafi, A. B. , 2009 ) .

American International Group ( AIG ) is one of the universe recognize MNEs every bit good as they operate over 130 states and legal powers. Besides, they employ a big figure of employees and have 714,000 agents and agent in worldwide. Additionally, the company portion monetary value is list in New York stock exchange, Ireland, Tokyo and other states ( AIG.INC, 2010 ) . AIG was the 4th largest company ( as per the evaluations ) in the universe from Global Forbes 2000 List in twelvemonth 2006 and in twelvemonth 2007 they own over $ 1 trillion assets around the universe ( Tyson, J. , 2010 ) .

2.0 Company Background

American international group ( AIG ) is the leader in insurance industry and fiscal services interim besides taking world-wide insurance association and it based in New York, United State ( AIG.INC, 2010 ) . The chief rivals for AIG are ALLIANZ SE and AXA SA ( AOL.INC, 2010 ) .

The end of AIG is to ever maintain in touch with their client, while to carry through client demands. Since 1919, founded Edwin Cornelius Vander Starr start to sell insurance services at Shanghai, China, and acquire good feedback from the responses, so growing the concern to other states such as Asia, Latin American, Europe and Middle East states every bit good. However, the operation has changed when Hank Greenberg takes over the company in twelvemonth 1962, from the cardinal personal insurance to the profitableness corporate insurance coverage. In twelvemonth 1969, the company went public and 1980s U.S. and Hong Kong formed direct private equity investing squads ( Insurance Lower, 2009 ) .

On twelvemonth 2006, AIG has the partnership with English football power Manchester United and as shirt patron to the football squad. Nowadays AIG has many subordinates by commanding through portion having because they ever focus on new market chance and set up new policy that suit to the clients, ( Quote Car Insurance, 2010 ) . AIG organisational construction and portion keeping on its subordinates can mention to Appendix ( 1 ) . ( Bethechange, n.d. )

3.0 AIG Operationss

AIG runs four types of service to clients, which are General Insurance, Life Insurance & A ; Retirement Services, Assets Management and Financial Services. In more item AIG underwrite Casualty, Commercial Property, Workers ‘ Compensation, and Mortgage Guarantee insurance under The General Insurance. However, in Life & A ; Retirement Service unit including foreign states, they serve Personal and Group Life Insurance, Payout Annuities, Endowment, Accident and Health Insurance policies ( Sjostrom, W. K. , n.d. )

The Financial Services provide capital market minutess, Aircraft, Equipment Leasing Consumer Finance, and Insurance Premium Finance. Besides, in the Asset Management division they provided many types of services that related to investing, persons investing, pension financess, and establishments ( Sjostrom, W. K. , n.d. )

Through general insurance AIG has serve single, corporate and institutional clients in belongings and casualty and life insurance, while it is besides provide to more than 100 states. Presently they start utilizing e-insurance services through cyberspace. ( Insurance Lower, 2009 ) .

4.0 Credit Crunch

Credit crunch is the state of affairs where market is lack of money supply or serious rising prices happens that will do to the cost addition aggressively. In fact, planetary market will hit by recognition and liquidness crunch when authorities is seeking to seek for private finance resources to ongoing the underinvestment undertakings ( PWC, 2008 ) .

Get downing of recognition crunch 2007-2008 started with fiscal crisis, which is the set off on sub-prime mortgage with unusual steady lodging mortgage market and stable rising prices. Before that, the Bankss and fiscal establishments in US are seeking to impart loans by making more securitization methods to everyone without look intoing the loaner ‘s background and fiscal position. However, the loaning procedure can non get away from some bad recognition background recorded from either purchaser or borrower ( DW-World. DE, 2008 ) .

Consequence, it caused the lodging monetary values ( estate market monetary value ) start to diminish, when borrower can non pay loan and hence all the Bankss and investing companies had markdown their plus monetary values, meanwhile the trade good and oil monetary value has rises together, market faces serious worldwide rising prices ( Asiaing, 2008 ) . Therefore, this state of affairs had caused to money liquidness job, many bankers and fiscal establishments halt loaning loans to other parties. Global economic started fall down, with expected to lose around $ 500 billion in US sub-prime mortgages market and higher unemployment workers, stock markets monetary value dropped and companies collapsed. ( Price Waterhouse Coopers, 2008 )

5.0 Credit Crunch Happened in AIG

AIG non merely affected by planetary recognition crunch, while AIG itself besides faces serious recognition crunch job. Since AIG offer 4 types of services, nevertheless Financial Service are apart from insurance concerns and it is the section that made immense Looss in AIG. Somehow some the AIG concerns are related to investing every bit good. As the beginning AIG Financial Products ( AIGFP ) provides fiscal service named as recognition default barter ( CDS ) . CDS portfolio is a service that offer protection against the uncollectable debts and losingss on loans moreover provide asset-backed security pool, such as collateralized debt duties ( CDO ) and subprime mortgage pool. ( Bradford. D, 2008 )

Many large counterparties such as European Bank and Wall Street houses have involved themselves in AIG CDS merchandises ( Desmond. M, 2009 ) . AIG is one of the chief participants in this hazardous market, with puting about $ 600 billion in CDS market and it includes $ 80 billion the investing in subprime mortgage ( Bradford. D, 2008 ) . However all these investing activities can see as unregulated insurance contract and AIG use their strong recognition background to be one of the largest participant in the market without capital and money back-up ( Tyson. J. , 2010 ) .

