FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2007 |
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or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number 1-8787
American International Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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13-2592361 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
70 Pine Street, New York, New York
(Address of principal executive offices) |
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10270
(Zip Code) |
Registrants telephone number, including area code
(212) 770-7000
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each exchange |
Title of each class |
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on which registered |
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Common Stock,
Par Value $2.50 Per Share
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New York Stock Exchange |
5.75% Series A-2 Junior Subordinated Debentures
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New York Stock Exchange |
4.875% Series A-3 Junior Subordinated Debentures
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New York Stock Exchange |
6.45% Series A-4 Junior Subordinated Debentures
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New York Stock Exchange |
7.70% Series A-5 Junior Subordinated Debentures
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New York Stock Exchange |
NIKKEI
225®
Index Market Index Target-Term
Securities®
due January 5, 2011 |
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American Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the
registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days. Yes þ No o
Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer,
accelerated filer and smaller reporting
company in
Rule 12b-2 of the
Exchange Act. (Check one):
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Large Accelerated
Filer þ
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Accelerated
Filer o |
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Non-Accelerated
Filer o |
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Smaller Reporting
Company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2 of the
Exchange Act).
Yes o No þ
The aggregate market value of the
voting and nonvoting common equity held by nonaffiliates of the
registrant computed by reference to the price at which the
common equity was last sold as of June 29, 2007 (the last
business day of the registrants most recently completed
second fiscal quarter), was approximately $152,287,000,000.
As of January 31, 2008, there were
outstanding 2,522,336,771 shares of Common Stock,
$2.50 par value per share, of the registrant.
Documents Incorporated by Reference:
Portions of the registrants
definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to
Regulation 14A involving the election of directors at the
Annual Meeting of Shareholders of the registrant scheduled to be
held on May 14, 2008 are incorporated by reference in
Part III of this
Form 10-K.
AIG 2007
Form 10-K
1
American International Group,
Inc. and Subsidiaries
Table of Contents
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* |
Except for the information provided in Part I under the
heading Directors and Executive Officers of AIG,
Part III Items 10, 11, 12, 13 and 14 are included
in AIGs Definitive Proxy Statement to be used in
connection with AIGs Annual Meeting of Shareholders
scheduled to be held on May 14, 2008. |
2 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
Part I
Item 1.
Business
American International Group, Inc. (AIG), a Delaware
corporation, is a holding company which, through its
subsidiaries, is engaged in a broad range of insurance and
insurance-related activities in the United States and abroad.
AIGs primary activities include both General Insurance and
Life Insurance & Retirement Services operations. Other
significant activities include Financial Services and Asset
Management. The principal business units in each of AIGs
operating segments are as follows*:
General Insurance
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American Home Assurance Company (American Home) |
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National Union Fire Insurance Company of Pittsburgh, Pa.
(National Union) |
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New Hampshire Insurance Company (New Hampshire) |
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Lexington Insurance Company (Lexington) |
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The Hartford Steam Boiler Inspection and Insurance Company (HSB) |
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Transatlantic Reinsurance Company |
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United Guaranty Residential Insurance Company |
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American International Underwriters Overseas, Ltd. (AIUO) |
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AIU Insurance Company (AIUI) |
Life Insurance & Retirement Services
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Domestic: |
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American General Life Insurance Company (AIG American General) |
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American General Life and Accident Insurance Company (AGLA) |
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The United States Life Insurance Company in the City of New York
(USLIFE) |
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The Variable Annuity Life Insurance Company (VALIC) |
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AIG Annuity Insurance Company (AIG Annuity) |
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AIG SunAmerica Life Assurance Company (AIG SunAmerica) |
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Foreign: |
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American Life Insurance Company (ALICO) |
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AIG Star Life Insurance Co., Ltd. (AIG Star Life) |
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AIG Edison Life Insurance Company (AIG Edison Life) |
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American International Assurance Company, Limited, together with
American International Assurance Company (Bermuda) Limited (AIA) |
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American International Reinsurance Company Limited (AIRCO) |
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Nan Shan Life Insurance Company, Ltd. (Nan Shan) |
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The Philippine American Life and General Insurance Company
(Philamlife) |
Financial Services
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International Lease Finance Corporation (ILFC) |
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AIG Financial Products Corp. and AIG Trading Group Inc. and
their respective subsidiaries (collectively, AIGFP) |
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American General Finance, Inc. (AGF) |
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AIG Consumer Finance Group, Inc. (AIGCFG) |
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Imperial A.I. Credit Companies (A.I. Credit) |
Asset Management
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AIG SunAmerica Asset Management Corp. (SAAMCo) |
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AIG Global Asset Management Holdings Corp. and its subsidiaries
and affiliated companies (collectively, AIG Investments) |
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AIG Private Bank Ltd. (AIG Private Bank) |
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AIG Global Real Estate Investment Corp. (AIG Global Real Estate) |
At December 31, 2007, AIG and its
subsidiaries had approximately 116,000 employees.
