2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations Continued index prices. For each scenario, each transaction was repriced. Segment and AIG-wide scenario values are then calculated by netting the values of all the underlying assets and liabilities. The following table presents the period-end, average, high and low VaRs on a diversified basis and of each component of market risk for AIG’s non-trading businesses. The diversified VaR is usually smaller than the sum of its components due to correlation effects. 2007 2006 For the Year Ended For the Year Ended December 31, December 31, (in millions) As of December 31 Average High Low As of December 31 Average High Low Total AIG Non-Trading Market Risk: Diversified $5,593 $5,316 $5,619 $5,073 $5,073 $5,209 $5,783 $4,852 Interest rate 4,383 4,600 4,757 4,383 4,577 4,962 5,765 4,498 Currency 785 729 785 685 686 641 707 509 Equity 2,627 2,183 2,627 1,873 1,873 1,754 1,873 1,650 General Insurance: Diversified $1,363 $1,637 $1,892 $1,363 $1,717 $1,697 $1,776 $1,617 Interest rate 1,117 1,492 1,792 1,117 1,541 1,635 1,717 1,541 Currency 255 222 255 205 212 162 212 119 Equity 835 659 835 573 573 551 573 535 Life Insurance & Retirement Services: Diversified $5,180 $4,848 $5,180 $4,574 $4,574 $4,672 $5,224 $4,307 Interest rate 4,405 4,465 4,611 4,287 4,471 4,563 5,060 4,229 Currency 649 621 678 568 568 538 592 459 Equity 1,810 1,512 1,810 1,293 1,293 1,228 1,299 1,133 Non-Trading Financial Services: Diversified $ 99 $ 117 $ 170 $ 85 $ 125 $ 165 $ 252 $ 125 Interest rate 95 116 168 76 127 166 249 127 Currency 13 12 13 11 11 8 11 7 Equity 1 1 1 1 1 1 2 1 Asset Management: Diversified $ 38 $ 49 $ 74 $ 26 $ 64 $ 144 $ 190 $ 64 Interest rate 32 45 72 22 63 145 192 63 Currency 2 3 5 2 3 4 7 3 Equity 13 11 13 8 8 9 13 8 AIG’s total non-trading VaR increased from $5.1 billion at Each business unit is responsible for implementing the December 31, 2006 to $5.6 billion at December 31, 2007, components of AIG’s operational risk management program to primarily due to higher exposures to U.S. equity risk. The higher ensure that effective operational risk management practices are contribution of U.S. equity risk during 2007 was driven by a utilized throughout AIG. combination of three factors: Upon full implementation, the program will consist of a risk ( increased U.S. equity investment allocation in the General and control self assessment (RCSA) process, risk event data Insurance and Life Insurance & Retirement Services segments, analysis, key risk indicators and governance. To date, AIG has ( increased volatility in U.S. equity prices, and developed the methodology for performing a combined operational ( rising correlations between U.S. equities and AIG’s structural risk and compliance RCSA in each of AIG’s key business units. duration exposures in Asia. Interest rate and foreign exchange volatilities generally moder- Insurance Risk Management ated during 2007. Reinsurance Operational Risk Management AIG uses reinsurance programs for its insurance risks as follows: ( facultative to cover large individual exposures; AIG’s corporate-level Operational Risk Management department ( quota share treaties to cover specific books of business; (ORM) oversees AIG’s operational risk management practices. The ( excess of loss treaties to cover large losses; Director of ORM reports to the CRO. ORM is responsible for ( excess or surplus automatic treaties to cover individual life establishing the framework, principles and guidelines for opera- risks in excess of stated per-life retention limits; and tional risk management. ORM also manages compliance with the ( catastrophe treaties to cover specific catastrophes including requirements of the Sarbanes-Oxley Act of 2002. earthquake, windstorm and flood. 116 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries For 2008, AIG purchased a U.S. catastrophe coverage of approximately $1.1 billion in excess of a per occurrence deducti- ble of $1.5 billion. For Life Insurance & Retirement Services, AIG’s 2008 catastrophe program covers losses of $250 million in excess of $200 million for Japan and Taiwan only. Reinsurance Recoverable General reinsurance recoverable assets are comprised of: ( balances due from reinsurers for indemnity losses and loss expenses billed to, but not yet collected from, reinsurers (Paid Losses Recoverable); ( ultimate ceded reserves for indemnity losses and expenses includes reserves for claims reported but not yet paid and estimates for IBNR (collectively, Ceded Loss Reserves); and ( Ceded Reserves for Unearned Premiums. At December 31, 2007, general reinsurance assets of $21.5 billion include Paid Losses Recoverable of $1.8 billion and Ceded Loss Reserves of $16.2 billion, and $4.0 billion of Ceded Reserves for Unearned Premiums. The methods used to estimate IBNR and to establish the resulting ultimate losses involve projecting the frequency and severity of losses over multiple years and are continually reviewed and updated by management. Any adjustments are reflected in income currently. It is AIG’s belief that the ceded reserves for losses and loss expenses at December 31, 2007 were representative of the ultimate losses recoverable. Actual losses may differ from the reserves currently ceded. AIG manages the credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound, and when necessary AIG requires reinsurers to post substantial collateral in the form of funds, securities and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. At December 31, 2007, approximately 55 percent of the general reinsurance assets were from unauthorized reinsurers. The terms authorized and unauthorized pertain to regulatory categories, not creditworthiness. More than 50 percent of these balances were collateralized, permitting statutory recognition. Additionally, with the approval of insurance regulators, AIG posted approximately $1.8 billion