However when the lodging bubble explosion, AIG subprime mortgage pool get into problem, meanwhile the losingss on loans, it is due to the policy holders did non manages to pay the loan. End up AIG merely realize that they fell into serious liquidness job to cover the indirect duty and insurance losingss, particularly on AIGFP ‘s CDS portfolio with realized and unfulfilled rating losingss and hence AIG operation has earnestly affected by globally and itself recognition crunch. ( Saporito, B. , 2009 )

6.0 Impacts on AIG Operations

6.1 Decrease of Workers

Chiefly AIG has own 116,000 world-wide employees, since recognition crunch hits AIG, there are above 60 directors left in late of 2008. From the one-year study 2009 identified that 17 % of the employees have cut off. On the other manus, the entire employees had been layoff by AIG during 2009 period was 20,000 people. In the derived functions unit through mortgage investing brought immense impact to AIG had been cutting down half of the occupation chance and one of the fiscal subordinate had been lay-off more than 1000 employees as its can non acquire the usual fiscal support. Current twelvemonth 2010 AIG ain 96,000 worldwide employees. ( Son, H. , 2010 )

6.2 General Operation

Since 2007, recognition crisis has caused to AIG operation ( underwrite insurance ) dropped drastically. Overall AIG ‘s operation started lessening in twelvemonth 2007 with net income of $ 6.2 billion or $ 2.39 per diluted portion compared to the twelvemonth 2006 with net income $ 14.05 billion or $ 5.36 per diluted portion. Stockholders equity besides decreases from $ 101.68 billion to $ 95.80 billion in twelvemonth 2006 to twelvemonth 2007 and the entire gross worsen 2.90 % or $ 110,064 ( Asiaing, 2005-2010 ) .

The entire operating income in twelvemonth 2007 besides falls drastically to $ 8943 million. In twelvemonth 2008, through the one-year study, they reported immense net loss of $ 99.3 billion or $ 37.84 per diluted portion in their concern nucleus concern, compared to the net income of 2007 the 2008 losingss is due to the immense sum of intangible assets charge, reconstituting fees and revenue enhancements. In between, the 4th one-fourth of 2008 had faced immense loss $ 61.7 billion compared to the old quarterly consequences ( AIG Annual Report, 2008 ) . However an betterment on the net loss in twelvemonth 2009, it is $ 10.9 billion. ( AIG Annual Report, 2009 )

6.2.1 General insurance

2007 4th one-fourth, General Insurance runing income was $ 2.1 billion, nevertheless when compared to 2008 4th one-fourth, losingss on runing income before net realized capital additions ( losingss ) was 2.8 billion, but in the first one-fourth of 2009, the losingss lessening to $ 446 million before net realized capital additions ( losingss ) ( Dostoc, 2010 ) . The losingss in twelvemonth 2008 had caused to the good will injury charges about $ 2.0 billion, it is chiefly due to selling off some subordinates company. ( AIG News, 2008 )

A 16.3 % diminution on the net premiums written by general insurance in 4th one-fourth 2008 compared to the same period in 2007. The alterations of construction in reinsurance concern and shrivel the workers ‘ compensation premium is the ground of 4th one-fourth 2008 Commercial Insurance fall 22.1 % , nevertheless an betterment on the Commercial Insurance rates besides in early 2009 is a good mark compared to the 2008 4th one-fourth rates decline 6.5 % . ( AIG News, 2008 )

On the other manus, 4th one-fourth of 2008 Foreign General Insurance portfolio success to keep its Property & A ; Casualty and Consumer Lines, although universe economic autumn severely. A decrease on foreign exchange militias of AIG was $ 1.6 billion in the 4th one-fourth 2008 and $ 2.1 billion for full twelvemonth 2008 is because of the foreign exchange effects ( AIG News, 2008 ) .