AIGs Internet address for its
corporate website is www.aigcorporate.com. AIG makes
available free of charge, through the Investor Information
section of AIGs corporate website, Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q, Current
Reports on
Form 8-K and Proxy
Statements on Schedule 14A and amendments to those reports
or statements filed or furnished pursuant to Section 13(a),
14(a) or 15(d) of the Securities Exchange Act of 1934 (the
Exchange Act) as soon as reasonably practicable after such
materials are electronically filed with, or furnished to, the
Securities and Exchange Commission (SEC). AIG also makes
available on its corporate website copies of the charters for
its Audit, Nominating and Corporate Governance and Compensation
and Management Resources Committees, as well as its Corporate
Governance Guidelines (which include Director Independence
Standards), Director, Executive Officer and Senior Financial
Officer Code of Business Conduct and Ethics, Employee Code of
Conduct and Related-Party Transactions Approval Policy. Except
for the documents specifically incorporated by reference into
this Annual Report on
Form 10-K,
information contained on AIGs website or that can be
accessed through its website is not incorporated by reference
into this Annual Report on
Form 10-K.
Throughout this Annual Report on
Form 10-K, AIG
presents its operations in the way it believes will be most
meaningful, as well as most transparent. Certain of the
measurements used by AIG management are non-GAAP financial
measures under SEC rules and regulations. Statutory
underwriting profit (loss) and combined ratios are determined in
accordance with accounting principles prescribed by insurance
regulatory authorities. For an explanation of why AIG management
considers these non-GAAP measures useful to
investors, see Managements Discussion and Analysis of
Financial Condition and Results of Operations.
*For information on AIGs business segments, see
Note 2 to Consolidated Financial Statements.
AIG 2007
Form 10-K
3
American International Group, Inc. and Subsidiaries
The following table presents the
general development of the business of AIG on a consolidated
basis, the contributions made to AIGs consolidated
revenues and operating income and the assets held, in the
periods indicated, by its General Insurance, Life
Insurance & Retirement Services, Financial Services and
Asset Management operations and Other operations. For additional
information, see Item 6. Selected Financial Data,
Managements Discussion and Analysis of Financial Condition
and Results of Operations and Notes 1 and 2 to Consolidated
Financial Statements.
