The Major Market of American International Group - Term Paper Example

Marketing Financial Services: American International Group Table of Contents Introduction 3 Brief Overview of American International Group (AIG) 4 SWOT Analysis 5 Strengths 6 Weaknesses 9 Opportunities 11 Threats 12 Conclusion 14 Reference 15 Introduction Increasing activities relating to trade and business has brought significant changes within an economy. With time, the complexities of trade and business have been multiplied. Globalization and technological advancements are two major factors that have encouraged the international trade activities and it has also expanded the scope of trade and business. The leading world economies gradually understood the importance of international trade for bringing growth and development. Hence, they started to follow and implement free trade policies that encourage multinational companies to enter into the global markets. Ultimately, overall market became competitive and matured. Monopoly market structure has become very rare and oligopoly becomes prominent. Hope and Maeleng have defined free trade policy as “competition-enhancing device” (Hope and Maeleng, 1998, p.52). The international and domestic countries started to compete with each other on price, better service, customer satisfaction etc for achieving greater market share. In this respect, to gain competitive advantage in market, the post modern organisations are using latest management tools, theories and models developed by many experts, critics and scholars. Financial services industry consist a number of financial services sectors like banking sectors, insurance, security market, factoring, credit ratings etc. With increased activities of trade and business and intensified competition, the importance of these financial services sectors has grown significantly. This paper will attempt to present and SWOT analysis of American International Group (AIG) which is one the most popular financial service organisation. In order to indentify its major internal strengths and weaknesses, external opportunities and threats, this paper will analyse important areas of this organisation like its customer relationship managements, marketing tools used the company, major issues and its mechanism of control system. Finally, the overall findings of this paper will be summed up in the conclusion. Brief Overview of American International Group (AIG) American International Group Inc. (AIG) is one of the popular insurance services providers in US and in global market. Primarily, it is a New York-based company and it is considered to be one of the most prominent market leaders in global insurance sector. AIG is a multinational company and offers its insurance services in more than 130 countries in the world. The company has acquired a large base of customers and its consumers primarily consist of institutional, commercial and individual clients. The major market share of the company comes from its domestic market i.e. from United States. In this market, the AIG offer retirement services and life insurance. With better performance, it has acquired an upper hand position in U.S. insurance sector. Along with the domestic market, AIG’s stocks are also listed in Tokyo and Ireland Stock exchange (American International Group, Inc-a, 2011). While tracing the history of AIG, its primary origin is found in Shanghai, China during 1919. However, later during the 1940s due to political issues, the company withdrew from the Chinese market. “AIG abandoned China completely in 1949, as the Communist People’s Liberation Army, led by Mao Zeding, advanced on Shanghai” ( H.W. Wilson Company, 2000, p.247). In U.S., the AIG had been formed by consolidating three companies and its multiple affiliates. These leading three companies are New Hampshire Insurance Company, American Home Assurance Company and National Union Fire Insurance Company. Since its inception, AIG has undergone through many significant occurrences like mergers and acquisitions. SunAmerica Inc was merged with AIG on January 01, 1999. In November 2000, the company acquired HSB Group and on August 29, 2001 AIG acquired American General Corporation (AGC) (Alacra, n.d.). In order to develop a standards organisational culture, the company has defined its vision and value. It vision statement is “to be the world’s first-choice provider of insurance and financial services” and the company strives to “create unmatched value for our customers, colleagues, business partners and shareholders as we contribute to the growth of sustainable, prosperous communities” (American International Group, Inc-b, 2010). AIG’s values focus on the six major areas that include people, customer focus, performance, integrity, respect, and entrepreneurship. The company believes that these core values are able to achieve business sustainability and growth. The Board of Directors include 12 members and Robert H. Benmosche is the President and Chief Executive Officer (American International Group, Inc-c, 2011). The group of directors are responsible for decision making, maintaining corporate governance and proper code of conducts. SWOT Analysis The primary aim of this paper is to present SWOT analysis of AIG and hence, it is necessary to understand the importance of SWOT analysis. SWOT analysis is a celebrated strategic tool which is used by most of organisation for scanning the internal and external environments. Basu has defined that “an SWOT (Strengths, Weaknesses, Opportunities and threats) is a tool for analysing an organisation’s competitive position in relation to its competitors” (Basu, 2008). It considered to one of the most effective analytical tools and the following diagram explains this. Figure 1: Effective Analytical Tools (Source: Ferrell and Hartline, 2008, p.119) The SWOT analysis of AIG is given below by focusing on its major internal