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 The following table provides information for each reinsurer representing in excess of five percent of AIG’s reinsurance assets at December 31, 2007: Gross Percent of Uncollateralized A.M. General General General S&P Best Reinsurance Reinsurance Collateral Reinsurance (in millions) Rating (a) Rating (a) Assets Assets, Net Held (b) Assets Reinsurer: Swiss Reinsurance Group AA- A+ $1,818 8.5% $372 $1,446 Berkshire Hathaway Insurance Group AAA A++ $1,618 7.5% $212 $1,406 Munich Reinsurance Group AA- A+ $1,200 5.6% $430 $ 770 Lloyd’s Syndicates — Lloyd’s of London (c) A+ A $1,089 5.1% $113 $ 976 (a) Rating designations as of February 19, 2008. (b) Excludes collateral held in excess of applicable treaty balances. (c) Excludes Equitas gross reinsurance assets that are unrated, which are less than five percent of AIG’s general reinsurance assets. ( ( AIG maintains an allowance for estimated unrecoverable cient cash flows to cover contract liabilities in the retirement reinsurance of $520 million. At December 31, 2007, AIG had no savings-oriented products. Risks are managed through product significant reinsurance recoverables due from any individual design, sound medical underwriting, external traditional reinsurreinsurer that was financially troubled (i.e., liquidated, insolvent, in ance programs and external catastrophe reinsurance programs. receivership or otherwise subject to formal or informal regulatory AIG is a major purchaser of reinsurance for its insurance restriction). operations. The use of reinsurance facilitates insurance risk management (retention, volatility, concentrations) and capital Segment Risk Management planning locally (branch and subsidiary). AIG may purchase reinsurance on a pooling basis. Pooling of AIG’s reinsurance risks Other than as described above, AIG manages its business risk enables AIG to purchase reinsurance more efficiently at a oversight activities through its business segments. consolidated level, manage global counterparty risk and relationships Insurance Operations and manage global catastrophe risks, both for the General Insurance and Life Insurance & Retirement Services businesses. AIG’s multiple insurance businesses conducted on a global basis expose AIG to a wide variety of risks with different time horizons. General Insurance These risks are managed throughout the organization, both In General Insurance, underwriting risks are managed through the centrally and locally, through a number of procedures, including: application approval process, exposure limitations as well as (i) pre-launch approval of product design, development and through exclusions, coverage limits and reinsurance. The risks distribution; (ii) underwriting approval processes and authorities; covered by AIG are managed through limits on delegated under- (iii) exposure limits with ongoing monitoring; (iv) modeling and writing authority, the use of sound underwriting practices, pricing reporting of aggregations and limit concentrations at multiple procedures and the use of actuarial analysis as part of the levels (policy, line of business, product group, country, individdetermination of overall adequacy of provisions for insurance ual/group, correlation and catastrophic risk events); contract liabilities. (v) compliance with financial reporting and capital and solvency A primary goal of AIG in managing its General Insurance targets; (vi) extensive use of reinsurance, both internal and thirdoperations is to achieve an underwriting profit. To achieve this party; and (vii) review and establishment of reserves. goal, AIG must be disciplined in its risk selection, and premiums AIG closely manages insurance risk by overseeing and controlmust be adequate and terms and conditions appropriate to cover ling the nature and geographic location of the risks in each line of the risk accepted. business underwritten, the terms and conditions of the underwriting and the premiums charged for taking on the risk. Concentra- Catastrophe Exposures tions of risk are analyzed using various modeling techniques and include, but are not limited to, wind, flood, earthquake, terrorism The nature of AIG’s business exposes it to various catastrophic and accident. events in which multiple losses across multiple lines of business AIG has two major categories of insurance risks as follows: can occur in any calendar year. In order to control this exposure, AIG uses a combination of techniques, including setting aggregate General Insurance — risks covered include property, casualty, fidelity/surety, management liability and mortgage insurance. limits in key business units, monitoring and modeling accumulated Risks in the general insurance segment are managed through exposures, and purchasing catastrophe reinsurance to suppleaggregations and limitations of concentrations at multiple levels: ment its other reinsurance protections. policy, line of business, correlation and catastrophic risk events. Natural disasters such as hurricanes, earthquakes and other catastrophes have the potential to adversely affect AIG’s operat- Life Insurance & Retirement Services — risks include mortality and morbidity in the insurance-oriented products and insuffidisease, ing results. Other risks, such as an outbreak of a pandemic such as the Avian Influenza A Virus (H5N1), could 118 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries AIG has revised the catastrophe exposure disclosures presented below from those included in the 2006 Annual Report on Form 10-K to reflect more recent data, as well as reinsurance programs in place as of January 31, 