of letters of credit issued by commercial banks in favor of certain Domestic General Insurance companies to permit those companies statutory recognition of balances otherwise uncollateralized at December 31, 2007. The remaining 45 percent of the general reinsurance assets were from authorized reinsurers. At December 31, 2007, approximately 87 percent of the balances with respect to authorized reinsurers are from reinsurers rated A (excellent) or better, as rated by A.M. Best, or A (strong) or better, as rated by S&P. These ratings are measures of financial strength. AIG’s Reinsurance Security Department (RSD) conducts periodic detailed assessments of the financial status and condition of current and potential reinsurers, both foreign and domestic. The RSD monitors both the nature of the risks ceded to the reinsurers and the aggregation of total reinsurance recoverables ceded to reinsurers. Such assessments may include, but are not limited to, identifying if a reinsurer is appropriately licensed and has sufficient financial capacity, and evaluating the local economic environment in which a foreign reinsurer operates. The RSD reviews the nature of the risks ceded to reinsurers and the need for credit risk mitigants. For example, in AIG’s treaty reinsurance contracts, AIG frequently includes provisions that require a reinsurer to post collateral when a referenced event occurs. Furthermore, AIG limits its unsecured exposure to reinsurers through the use of credit triggers, which include, but are not limited to, insurer financial strength rating downgrades, declines in policyholders surplus below predetermined levels, decreases in the NAIC risk-based capital (RBC) ratio or reaching maximum limits of reinsurance recoverables. In addition, AIG’s CRC reviews all reinsurer exposures and credit limits and approves most large reinsurer credit limits that represent actual or potential credit concentrations. AIG believes that no exposure to a single reinsurer represents an inappropriate concentration of risk to AIG, nor is AIG’s business substantially dependent upon any single reinsurance contract. AIG enters into intercompany reinsurance transactions for its General Insurance and Life Insurance & Retirement Services operations. AIG enters into these transactions as a sound and prudent business practice in order to maintain underwriting control and spread insurance risk among AIG’s various legal entities and to leverage economies of scale with external reinsurers. When required for statutory recognition, AIG obtains letters of credit from third-party financial institutions to collateral- ize these intercompany transactions. At December 31, 2007, approximately $8.8 billion of letters of credit were outstanding to cover intercompany reinsurance transactions between subsidiaries. Although reinsurance arrangements do not relieve AIG subsidiaries from their direct obligations to insureds, an efficient and effective reinsurance program substantially mitigates AIG’s exposure to potentially significant losses. AIG continually evaluates the reinsurance markets and the relative attractiveness of various arrangements for coverage, including structures such as catastrophe bonds, insurance risk securitizations, ‘‘sidecars’’ and similar vehicles. Based on this ongoing evaluation and other factors, effective December 31, 2007, Lexington and Concord Re Limited agreed to commute their quota share reinsurance agreement covering U.S. commercial property insurance business written by Lexington on a risk attaching basis. This agreement was effective in July 2006 and was due to expire on January 15, 2008. AIG 2007 Form 10-K 117
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AMERICAN INTERNATIONAL GROUP, INC.
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FINANCIAL HIGHLIGHTS (in millions,
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overall financial condition, althou
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Group Executive Committee We are ad
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AIG’s life insurance network is t
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We have also begun to address the e
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WHAT WE SEE The ability to see and
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The Major Accounts Practice within
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Around the world, the middle class
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WE SEE GROWTH OPPORTUNITIES IN EMER
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To grow the strength of the AIG glo
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Since 2003, the AIG Disaster Relief
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RESPECT Respect encompasses how we
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Life Insurance & Retirement Service
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Domestic Brokerage Group— Gross P
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In the summer of 2007, widespread f
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in gross premiums written. It launc
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It grew new business premiums from
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emerging markets for its services,
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ILFC—Revenues by Region Total = $
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AIG Investments acquired a 94 perce
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and changing interest rates, as wel
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American International Group, Inc.
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UNITED STATES SECURITIES AND EXCHAN
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SHAREHOLDER INFORMATION Corporate H
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