and external environment. Strengths AIG has been able to achieve higher competitive advantage and shape its internal strengths by excellent business management and effective strategy formulation and implementation. In order to achieve higher sales revenue and to avoid risks, the company focuses on its two major areas financial strategy, and sales and marketing strategies. The prime strength of AIG is its brand name as it has successfully executed its branding strategies in its target markets. Strong brand image of US insurance is a key factor for its global expansion process. The company is presented in more than 130 countries and in most of the international markets, it has gained higher portion of market shares in spite of the existence of respective domestic companies in international markets. Its ‘forwards going strategies’ concentrates on its general insurance activities in the global as well as in domestic market. Moreover, the strategies also consider retirement services and life insurance services by taking the financial risks like liquidity, credit crunch etc into account. Besides, for better marketing plans, AIG’s strategies are viable for its growth, market position, customer retention and financial strengths (American International Group, Inc-d, 2009). During the financial crisis of 2006-2008, entire US economy suffered and financial services sectors were highly affected than any other sectors. Prior to September 2008, AIG was the largest insurance services providers in America. However, after such bitter experience of uncertainties and great loss, the company has efficiency restructured and rebuilt its operational strategies. The primary aim of this restructuring and rebuilding is to offer support “strengthen its financial condition and enhance the enterprise value of its nucleus of businesses to meet working capital needs and repay obligations to U.S. taxpayers” and hence, it considers four major priorities i.e. “building AIG’s enterprise value”, repaying loans from the U.S. government”, “reducing operating costs” and “reducing excessive risk” (American International Group, Inc-e, 2011). After September 2008, the company has experienced a substantial growth in its business. Strong financial position of the company is another major strength. The following table presents its key financial indicators comparing its major competitors in domestic market. Table 1: Direct Competitor Comparison of AIG as of 2009 (Source: Yahoo Finance, 2011) As per the above table, during financial years of 2009, AIG’s financial performance have been better comparing to its key competitors. Moreover, AIG stands at too higher position comparing to industry averages. After the financial crisis of 2008, the company faced a drastic fall in its financial position as its revenue and net income was USD -6,840000 and USD -99,289000 respectively in 2008 (MSN Finance, 2011). The rapid come back of the company provides a strong evidence of AIG’s efficient business management strategies. Higher brand name of the company is the result of its higher consumer satisfaction level. The company has developed pre-defined strategies to meet the customers’ satisfaction level. In this respect, international expansion plans of AIG primarily focus on understanding the customer needs and on providing customer better services. Besides, AIG has been performing excellently in maintaining diversified portfolio and product developments as the market needs. The company brings new products after conducting extensive market research. Weaknesses As AIG is a financial services organisation, control system in the organisation is very vital for the company. Insurance business requires a standard controlling system and procedures for flawless and riskless operational and financial activities. The primary focus of the company is on its internal control rather than external market control. The internal control system of AIG concentrates on risk management, financial reporting, shareholder management, asset control and other managerial control. However, The AIG is often criticised for its inadequate controlling system. During the fourth quarter of 2008, this inadequate controlling system was a major weakness of AIG. Financial risk controlling system was proved to inefficient in combating prevailing crisis and moreover, AIG controlling system multiplied the risk level. Harvey Golub, the former chairman of American International Group Inc. commented that AIG had “inadequate control systems, inadequate oversight of many of the products and a mismatch of assets and liabilities that was quite substantial” (Frye, Son and Liu, 2011). In spite of excellent financial performance during 2009, AIG financial leverage is still higher than the industry averages. Therefore, the above statement of Golub is justifiable in this respect. The following table portrays the calculation of WACC of AIG comparing to industry averages. Table 2: WACC of AIG and Insurance Industry (Source: Barron, 2009) On December 31, 2009, AIG’s balance sheet disclosed the company has $13.9 billion and $38.9 billion of liabilities and assets respectively. This huge amount of debt has led to increase its volatility significantly. A large portion of its debts is provided by the U.S. government and the company is suffering from the major issues relating financial security. Therefore, company needs to take very careful decisions for financial activities and operational activities. Besides, the company has acquired a number of subsidiaries and business units in different areas other than the insurance business. For example, it also owns an airline leasing company called International Lease Finance Corporation. This may be considered as a major barrier for its financial services business as AIG’s Board of Directors also needs to control this corporation and as result, its insurance business may be neglected