2007 Annual Report - AIG.com

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 prop-
erty, 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