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Reasons For AIG Bankruptcy

The insurance business is all about risk -- understanding it, minimizing it, pricing to compensate for it. But American International Group, the biggest insurance company in the world seems to ignore it.

American International Group, Inc. is a major American insurance corporation based at the American International Building in New York City. According to the 2008 Forbes Global 2000 list, AIG was the 18th-largest company in the world. But, the insurance business is all about risk and AIG seems to have had very little concept of the risk it held in its own businesses.

  1. Mortgage Delinquencies

The job of an underwriter is to spread risk around. If you write earthquake insurance, you don't write it only in California as that could leave your entire business exposed to one terrible turn of events. AIG appeared to ignore that practice when making just such a dangerous bet on subprime mortgages.

AIG became one of the biggest U.S. mortgage lenders. They are already warned that mortgage defaults are spreading.Although acknowledging the "significant declines" in subprime securities, Chief Executive Martin Sullivan said AIG's tight underwriting standards had minimized losses and he was "poised to take advantage of opportunities" in the mortgage market.

2.Huricane Damages and Tax charges

An article from foxnews was published dated March 17,2006 featuring the steep drop of quarterly profit seen from AIG last two years ago when they have to pay $2 billion in charges to cover a large settlement with state and federal regulators. Payments from the massive U.S. hurricane damage last 2005 also battered 2006 fourth-quarter earnings of AIG.

New York-based AIG, which is among the world's largest insurance companies, said net income for the October-December period for year 2006 was $444 million, or 17 cents a share, down more than 70 percent from $1.6 billion, or 62 cents a share, a year earlier.

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