partially. Financial crisis of 2008 caused a bailout for the company and many of its customers withdrew its accounts and funds from AIG. Moreover, many banking institutes refused to sell its products and many contractual agreements were terminated by its significant clients. This was drastic fall for AIG during that period and as a result, its reputation faced a steep decline. Still AIG has to face its negative reputation in US market. On the other hand, AIG has been proved inefficient in countering the exposure of American residential mortgage market that cause a decreasing cost efficiency of its business operations. These are substantial issues in AIG that indicate its major weaknesses. Opportunities The financial crisis has led to highlight the major weaknesses of AIG as the company is still facing major issues. However, the prevailing fact is that the entire world economies are in recovering stage. The demographic conditions of countries like U.S., UK, Canada, France and other major nations are regaining and peoples’ purchasing power is increasing at a steady pace. Therefore, insurance sector is also expected to grow in coming years. Enhancing economic parameters during 2010 have indicated a light of business boom. Besides, major players of global insurance industry including AIG have experienced a rapid comeback. On the other hand, governments and financial service regulators have taken many necessary steps for avoiding such financial crisis. Therefore, the market is expected to become reliable that reduces business, economic and country risks. Besides, the domestic market of AIG i.e. U.S. keeps improving at a steady rate that will lead to increase the sales revenue of the company (Leybovich, 2011). AIG has already entered into the developing countries like China and India which is very promising markets for business growth. There has been significant improvement in their economies and AIG has greater opportunities to grow its business in these developing markets. AIG has been very successful in market diversification strategies that also offer greater opportunities for further market expansions in other countries (Barron, 2009). Management of assets has become a prominent trend in modern business world and in many countries assets’ insurance has become mandatory. Besides, the increasing population in US and in other markets is also major opportunities for AIG. Health insurance and life insurance is expected to grow at higher rate. Threats Nearly, all the key competitors of AIG have faced more or less same negative consequences of financial crisis. Now, the economy is recovering and as an effect, the insurance market is also expected to grow. Therefore, rivalry among the existing insurance companies is expected to intensify significantly. AIG’s major markets include U.S., Europe and China. In these markets, leading insurance companies like Axa, Allianz etc are already present. Apparently, competition will be very high that will affect the industry’s overall profitability. Besides, industry consolidation is also increasing with a number of new entrants. In this industry the barriers of entry is comparatively lower. The major players in banking sectors are major potential entrants of insurance sector. After the global crisis, the insurance regulators have become stricter and imposed a number of restrictions in many areas that has led to increase the operating expenses of insurance companies. On the other, U.S. financial market has become financially volatile after the global downturn. Therefore, there is still a fear of financial uncertainties in the market. Insurance fraud has become very frequent offence in major countries like UK and U.S. In spite of strict legal actions, and better security and investigation, the insurance regulators are not able to reduce the number of such frauds in this industry. The following diagram portrays an estimated loss due to insurance frauds. Figure 2: Insurance fraud and Annual Loss (Source: Deloitte, 2007) As per the above diagram, insurance industry has to face nearly $168 billion loss per year due to insurance fraud. Therefore, AIG can also be affected by this increasing rate of insurance fraud that may harm profit of the company. On the other hand, mass death and mass asset loss due to natural calamities or disasters are also major threat for the entire insurance industry including AIG. For example, Omega Insurance of UK has experienced a huge loss due to occurrence of natural disasters like “earthquakes in Chile and New Zealand, the Gulf Of Mexico oil spill and the Queensland floods in Australia” (Reuters, 2011). AIG is present in counties like Japan and other earthquake prone countries that may be very vital threat for the company. Conclusion This paper has presented an analysis of AIG’s internal strengths and weaknesses, external opportunities and threats. AIG is one of the leading insurance companies in U.S. as well as in global market. The company is presented in more than 130 countries and it has vast operational process. Major strengths of the company include its effective business and operational strategies and it has developed a strong brand image in global market as a leading U.S. insurance company. AIG’s financial performance during 2009 after the global downturn indicates its effective operational and marketing activities. Major weaknesses of the company are its inadequate controlling system and its huge amount of debts that pulls up its leverage. Recovering economy and enhancing consumers’ purchasing power is expected to bring growth in insurance industry. On the other hand, AIG is present in China and India which is major potential markets for insurance industry. Increasing competition, insurance fraud and natural calamities can pose great threats for insurance industry and for AIG Reference Alacra. No date. 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