6.2.2 Life insurance & A ; retirement services

In the 4th one-fourth of 2008, the operating income in Life Insurance & A ; Retirement Services before net realized capital additions ( losingss ) was lessening from $ 2.7 billion 4th one-fourth 2007 to $ 742 million and the losingss addition to $ 1.2 billion in first one-fourth 2009 ( Dostoc, 2010 ) . Domestic Life Insurance & A ; Retirement Services get immense losingss on net realized capital of $ 11.9 billon in 4th one-fourth 2008, Furthermore, the diminution on common fund income and partnership had brought to the losingss on net investing income to veto in the 4th one-fourth on 2008. ( AIG News, 2008 )

The gross revenues lessen caused to the premiums, sedimentations and other considerations lessening of 38.5 % in the 4th one-fourth 2008. Primarily, decrease on gross revenues is due to the downgraded on recognition evaluation and negative intelligence on AIG, but the gross revenues on Foreign Life and Retirement Services operation in many states are sing maintained. ( AIG News, 2008 )

On the other manus, when AIG suffered with their operation activities, retirement services in Japan and Asia, and U.S. domestic fixed pension concern and foreign investment-oriented besides dropped ( AIG News, 2008 ) , but during first one-fourth 2009, this foreign investment-oriented and retirement services has stabilized. ( Dostoc, 2010 )

6.2.3 Financial service

2007 4th one-fourth, losingss in runing income on Financial Service before net realized capital addition ( losingss ) was $ 10.3 billion, losingss continued addition to 4th one-fourth 2008 to $ 17.6 billion, nevertheless the losingss lessening to $ 1.1 billion in first one-fourth 2009 ( Dostoc, 2010 ) . AIG Financial Products Corp. ( AIGFP ) autumn into recognition problem with net runing $ 17.2 billion losingss in 2008 4th one-fourth on fiscal merchandises, it is chiefly due to the losingss of unfulfilled rating on Credit Default Swap ( CDS ) portfolio and an accommodation on recognition rating. Besides, lesser gross revenues on aircraft and higher involvement costs incurred, caused to the International Lease Finance Corporation ( ILFC ) besides recorded a loss on the operating income ( AIG News, 2008 )

American General Finance, Inc. ( AGF ) recorded 4th one-fourth of 2007, an operating income as $ 9 million, nevertheless at the same period of 2008 they recorded a loss on operating as $ 248 million. The immense losingss on 2008 4th one-fourth is due to the wage off on duty to the policyholders that insured by AGF. Furthermore, AGF closed some of the subdivisions in 4th one-fourth and cut down further operation capacity as easy to pull off its liquidness ( AIG News, 2008 ) .

6.2.4 Assets direction

Operating losingss hits assets direction before net realized capital additions ( losingss ) in 4th one-fourth 2008 compared to 2007, it loss $ 705 million in 4th one-fourth 2008 compared to $ 458 million net income in 2007. These losingss had caused to the accommodation on certain existent estate value, lessenings of assets under direction and partnership losingss. ( AIG News, 2008 )

6.2.5 Other operations

Other operations income in 4th one-fourth 2008 reported an $ 11 billion loss before net realized capital additions ( losingss ) , it is a immense loss compared to twelvemonth 2007 $ 400 million losingss. However, the losingss are included $ 10.6 billion on involvement disbursals and all the paying off activities. Besides, $ 900 million to the market losingss of maintained the equity involvement in Maiden Lane III. ( AIG News, 2008 )

6.3 Recognition Rating

AIG recognition evaluation has been downgrade by U.S celebrated recognition evaluation bureaus. They downgraded AIG ‘s recognition evaluation at least two notches, such as Standard & A ; Poor ‘s downgraded AIG recognition evaluation from AA- to A- and Moody ‘s Investors Service downgraded AIG recognition evaluation from Aa3 to A2 ( REUTERS, 2008 ) . They downgraded recognition evaluation is because the trouble for AIG to raise capital, due to its market portion monetary value dropped and debt job acquiring serious. ( Ruhby, T. , 2008 )

The mentality for debt evaluation on AIG ‘s subordinates is negative. Moody ‘s Investor Service has downgraded AIG subordinates debt evaluation from Baa1 to Ba2. Furthermore, Moody ‘s has evaluation AIG ‘s operations based on the insurance fiscal strength ( IFS ) , for illustration in belongings and casualty insurance subordinates includes AIG Commercial Insurance ( AIGCI ) had downgraded to negative Aa3 and AIG UK Limited had downgraded to veto A because these concern has face operation losingss. Furthermore, because of the pandemonium on AIG and bad economic state of affairs, AIG ‘s Domestic Life Insurance & A ; Retirement Services ( DLIRS ) companies, American Life Insurance Company ( ALICO ) and AIG Edison Life Insurance Company ( AIG Edison ) had been downgrade from Aa3 to A1. ( Global Credit Research Rating Action, 2009 )