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Years Ended December 31, |
(in millions) |
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2007 | |
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2006(a) | |
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2005(a) | |
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2004(a) | |
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2003(a) | |
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General Insurance operations:
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Gross premiums written
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$ |
58,798 |
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$ |
56,280 |
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$ |
52,725 |
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$ |
52,046 |
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$ |
46,938 |
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Net premiums written
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47,067 |
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44,866 |
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41,872 |
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40,623 |
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35,031 |
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Net premiums earned
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45,682 |
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43,451 |
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40,809 |
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38,537 |
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31,306 |
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Net investment
income(b)
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6,132 |
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5,696 |
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4,031 |
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3,196 |
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2,566 |
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Net realized capital gains (losses)
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(106 |
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59 |
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334 |
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228 |
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(39 |
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Operating
income(b)(c)(d)
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10,526 |
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10,412 |
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2,315 |
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3,177 |
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4,502 |
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Year-end identifiable assets
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181,708 |
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167,004 |
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150,667 |
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131,658 |
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117,511 |
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Statutory
measures(e):
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Statutory underwriting profit
(loss)(c)(d)
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4,073 |
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4,408 |
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(2,165 |
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(564 |
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1,559 |
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Loss ratio
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65.6 |
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64.6 |
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81.1 |
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78.8 |
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73.1 |
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Expense ratio
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24.7 |
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24.5 |
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23.6 |
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21.5 |
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19.6 |
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Combined
ratio(d)
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90.3 |
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89.1 |
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104.7 |
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100.3 |
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92.7 |
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Life Insurance & Retirement Services operations:
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Premiums and other considerations
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33,627 |
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30,766 |
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29,501 |
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28,167 |
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23,568 |
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Net investment
income(b)
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22,341 |
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20,024 |
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18,677 |
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15,654 |
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13,278 |
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Net realized capital gains
(losses)(f)
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(2,398 |
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88 |
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(158 |
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45 |
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362 |
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Operating
income(b)(f)
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8,186 |
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10,121 |
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8,965 |
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7,968 |
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6,970 |
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Year-end identifiable assets
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615,386 |
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550,957 |
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489,331 |
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457,071 |
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380,126 |
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Gross insurance in force at end of year
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2,312,045 |
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2,070,600 |
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1,852,833 |
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1,858,094 |
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1,583,031 |
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Financial Services operations:
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Interest, lease and finance
charges(g)(h)
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(1,209 |
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7,910 |
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10,523 |
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7,495 |
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6,241 |
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Net realized capital gains (losses)
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(100 |
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(133 |
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154 |
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(45 |
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123 |
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Operating income
(loss)(g)(h)
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(9,515 |
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383 |
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4,424 |
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2,131 |
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1,302 |
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Year-end identifiable assets
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203,894 |
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202,485 |
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161,919 |
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161,929 |
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138,613 |
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Asset Management operations:
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Investment income from spread-based products and management,
advisory and incentive fees
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6,625 |
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4,668 |
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4,500 |
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4,179 |
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3,379 |
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Net realized capital gains (losses)
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(1,000 |
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(125 |
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82 |
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60 |
