2007 Annual Report - AIG.com

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 reinsur-
ers. 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 commer-
cial 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 reinsur-
ers 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 subsidi-
aries 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 catastro-
phe 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