7.0 Strategic and Evaluate on AIG Operations

7.1 Bailout by Federal Bank and U.S. Treasury

As to forestall AIG insolvent and tools to back up the losingss on the operation, tardily of 2008, U.S. Federal Reserve Bank of New York ( FRBNY ) has borrow AIG up to $ 85 billion with high involvement. As term and status on the loaning plan US authorities has held 79.9 % of equity portion in AIG keeping. However, US federal authorities bailout AIG is harmonizing to the legal authorization, Section 13 ( 3 ) of the Federal Reserve Act because Federal Reserve can non merely borrow money to fiscal house. ( Webel, B. , 2010, pp.7 )

Federal bank bailed out AIG because they own 1 trillion world-wide assets and it is excessively big to neglect if AIG can non pay back the insurance claims. Primarily it is due to AIG excessively cosmopolitan runing in 130 states and excessively connected throughout the universe concerns, universe economic system, family wealth, worker, authorities and counterparties, therefore the failure will do to concatenation impact to the planetary ( Saporito, B. , 2009 ) . However, as daily the bailout understanding by authorities has addition to $ 182.5 billion in twelvemonth 2009 ( Sjostrom, W. K. , 2009 ) . The bailout money to AIG is to pay back all the counterparties and debt collateral.

Besides, the US Treasury has bought over $ 40 billion in preferable portions from AIG, through the Troubled Asset Relief Program ( TARP ) , and the exchequer will have 10 % dividend per annum. However, TARP appears is to assist AIG cut down the debt. ( Webel, B. , 2010 )

7.2 Sell off Subsidiaries Company and A Portion on ITS Core Business

AIG started selling its subordinates to other strong finance background companies. End of 2008 a German reinsurer company, Munich Re bought over Hartford Steam Boiler ( HSB ) group.inc with $ 742 million. HSB is an equipment insurance company. ( Ruhby, T. , 2008 )

AIG subordinate, twenty-first century at Switzerland with served car insurance concern, had acquired by Farmers Insurance Group in Los Angeles with $ 1.9 billion ( Lisher, M. and Zimmerman, M. , 2009 ) . Besides on twelvemonth 2010 Prudential agrees to take over American International Assurance ( AIA ) which is one of the largest pan-Asian Life insurance companies with $ 35.5 billion ( Thestar online, 1995-2010 ) and MetLife take over American Life Insurance Company ( ALICO ) with $ 15.5 billion, There are more subordinates will selling off in the hereafter to lift up the capital. ( AAAFTA, 2000-2010 )

Furthermore, AIG besides sell off a part of plus direction concern, which generate operating losingss $ 222 million in the 2nd one-fourth 2009 to Bridge Partners LP, a Hong Kong company with $ 500 million, nevertheless AIG investing operate in 32 states, with keeping $ 88.7 billion investing portfolio. ( Kuykendall, L. , 2009 )

AIG selling off the subordinates and concern to other companies, chiefly it is the faster manner to lift up capital to pay back the authorities loan, compensation and work out the operation liquidness job.

7.3 Rebranding

The rebranding on general insurance keeping company will now named as Chartis. Chartis was the rebranded from AIG general insurance which written all types of belongings and casualty insurance, commercial insurance and foreign general insurance. The Chartis U.S and Chartis International formed from commercial insurance and Foreign General Insurance ( REUTERS, 2008 ) . It will be functioning above 40 million clients over 130 states and legal powers ( Ruquet, M.E. , 2009 ) .

Furthermore Sun America Financial Group rebranded from Domestic Life Insurance & A ; Retirement Services section, which serves few of the Life and Retirement Products and Services ( REUTERS, 2008 ) .

Rebranding is to give clients and internal workers may hold trusted on new trade name name and new hope on future operation, therefore it can convey to future benefits such as addition on gross and portion monetary value.

7.4 Hire New Board Members

AIG has employ many new talented and qualified people to serves in their board such as former President and Chief Executive Officer of Northwest Airlines Corporation, Doug Steenland, and Christopher Lynch former KPMG National Partner in Charge-Financial Services to work with them with some bing staffs. The chief ground invite new member to fall in the board is a scheme traveling frontward on AIG and they agreed to work harder to get by with the complex restructuring in AIG. ( AIG Annual Report, 2009 )

8.0 Decision

AIG is a well-known company with functioning 130 states and keep many of its subordinates portions, every twelvemonth they achieved good public presentation consequence and in twelvemonth 2007 AIG owns 1 trillion world-wide assets, but after recognition crunch hits AIG aggressively, there are a lots impact to the AIG operation, include lay-off workers, premium written lessening and downgraded recognition evaluation. To get the better of the impact of recognition crunch AIG maintain selling off its subordinates, selling a part of the nucleus concern, rebranding its portfolio and employ experient people to work out the job and pay back the full loan, debt duty to Federal Bank and other parties.