2007 Annual Report - AIG.com
2007 Annual Report - AIG.com
2007 Annual Report - AIG.com
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American International Group, Inc. and Subsidiaries<br />
Management’s Discussion and Analysis of<br />
Financial Condition and Results of Operations Continued<br />
<strong>AIG</strong> also monitors key international property risks utilizing actively monitors and controls its aggregate accumulated exposure<br />
modeled statistical return period losses. Based on these simula- within the parameters of the protection provided by the TRIA.<br />
tions, the 100-year return period loss for Japanese Earthquake is<br />
$510 million gross, and $170 million net, the 100-year return Life Insurance & Retirement Services<br />
period loss for European Windstorm is $448 million gross, and<br />
In Life Insurance & Retirement Services, the primary risks are the<br />
$154 million net, and the 100-year return period loss for<br />
following:<br />
Japanese Typhoon is $340 million gross, and $212 million net.<br />
( underwriting, which represents the exposure to loss resulting<br />
The losses provided above do not include Transatlantic and<br />
from the actual policy experience emerging adversely in<br />
Ascot. The <strong>com</strong>bined earthquake and tropical cyclone 100-year<br />
<strong>com</strong>parison to the assumptions made in the product pricing<br />
return period modeled losses for Ascot and Transatlantic together<br />
associated with mortality, morbidity, termination and expenses;<br />
are estimated to be $1.0 billion, on a gross basis, $749 million,<br />
and<br />
net of reinsurance.<br />
( investment risk which represents the exposure to loss resulting<br />
ACTUAL RESULTS IN ANY PERIOD ARE LIKELY TO VARY,<br />
from the cash flows from the invested assets being less than<br />
PERHAPS MATERIALLY, FROM THE MODELED SCENARIOS, AND the cash flows required to meet the obligations of the expected<br />
THE OCCURRENCE OF ONE OR MORE SEVERE EVENTS COULD policy and contract liabilities and the necessary return on<br />
HAVE A MATERIAL ADVERSE EFFECT ON <strong>AIG</strong>’S FINANCIAL CONDI- investments.<br />
TION, RESULTS OF OPERATIONS AND LIQUIDITY.<br />
<strong>AIG</strong> businesses manage these risks through exposure limitations<br />
and the active management of the asset-liability relationship<br />
Measures Implemented to Control Hurricane and Earthquake<br />
in their operations. The emergence of significant adverse experi-<br />
Catastrophic Risk<br />
ence would require an adjustment to DAC and benefit reserves<br />
Catastrophic risk from the earthquake and hurricane perils is that could have a material adverse effect on <strong>AIG</strong>’s consolidated<br />
proactively managed through reinsurance programs, and aggregate results of operations for a particular period.<br />
accumulation monitoring. Catastrophe reinsurance is purchased by <strong>AIG</strong>’s Foreign Life Insurance & Retirement Services <strong>com</strong>panies<br />
<strong>AIG</strong> from financially sound reinsurers. Recoveries under this generally limit their maximum underwriting exposure on life<br />
program, along with other non-catastrophic reinsurance protec- insurance of a single life to approximately $1.7 million of<br />
tions, are reflected in the net values provided in the tables above. coverage. <strong>AIG</strong>’s Domestic Life Insurance & Retirement Services<br />
In addition to catastrophic reinsurance programs, hurricane and <strong>com</strong>panies limit their maximum underwriting exposure on life<br />
earthquake exposures are controlled by periodically monitoring insurance of a single life to $15 million of coverage in certain<br />
aggregate exposures. The aggregate exposures are calculated by circumstances by using yearly renewable term reinsurance. In Life<br />
<strong>com</strong>piling total liability within <strong>AIG</strong> defined hurricane and earth- Insurance & Retirement Services, the reinsurance programs<br />
quake catastrophe risk zones and therefore represent the maxi- provide risk mitigation per policy, per individual life for life and<br />
mum that could be lost in any individual zone. These aggregate group covers and for catastrophic risk events.<br />
accumulations are tracked over time in order to monitor both longand<br />
short-term trends. <strong>AIG</strong>’s major property writers, Lexington and Pandemic Influenza<br />
<strong>AIG</strong> Private Client Group, have also implemented catastrophe-<br />
The potential for a pandemic influenza outbreak has received<br />
related underwriting procedures and manage their books at an<br />
much recent attention. While outbreaks of the Avian Flu continue<br />
account level. Lexington individually models most accounts prior to<br />
to occur among poultry or wild birds in a number of countries in<br />
binding in order to specifically quantify catastrophic risk for each<br />
Asia, Europe, including the U.K., and Africa, transmission to<br />
account.<br />
humans has been rare to date. If the virus mutates to a form that<br />
Terrorism<br />
can be transmitted from human to human, it has the potential to<br />
spread rapidly worldwide. If such an outbreak were to take place,<br />
Exposure to loss from terrorist attack is controlled by limiting the<br />
early quarantine and vaccination could be critical to containment.<br />
aggregate accumulation of workers <strong>com</strong>pensation and property<br />
The contagion and mortality rates of any mutated H5N1 virus<br />
insurance that is underwritten within defined target locations.<br />
that can be transmitted from human to human are highly<br />
Modeling is used to provide projections of probable maximum loss<br />
speculative. <strong>AIG</strong> continues to monitor the developing facts. A<br />
by target location based upon the actual exposures of <strong>AIG</strong><br />
significant global outbreak could have a material adverse effect on<br />
policyholders.<br />
Life Insurance & Retirement Services operating results and<br />
Terrorism risk is monitored to manage <strong>AIG</strong>’s exposure. <strong>AIG</strong><br />
liquidity from increased mortality and morbidity rates. <strong>AIG</strong> continshares<br />
its exposures to terrorism risks under the Terrorism Risk<br />
ues to analyze its exposure to this serious threat and has<br />
Insurance Act, which was recently extended through December 31,<br />
engaged an external risk management firm to model loss<br />
2014 by the Terrorism Risk Insurance Program Reauthorization Act<br />
scenarios associated with an outbreak of Avian Flu. For a ‘‘mild’’<br />
of <strong>2007</strong> (TRIA). During <strong>2007</strong>, <strong>AIG</strong>’s deductible under TRIA was<br />
scenario, <strong>AIG</strong> estimates its after-tax net losses under its life<br />
approximately $4.0 billion, with a 15 percent share of certified<br />
insurance policies due to Avian Flu at approximately 2 percent of<br />
terrorism losses in excess of the deductible. As of January 1,<br />
consolidated shareholders’ equity as of December 31, <strong>2007</strong>. This<br />
2008, the deductible increased to $4.2 billion, with a 15 percent<br />
estimate was calculated over a 3-year period, although the<br />
share of certified terrorism losses in excess of the deductible. <strong>AIG</strong><br />
120 <strong>AIG</strong> <strong>2007</strong> Form 10-K