2008. The modeled results provided in the table below were based on the aggregate exceedence probability (AEP) losses which represent total property, workers compensation, life insurance, and A&H losses that may occur in any single year from one or more natural events. The life insurance and A&H data include exposures for United States, Japan, and Taiwan earthquakes. These represent the largest share of life insurance and A&H exposures to earthquake. A&H losses were modeled using December 2006 data, and life insurance losses were modeled using March 2006 data. Modeled life insurance results using more recent data will be available by May 2008. However, management does not believe that changes in the life insurance and A&H exposures will materially increase AIG’s overall exposures. The updated property exposures were generally modeled with exposure data as of June 2007. Lexington commercial lines exposure, which represents the largest share of the modeled losses, was based on data as of October 2007. All reinsurance program structures, including both domestic and international structures, have also been updated. The values provided are based on 100-year return period losses, which have a one percent likelihood of being exceeded in any single year. Thus, the model projects that there is a one percent probability that AIG could incur in any year losses in excess of the modeled amounts for these perils. Losses include loss adjustment expenses and the net values include reinstatement premiums. adversely affect AIG’s business and operating results to an extent that may be only partially offset by reinsurance programs. AIG evaluates catastrophic events and assesses the probability of occurrence and magnitude of catastrophic events through the use of industry recognized models, among other techniques. AIG updates these models by periodically monitoring the exposure to risks of AIG’s worldwide General Insurance operations and adjusting such models accordingly. Following is an overview of modeled losses associated with the more significant natural perils, which includes exposures for DBG, Personal Lines, Foreign General (other than Ascot), and The Hartford Steam Boiler Inspection and Insurance Company. Transatlantic and Ascot utilize a different model, and their combined results are presented separately below. Significant life insurance and accident and health (A&H) exposures have been added to these results as well. The modeled results assume that all reinsurers fulfill their obligations to AIG in accordance with their terms. It is important to recognize that there is no standard methodology to project the possible losses from total property and workers compensation exposures. Further, there are no industry standard assumptions to be utilized in projecting these losses. The use of different methodologies and assumptions could materially change the projected losses. Therefore, these modeled losses may not be comparable to estimates made by other companies. These estimates are inherently uncertain and may not reflect AIG’s maximum exposures to these events. It is highly likely that AIG’s losses will vary, perhaps significantly, from these estimates. Net After % of Consolidated Net of 2008 Income Shareholders’ Equity at (in millions) Gross Reinsurance Tax December 31, 2007 Natural Peril: Earthquake $5,625 $3,397 $2,208 2.3% Tropical Cyclone* $5,802 $3,430 $2,230 2.3% * Includes hurricanes, typhoons and other wind-related events. Gross earthquake and tropical cyclone modeled losses in- AIG could incur from this type of an event in these regions. The creased $1.9 billion and $1.0 billion, respectively, while net losses associated with the RDSs are included in the table below. losses increased $923 million and $234 million, respectively. The earthquake probable maximum loss for 2007 now includes AIG’s Single event modeled property and workers compensation losses life insurance and A&H exposures that were previously not to AIG’s worldwide portfolio of risk for key geographic areas are included. These changes also reflect overall increased exposure, set forth below. Gross values represent AIG’s liability after the changes in the Lexington quota share program, the inclusion of application of policy limits and deductibles, and net values loss adjustment expenses, and changes in corporate catastrophe represent losses after reinsurance is applied and include reinsur- structure. ance reinstatement premiums. Both gross and net losses In addition to the return period loss, AIG evaluates potential include loss adjustment expenses. single event earthquake and hurricane losses that may be Net of 2008 incurred. The single events utilized are a subset of potential (in millions) Gross Reinsurance events identified and utilized by Lloyd’s (as described in Lloyd’s Natural Peril: Realistic Disaster Scenarios, Scenario Specifications, April 2006) San Francisco Earthquake $6,236 $3,809 and referred to as Realistic Disaster Scenarios (RDSs). The Miami Hurricane 5,829 3,280 purpose of this analysis is to utilize these RDSs to provide a Northeast Hurricane 5,287 3,739 reference frame and place into context the model results. Los Angeles Earthquake 5,375 3,297 Gulf Coast Hurricane 3,730 2,088 However, it is important to note that the specific events used for Japanese Earthquake 1,109 406 this analysis do not necessarily represent the worst case loss that European Windstorm 252 89 Japanese Typhoon 177 103 AIG 2007 Form 10-K 119
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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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