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(754 |
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Operating income
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1,164 |
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1,538 |
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1,963 |
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1,947 |
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521 |
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Year-end identifiable assets
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77,274 |
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78,275 |
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69,584 |
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68,503 |
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56,047 |
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Other operations:
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Net realized capital gains (losses)
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12 |
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217 |
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(71 |
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(244 |
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(134 |
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All
other(i)
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(1,430 |
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(984 |
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(2,383 |
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(134 |
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(1,254 |
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Consolidated:
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Total
revenues(j)(k)
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110,064 |
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113,387 |
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108,781 |
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97,823 |
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79,601 |
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Operating
income(b)(j)(k)
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8,943 |
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21,687 |
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15,213 |
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14,845 |
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11,907 |
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Year-end total assets
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1,060,505 |
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979,410 |
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853,048 |
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801,007 |
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675,602 |
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(a) |
Certain reclassifications have been made to prior period
amounts to conform to the current period presentation. |
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(b) |
In 2006, includes the effect of out of period adjustments
related to the accounting for certain interests in unit
investment trusts (UCITS). The effect was an increase of
$490 million in both revenues and operating income for
General Insurance and an increase of $240 million and
$169 million in revenues and operating income,
respectively, for Life Insurance & Retirement
Services. |
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(c) |
Includes current year catastrophe-related losses of
$276 million, $2.89 billion and $1.05 billion in
2007, 2005 and 2004, respectively. There were no significant
catastrophe-related losses in 2006 or 2003. |
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(d) |
Operating income was reduced by fourth quarter charges of
$1.8 billion and $850 million in 2005 and 2004,
respectively, resulting from the annual review of General
Insurance loss and loss adjustment reserves. In 2006, 2005 and
2004, changes in estimates for asbestos and environmental
reserves were $198 million, $873 million and
$850 million, respectively. |
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(e) |
Calculated on the basis under which the
U.S.-domiciled general
insurance companies are required to report such measurements to
regulatory authorities. |
4 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
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(f) |
In 2007, 2006, 2005, 2004 and 2003, includes
other-than-temporary impairment charges of $2.8 billion,
$641 million, $425 million, $441 million and
$1.2 billion. See Managements Discussion and Analysis
of Financial Condition and Results of Operations
Invested Assets Other-than-temporary impairments. |
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(g) |
Includes gains (losses) from hedging activities that did not
qualify for hedge accounting treatment under Statement of
Financial Accounting Standards (FAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities (FAS 133), including the related foreign
exchange gains and losses. In 2007, 2006, 2005, 2004 and 2003,
respectively, the effect was $211 million,
$(1.82) billion, $2.01 billion, $(122) million
and $(1.01) billion in both revenues and operating income
for Capital Markets. These amounts result primarily from
interest rate and foreign currency derivatives that are
effective economic hedges of investments and borrowings. These
gains (losses) in 2007 include a $380 million out of period
charge to reverse net gains recognized on transfers of available
for sale securities among legal entities consolidated within
AIGFP. In 2006, includes an out of period charge of $223 million
related to the remediation of the material weakness in internal
control over the accounting for certain derivative transactions
under FAS 133. In the first quarter of 2007, AIGFP began
applying hedge accounting for certain of its interest rate swaps
and foreign currency forward contracts hedging its investments
and borrowings. |
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(h) |
In 2007, both revenues and operating income (loss) include an
unrealized market valuation loss of $11.5 billion on AIGFP
super senior credit default swap portfolio and an
other-than-temporary impairment charge of $643 million on
AIGFPs available for sale investment securities. See
Managements Discussion and Analysis of Financial Condition
and Results of Operations Invested
Assets Other-than- temporary impairments. |
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(i) |
In 2005, includes $1.6 billion of regulatory settlement
costs as described under Item 3. Legal Proceedings. |
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(j) |
In 2007, 2006, 2005, 2004 and 2003, includes
other-than-temporary impairment charges of $4.7 billion,
$944 million, $598 million, $684 million and
$1.5 billion. Also includes gains (losses) from hedging
activities that did not qualify for hedge accounting treatment
under FAS 133, including the related foreign exchange gains
and losses. In 2007, 2006, 2005, 2004 and 2003, respectively,
the effect was $(1.44) billion, $(1.87) billion,
$2.02 billion, $385 million and $(1.50) billion
in revenues and $(1.44) billion, $(1.87) billion,
$2.02 billion, $671 million and $(1.22) billion
in operating income. These amounts result primarily from
interest rate and foreign currency derivatives that are
effective economic hedges of investments and borrowings. |
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(k) |
Represents income before income taxes, minority interest and
cumulative effect of accounting changes. |
AIG 2007
Form 10-K
5
American International Group, Inc. and Subsidiaries
General Insurance Operations
AIGs General Insurance subsidiaries write substantially
all lines of commercial property and casualty insurance and
various personal lines both domestically and abroad. Domestic
General Insurance operations are comprised of the Domestic
Brokerage Group (DBG), Reinsurance, Personal Lines and Mortgage
Guaranty.
AIG is diversified both in terms of classes of business and
geographic locations. In General Insurance, workers compensation
business is the largest class of business written and
represented approximately 15 percent of net premiums
written for the year ended December 31, 2007. During 2007,
10 percent and 7 percent of the direct General
Insurance premiums written (gross premiums less return premiums
and cancellations, excluding reinsurance assumed and before
deducting reinsurance ceded) were written in California and New
York, respectively. No other state or foreign country accounted
for more than five percent of such premiums.
The majority of AIGs General Insurance business is in the
casualty classes, which tend to involve longer periods of time
for the reporting and settling of claims. This may increase the
risk and uncertainty with respect to AIGs loss reserve
development.
DBG
AIGs primary Domestic General Insurance division is DBG.
DBGs business in the United States and Canada is conducted
through American Home, National Union, Lexington, HSB and
certain other General Insurance company subsidiaries of AIG.
During 2007, DBG accounted for 51 percent of AIGs
General Insurance net premiums written.
DBG writes substantially all classes of business insurance,
accepting such business mainly from insurance brokers. This
provides DBG the opportunity to select specialized markets and
retain underwriting control. Any licensed broker is able to
submit business to DBG without the traditional agent-company
contractual relationship, but such broker usually has no
authority to commit DBG to accept a risk.
