2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements Continued 5. Reinsurance Life Insurance assumed represented less than 0.1 percent, Continued 0.1 percent and 0.8 percent of gross Life Insurance in force at December 31, 2007, 2006 and 2005, respectively, and Life General Insurance premiums written and earned were Insurance & Retirement Services premiums assumed represented comprised of the following: 0.1 percent, 0.1 percent and 0.3 percent of gross premiums and Years Ended December 31, other considerations for the years ended December 31, 2007, (in millions) 2007 2006 2005 2006 and 2005, respectively. Premiums written: AIG’s Domestic Life Insurance & Retirement Services opera- Direct $ 52,055 $ 49,609 $ 46,689 tions utilize internal and third-party reinsurance relationships to Assumed 6,743 6,671 6,036 manage insurance risks and to facilitate capital management Ceded (11,731) (11,414) (10,853) strategies. Pools of highly-rated third-party reinsurers are utilized Total $ 47,067 $ 44,866 $ 41,872 to manage net amounts at risk in excess of retention limits. AIG’s Domestic Life Insurance companies also cede excess, non- Premiums earned: economic reserves carried on a statutory-basis only on certain Direct $ 50,403 $ 47,973 $ 45,794 term and universal life insurance policies and certain fixed Assumed 6,530 6,449 5,921 Ceded (11,251) (10,971) (10,906) annuities to an offshore affiliate. AIG generally obtains letters of credit in order to obtain Total $ 45,682 $ 43,451 $ 40,809 statutory recognition of its intercompany reinsurance transactions. For this purpose, AIG has a $2.5 billion syndicated letter of credit For the years ended December 31, 2007, 2006 and 2005, facility outstanding at December 31, 2007, all of which relates to reinsurance recoveries, which reduced loss and loss expenses life intercompany reinsurance transactions. incurred, amounted to $9.0 billion, $8.3 billion and $20.7 billion, AIG is also a party to a 364-day bilateral revolving credit facility respectively. for an aggregate amount of $3.2 billion. The facility can be drawn Life Reinsurance in the form of letters of credit with terms of up to eight years. At December 31, 2007, approximately $3.0 billion principal amount Life reinsurance is effected principally under yearly renewable of letters of credit are outstanding under this facility, of which term treaties. The premiums with respect to these treaties are approximately $2.1 billion relates to life intercompany reinsurance considered prepaid reinsurance premiums and are recognized as transactions. AIG has also obtained approximately $377 million of a reduction of premiums earned over the contract period in letters of credit on a bilateral basis. proportion to the protection provided. Amounts recoverable from life reinsurers are estimated in a manner consistent with the Reinsurance Security assumptions used for the underlying policy benefits and are AIG’s third-party reinsurance arrangements do not relieve AIG from presented as a component of reinsurance assets. its direct obligation to its insureds. Thus, a credit exposure exists Life Insurance & Retirement Services premiums were with respect to both general and life reinsurance ceded to the comprised of the following: extent that any reinsurer fails to meet the obligations assumed under any reinsurance agreement. AIG holds substantial collateral Years Ended December 31, (in millions) 2007 2006 2005 as security under related reinsurance agreements in the form of funds, securities, and/or letters of credit. A provision has been Gross premiums $34,585 $32,247 $30,818 recorded for estimated unrecoverable reinsurance. AIG has been Ceded premiums (1,778) (1,481) (1,317) largely successful in prior recovery efforts. Premiums $32,807 $30,766 $29,501 AIG evaluates the financial condition of its reinsurers and establishes limits per reinsurer through AIG’s Credit Risk Commit- Life Insurance recoveries, which reduced death and other tee. AIG believes that no exposure to a single reinsurer reprebenefits, approximated $1.1 billion, $806 million and $770 milsents an inappropriate concentration of risk to AIG, nor is AIG’s lion, respectively, for the years ended December 31, 2007, 2006 business substantially dependent upon any single reinsurer. and 2005. Life Insurance in-force ceded to other insurance companies was as follows: At December 31, (in millions) 2007 2006 2005 Life Insurance in force ceded $402,654 $408,970 $365,082 158 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries 6. Deferred Policy Acquisition Costs The following reflects the policy acquisition costs deferred for amortization against future income and the related amortization charged to income for General Insurance and Life Insurance & Retirement Services operations: Years Ended December 31, (in