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 />
In the event of a downgrade of <strong>AIG</strong>, <strong>AIG</strong> would be required to the extent not mitigated by collateral or other credit enhancepost<br />
additional collateral. It is estimated that, as of the close of ments. A reinsurer’s insolvency or inability or refusal to make<br />
business on February 14, 2008, based on <strong>AIG</strong>’s outstanding timely payments under the terms of its agreements with the <strong>AIG</strong><br />
municipal GIAs and financial derivatives transactions as of such subsidiaries could have a material adverse effect on <strong>AIG</strong>’s results<br />
date, a further downgrade of <strong>AIG</strong>’s long-term senior debt ratings of operations and liquidity. See also Management’s Discussion<br />
to Aa3 by Moody’s or AA- by S&P would permit counterparties to and Analysis of Financial Condition and Results of Operations —<br />
call for approximately $1.39 billion of additional collateral.<br />
Risk Management — Reinsurance.<br />
Further, additional downgrades could result in requirements for<br />
substantial additional collateral, which could have a material Adjustments to Life Insurance & Retirement<br />
effect on how <strong>AIG</strong> manages its liquidity. For a further discussion Services Deferred Policy<br />
of <strong>AIG</strong>’s credit ratings and the potential effect of posting collateral Acquisition Costs<br />
on <strong>AIG</strong>’s liquidity, see Management’s Discussion and Analysis of<br />
Interest rate fluctuations and other events may require <strong>AIG</strong><br />
Financial Condition and Results of Operations — Capital Resubsidiaries<br />
to accelerate the amortization of deferred policy<br />
sources and Liquidity — Credit Ratings and — Liquidity.<br />
acquisition costs (DAC) which could adversely affect <strong>AIG</strong>’s<br />
consolidated financial condition or results of operations. DAC<br />
Catastrophe Exposures<br />
represents the costs that vary with and are related primarily to<br />
The occurrence of catastrophic events could adversely affect the acquisition of new and renewal insurance and annuity<br />
<strong>AIG</strong>’s consolidated financial condition or results of operations. contracts. When interest rates rise, policy loans and surrenders<br />
The occurrence of events such as hurricanes, earthquakes, and withdrawals of life insurance policies and annuity contracts<br />
pandemic disease, acts of terrorism and other catastrophes could may increase as policyholders seek to buy products with perceived<br />
adversely affect <strong>AIG</strong>’s consolidated financial condition or results of higher returns, requiring <strong>AIG</strong> subsidiaries to accelerate the<br />
operations, including by exposing <strong>AIG</strong>’s businesses to the<br />
amortization of DAC. To the extent such amortization exceeds<br />
following:<br />
surrender or other charges earned upon surrender and withdraw-<br />
) widespread claim costs associated with property, workers als of certain life insurance policies and annuity contracts, <strong>AIG</strong>’s<br />
<strong>com</strong>pensation, mortality and morbidity claims;<br />
results of operations could be negatively affected.<br />
) loss resulting from the value of invested assets declining to DAC for both insurance-oriented and investment-oriented prodbelow<br />
the amount required to meet the policy and contract ucts as well as retirement services products is reviewed for<br />
liabilities; and<br />
recoverability, which involves estimating the future profitability of<br />
) loss resulting from actual policy experience emerging ad- current business. This review involves significant management<br />
versely in <strong>com</strong>parison to the assumptions made in the judgment. If the actual emergence of future profitability were to be<br />
product pricing related to mortality, morbidity, termination substantially lower than estimated, <strong>AIG</strong> could be required to<br />
and expenses.<br />
accelerate its DAC amortization and such acceleration could<br />
adversely affect <strong>AIG</strong>’s results of operations. See also Management’s<br />
Reinsurance<br />
Discussion and Analysis of Financial Condition and Results<br />
of Operations — Critical Accounting Estimates and Notes 1 and 6<br />
Reinsurance may not be available or affordable. <strong>AIG</strong> subsidiaries<br />
to Consolidated Financial Statements.<br />
are major purchasers of reinsurance and utilize reinsurance as<br />
part of <strong>AIG</strong>’s overall risk management strategy. Reinsurance is an<br />
important risk management tool to manage transaction and<br />
Use of Estimates<br />
insurance line risk retention, and to mitigate losses that may arise If actual experience differs from management’s estimates used<br />
from catastrophes. Market conditions beyond <strong>AIG</strong>’s control deter- in the preparation of financial statements, <strong>AIG</strong>’s consolidated<br />
mine the availability and cost of the reinsurance purchased by <strong>AIG</strong> results of operations or financial condition could be adversely<br />
subsidiaries. For example, reinsurance may be more difficult to affected. The preparation of financial statements in conformity<br />
obtain after a year with a large number of major catastrophes. with accounting principles generally accepted in the United States<br />
Accordingly, <strong>AIG</strong> may be forced to incur additional expenses for requires the application of accounting policies that often involve a<br />
reinsurance or may be unable to obtain sufficient reinsurance on significant degree of judgment. <strong>AIG</strong> considers that its accounting<br />
acceptable terms, in which case <strong>AIG</strong> would have to accept an policies that are most dependent on the application of estimates<br />
increase in exposure risk, reduce the amount of business written and assumptions, and therefore viewed as critical accounting<br />
by its subsidiaries or seek alternatives.<br />
estimates, are those described in Management’s Discussion and<br />
Analysis of Financial Condition and Results of Operations —<br />
Reinsurance subjects <strong>AIG</strong> to the credit risk of its reinsurers and<br />
Critical Accounting Estimates. These accounting estimates require<br />
may not be adequate to protect <strong>AIG</strong> against losses. Although<br />
the use of assumptions, some of which are highly uncertain at<br />
reinsurance makes the reinsurer liable to the <strong>AIG</strong> subsidiary to<br />
the time of estimation. For example, recent market volatility and<br />
the extent the risk is ceded subject to the terms and conditions of<br />
declines in liquidity have made it more difficult to value certain of<br />
the reinsurance contracts in place, it does not relieve the <strong>AIG</strong><br />
<strong>AIG</strong>’s invested assets and the obligations and collateral relating to<br />
subsidiary of the primary liability to its policyholders. Accordingly,<br />
certain financial instruments issued or held by <strong>AIG</strong>, such as<br />
<strong>AIG</strong> bears credit risk with respect to its subsidiaries’ reinsurers to<br />
18 <strong>AIG</strong> <strong>2007</strong> Form 10-K