In addition to writing substantially all classes of business
insurance, including large commercial or industrial property
insurance, excess liability, inland marine, environmental,
workers compensation and excess and umbrella coverages, DBG
offers many specialized forms of insurance such as aviation,
accident and health, equipment breakdown, directors and officers
liability (D&O),
difference-in-conditions,
kidnap-ransom, export credit and political risk, and various
types of professional errors and omissions coverages. Also
included in DBG are the operations of AIG Risk Management, which
provides insurance and risk management programs for large
corporate customers and is a leading provider of customized
structured insurance products, and AIG Environmental, which
focuses specifically on providing specialty products to clients
with environmental exposures. Lexington writes surplus lines for
risks on which conventional insurance companies do not readily
provide insurance coverage, either because of complexity or
because the coverage does not lend itself to conventional
contracts. The AIG Worldsource Division introduces and
coordinates AIGs products and services to
U.S.-based
multinational clients and foreign corporations doing business in
the U.S.
Reinsurance
The subsidiaries of Transatlantic Holdings, Inc. (Transatlantic)
offer reinsurance on both a treaty and facultative basis to
insurers in the United States and abroad. Transatlantic
structures programs for a full range of property and casualty
products with an emphasis on specialty risk. Transatlantic is a
public company owned 59.0 percent by AIG and therefore is
included in AIGs consolidated financial statements.
Personal Lines
AIGs Personal Lines operations provide automobile
insurance through aigdirect.com, the newly formed operation
resulting from the 2007 combination of AIG Direct and
21st Century Insurance Group (21st Century) operations, and
the Agency Auto Division, as well as a broad range of coverages
for high net worth individuals through the AIG Private Client
Group.
Mortgage Guaranty
The main business of the subsidiaries of United Guaranty
Corporation (UGC) is the issuance of residential mortgage
guaranty insurance, both domestically and internationally, that
covers the first loss for credit defaults on high loan-to-value
conventional first-lien mortgages for the purchase or refinance
of one to four family residences. UGC subsidiaries also write
second-lien and private student loan guaranty insurance.
Foreign General Insurance
AIGs Foreign General Insurance group accepts risks
primarily underwritten through American International
Underwriters (AIU), a marketing unit consisting of wholly owned
agencies and insurance companies. The Foreign General Insurance
group also includes business written by AIGs foreign-based
insurance subsidiaries. The Foreign General Insurance group uses
various marketing methods and multiple distribution channels to
write both commercial and consumer lines insurance with certain
refinements for local laws, customs and needs. AIU operates in
Asia, the Pacific Rim, Europe, the U.K., Africa, the Middle East
and Latin America. During 2007, the Foreign General Insurance
group accounted for 28 percent of AIGs General
Insurance net premiums written.
Discussion and Analysis of Consolidated
Net Losses and Loss Expense Reserve Development
The reserve for net losses and loss expenses represents the
accumulation of estimates for reported losses (case basis
reserves) and provisions for losses incurred but not reported
(IBNR), both reduced by applicable reinsurance recoverable and
the discount for future investment income, where permitted. Net
losses and loss expenses are charged to income as incurred.
Loss reserves established with respect to foreign business are
set and monitored in terms of the currency in which payment is
expected to be made. Therefore, no assumption is included for
6 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
changes in currency rates. See also Note 1(ff) to
Consolidated Financial Statements.
Management reviews the adequacy of established loss reserves
utilizing a number of analytical reserve development techniques.
Through the use of these techniques, management is able to
monitor the adequacy of AIGs established reserves and
determine appropriate assumptions for inflation. Also, analysis
of emerging specific development patterns, such as case reserve
redundancies or deficiencies and IBNR emergence, allows
management to determine any required adjustments.
The Analysis of Consolidated Losses and Loss Expense
Reserve Development table presents the development of net
losses and loss expense reserves for calendar years 1997 through
2007. Immediately following this table is a second table that
presents all data on a basis that excludes asbestos and
environmental net losses and loss expense reserve development.
The opening reserves held are shown at the top of the table for
each year end date. The amount of loss reserve discount included
in the opening reserve at each date is shown immediately below
the reserves held for each year. The undiscounted reserve at
each date is thus the sum of the discount and the reserve held.
