American International Group, Inc. (AIG) is a leading international insurance organization serving customers in more than 130 countries. AIG companies serve commercial, institutional, and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange.
AIG Board of Directors Elects Robert H. Benmosche President and CEO
On August 3, 2009, AIG announced that its Board of Directors has elected Robert H. Benmosche President and Chief Executive Officer. Mr. Benmosche was also elected a member of the Board of Directors and will assume his new roles on August 10, 2009, with the retirement of Chairman and Chief Executive Officer Edward M. Liddy.
“AIG and American taxpayers are fortunate to gain the commitment of Bob Benmosche, a highly experienced executive who understands the challenges and opportunities of restructuring complex organizations,” Mr. Liddy said. “Our stakeholders can look forward to a seamless transition and rest assured that the work of rebuilding the value of AIG’s businesses and repaying the government will continue uninterrupted.”
Dennis Dammerman, Chairman of the AIG Board of Directors’ Search Committee, said that Mr. Benmosche’s experience is an ideal match for AIG. “Bob’s outstanding track record as head of a major insurer and his success in business integration and execution of major transactions make him well-suited to lead AIG in the next phase of its restructuring. We are confident he will continue the substantial progress the company has achieved under the leadership of Ed Liddy. Ed answered the call for public service amid an extraordinary financial crisis that has only now begun to ease, and our company and country owe him a debt of gratitude.”
“Ed and his team have done a terrific job stabilizing AIG and implementing a strategy to repay the Company’s stakeholders, including taxpayers,” Mr. Benmosche said. “Now he has passed the baton to me, and I look forward to continuing the race. With my AIG colleagues, we will focus on this mission: maximizing the value of the company’s assets and meeting all of our stakeholder obligations.”
In addition, the Company announced that Paula Rosput Reynolds, Vice Chairman and Chief Restructuring Officer, has decided to leave the company effective late in the third quarter of 2009. “Paula has played an instrumental role in our progress, having divested operations around the world and implemented a durable, long-term restructuring plan that has stabilized the Company and provided time for asset values to recover,” Mr. Liddy said. “I could not have asked for a better partner, and we all wish her well in her future endeavors.”
Mr. Benmosche, 65, is former Chairman, President, and Chief Executive Officer of MetLife, a leading provider of insurance and other financial services. Mr. Benmosche led the transition of MetLife from a mutual to a public company in 2000. He joined MetLife in 1995 as Executive Vice President responsible for business integration and product development, marketing and sales efforts focused on MetLife’s individual customers. Earlier in his career he served as Executive Vice President for PaineWebber, Inc., where he directed the merger of Kidder Peabody into PaineWebber. He also served in various capacities with Chase Manhattan Bank from 1976 to 1982.
Pre-September 2008: The AIG Crisis
Over the years, AIG built upon its premier global franchises in life and general insurance by expanding into a range of financial services businesses. One of these, created in 1987, was AIG Financial Products Corp. (AIGFP), a company that engaged as principal in a wide variety of financial transactions for a global client base. In 1998, AIGFP began to sell credit default swaps to other financial institutions to protect against the default of certain securities. At the time, many of these securities were rated AAA, the highest rating possible. However, in late 2007, as the U.S. residential mortgage market began to deteriorate, the valuation of these securities declined severely. As a result, AIG recorded significant unrealized market valuation losses, especially on AIGFP’s credit default swap portfolio, which led to substantial cash requirements.
At the same time, AIG reported large unrealized losses in its securities lending program. Through this program, AIG made short-term loans of certain securities it owned to generate revenues by investing in high-grade residential mortgage backed securities. These and other AIG real estate-related investments suffered sharp decline in fair value as well.
It is important to reiterate that throughout the crisis, AIG’s insurance businesses were—and continue to be—healthy and well capitalized. The losses that occurred as a result of AIGFP’s actions have no direct impact on AIG policyholders. AIG’s insurance companies are closely regulated, and their reserves are protected with adequate assets to meet policyholder obligations.
The collapse of respected financial institutions such as Bear Stearns and Lehman Brothers sent shock waves throughout the world economy. The crises at the U.S.-sponsored mortgage companies Fannie Mae and Freddie Mac added to the financial disruption. Credit markets deteriorated rapidly, making it virtually impossible to access capital. In September, AIG’s credit ratings were downgraded once again, triggering additional collateral calls and cash requirements in excess of $20 billion. Although solvent, AIG suddenly faced an acute liquidity crisis.
September 2008: Initial Investment from the U.S. Government
Because of its size and substantial interconnection with financial markets and institutions around the world, the government recognized that a failure of AIG would have had severe ramifications. In addition to being one of the world’s largest insurers, AIG was providing more than $400 billion of credit protection to banks and other clients around the world through its credit default swap business. AIG also is a major participant in foreign exchange and interest rate markets.
To stabilize AIG and prevent reverberations throughout the economy, the FRBNY extended to AIG a two-year emergency secured loan of up to $85 billion on September 16, 2008. The credit facility carried a rate of LIBOR (the London Interbank Offered Rate—a widely used benchmark to set short-term interest rates) plus 8.5 percent, a commitment fee of 2 percent on the loan principal and a fee on the undrawn portion of 8.5 percent. Additionally, the U.S. Treasury would be entitled to 79.9 percent equity ownership of AIG through preferred stock.
October-November 2008: Further Deterioration in Market Conditions
With the Federal Reserve Bank of New York (FRBNY) loan in place, the management team developed a plan to sell many of AIG's leading businesses around the world to pay back the FRBNY loan with interest. However, with this divestiture and restructuring plan in place, AIG still had to address its two principal liquidity issues: the multisector credit default swap portfolio and the securities lending program. On November 10, 2008, AIG and the FRBNY announced a comprehensive plan to address AIG’s liquidity issues and provide more time and greater flexibility to sell assets and repay the government. The plan included the creation by FRBNY of two financing entities, Maiden Lane II and Maiden Lane III, to acquire AIG’s securities lending assets and the multi-sector collateralized debt obligations that were guaranteed by AIGFP’s credit default swaps. The entities were funded primarily by the FRBNY, with a subordinated capital contribution by AIG. Under the terms of the agreements, the majority of any appreciation in the securities held by the entities would go to the FRBNY, but a portion would be retained by AIG.
In addition, the U.S. Department of the Treasury (U.S. Treasury) purchased, through the Troubled Asset Relief Program (TARP), $40 billion of newly issued AIG perpetual preferred shares. The proceeds were used to pay down a portion of amounts then-outstanding of the FRBNY loan. The perpetual preferred shares carried cumulative compound dividends at 10 percent per year.
Although Maiden Lane II and III and the government’s equity injection significantly relieved AIG’s liquidity pressures, the world economy in general and the financial industry in particular continued to falter. Asset valuations continued to decline and AIG’s losses increased through the end of the year, taking a heavy toll on fourth quarter results.