millions) 2007 2006 2005 General Insurance operations: Balance at beginning of year $ 4,355 $ 4,048 $ 3,998 Acquisition costs deferred 8,661 8,115 7,480 Amortization expense (8,235) (7,866) (7,365) Increase (decrease) due to foreign exchange and other (138) 58 (65) Balance at end of year $ 4,643 $ 4,355 $ 4,048 Life Insurance & Retirement Services operations: Balance at beginning of year $32,810 $28,106 $25,080 Acquisition costs deferred 7,276 6,823 6,513 Amortization expense (a) (3,367) (3,712) (3,328) Change in net unrealized gains (losses) on securities 745 646 977 Increase (decrease) due to foreign exchange 916 947 (1,136) Other (b) 65 — — Subtotal $38,445 $32,810 $28,106 Consolidation and eliminations 62 70 — Balance at end of year (c) $38,507 $32,880 $28,106 Total deferred policy acquisition costs $43,150 $37,235 $32,154 (a) In 2007, amortization expense was reduced by $733 million related to changes in actuarial estimates, which was mostly offset in incurred policy losses and benefits. (b) In 2007, includes the cumulative effect of the adoption of SOP 05-1 of $(118) million and a balance sheet reclassification of $189 million. (c) Includes $5 million and $(720) million at December 31, 2007 and 2006, respectively, related to the effect of net unrealized gains and losses on available for sale securities. Included in the above table is the VOBA, an intangible asset interest or do not have sufficient equity that is at risk which would recorded during purchase accounting, which is amortized in a allow the entity to finance its activities without additional subordimanner similar to DAC. Amortization of VOBA was $213 million, nated financial support. FIN 46R recognizes that consolidation $239 million and $291 million in 2007, 2006 and 2005, based on majority voting interest should not apply to certain types respectively, while the unamortized balance was $1.86 billion, of entities that are defined as VIEs. A VIE is consolidated by its $1.98 billion and $2.14 billion at December 31, 2007, 2006 and primary beneficiary, which is the party that absorbs a majority of 2005, respectively. The percentage of the unamortized balance of the expected losses or a majority of the expected residual returns VOBA at 2007 expected to be amortized in 2008 through 2012 by of the VIE, or both. year is: 11.7 percent, 10.2 percent, 8.4 percent, 6.6 percent and AIG, in the normal course of business, is involved with various 5.9 percent, respectively, with 57.2 percent being amortized after VIEs. In some cases, AIG has participated to varying degrees in five years. These projections are based on current estimates for the design of the entity. AIG’s involvement in VIEs varies from investment, persistency, mortality and morbidity assumptions. The being a passive investor to managing and structuring the activities DAC amortization charged to income includes the increase or of the VIE. AIG engages in transactions with VIEs to manage its decrease of amortization for FAS 97-related realized capital gains investment needs, obtain funding as well as facilitate client needs (losses), primarily in the Domestic Retirement Services business. through a global network of operating subsidiaries comprising AIG In 2007, 2006 and 2005, the rate of amortization expense Global Asset Management Holdings Corp. and its subsidiaries and decreased by $291 million, $90 million and $46 million, affiliated companies (collectively, AIG Investments) and AIGFP. AIG respectively. purchases debt securities (rated and unrated) and equity interests There were no impairments of DAC or VOBA for the years issued by VIEs, makes loans and provides other credit support to ended December 31, 2007, 2006 and 2005. VIEs, enters into insurance and reinsurance transactions with VIEs, enters into leasing arrangements with VIEs, enters into 7. Variable Interest Entities derivative transactions with VIEs through AIGFP and acts as the collateral manager of VIEs through AIG Investments and AIGFP. FIN 46R, ‘‘Consolidation of Variable Interest Entities’’ clarifies the Obligations to outside interest holders in VIEs consolidated by AIG consolidation accounting for certain entities in which equity are reported as liabilities in the consolidated financial statements. investors do not have the characteristics of a controlling financial These interest holders generally have recourse only to the assets AIG 2007 Form 10-K 159
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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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Page 161 and 162: American International Group, Inc.
Page 191 and 192: Index of Notes to Consolidated Fina
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SHAREHOLDER INFORMATION Corporate H
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