The upper half of the table presents the cumulative amounts paid
during successive years related to the undiscounted opening loss
reserves. For example, in the table that excludes asbestos and
environmental losses, with respect to the net losses and loss
expense reserve of $24.83 billion as of December 31,
2000, by the end of 2007 (seven years later) $33.05 billion
had actually been paid in settlement of these net loss reserves.
In addition, as reflected in the lower section of the table, the
original undiscounted reserve of $26.12 billion was
reestimated to be $41.21 billion at December 31, 2007.
This increase from the original estimate would generally result
from a combination of a number of factors, including reserves
being settled for larger amounts than originally estimated. The
original estimates will also be increased or decreased as more
information becomes known about the individual claims and
overall claim frequency and severity patterns. The redundancy
(deficiency) depicted in the table, for any particular
calendar year, presents the aggregate change in estimates over
the period of years subsequent to the calendar year reflected at
the top of the respective column heading. For example, the
redundancy of $672 million at December 31, 2007
related to December 31, 2006 net losses and loss
expense reserves of $62.72 billion represents the
cumulative amount by which reserves in 2006 and prior years have
developed favorably during 2007.
The bottom of each table below presents the remaining
undiscounted and discounted net loss reserve for each year. For
example, in the table that excludes asbestos and environmental
losses, for the 2002 year end, the remaining undiscounted
reserves held as of December 31, 2007 are
$13.57 billion, with a corresponding discounted net reserve
of $12.57 billion.
The reserves for net losses and loss expenses with respect to
Transatlantic and 21st Century are included only in
consolidated net losses and loss expenses commencing with the
year ended December 31, 1998, the year they were first
consolidated in AIGs financial statements. Reserve
development for these operations is included only for 1998 and
subsequent periods. Thus, the presentation for 1997 and prior
year ends is not fully comparable to that for 1998 and
subsequent years in the tables below.
AIG 2007
Form 10-K
7
American International Group, Inc. and Subsidiaries
Analysis of Consolidated Losses and
Loss Expense Reserve Development
The following table presents for each
calendar year the losses and loss expense reserves and the
development thereof including those with respect to asbestos and
environmental claims. See also Managements Discussion and
Analysis of Financial Condition and Results of
Operations Operating Review General
Insurance Operations Reserve for Losses and Loss
Expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
2007 | |
| |
Net Reserves Held
|
|
$ |
20,901 |
|
|
$ |
25,418 |
|
|
$ |
25,636 |
|
|
$ |
25,684 |
|
|
$ |
26,005 |
|
|
$ |
29,347 |
|
|
$ |
36,228 |
|
|
$ |
47,254 |
|
|
$ |
57,476 |
|
|
$ |
62,630 |
|
|
$ |
69,288 |
|
Discount (in Reserves Held)
|
|
|
619 |
|
|
|
897 |
|
|
|
1,075 |
|
|
|
1,287 |
|
|
|
1,423 |
|
|
|
1,499 |
|
|
|
1,516 |
|
|
|
1,553 |
|
|
|
2,110 |
|
|
|
2,264 |
|
|
|
2,429 |
|
Net Reserves Held (Undiscounted)
|
|
|
21,520 |
|
|
|
26,315 |
|
|
|
26,711 |
|
|
|
26,971 |
|
|
|
27,428 |
|
|
|
30,846 |
|
|
|
37,744 |
|
|
|
48,807 |
|
|
|
59,586 |
|
|
|
64,894 |
|
|
|
71,717 |
|
Paid (Cumulative) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
5,607 |
|
|
|
7,205 |
|
|
|
8,266 |
|
|
|
9,709 |
|
|
|
11,007 |
|
|
|
10,775 |
|
|
|
12,163 |
|
|
|
14,910 |
|
|
|
15,326 |
|
|
|
14,862 |
|
|
|
|
|
|
Two years later
|
|
|
9,754 |
|
|
|
12,382 |
|
|
|
14,640 |
|
|
|
17,149 |
|
|
|
18,091 |
|
|
|
18,589 |
|
|
|
21,773 |
|
|
|
24,377 |
|
|
|
25,152 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
12,939 |
|
|
|
16,599 |
|
|
|
19,901 |
|
|
|
21,930 |
|
|
|
23,881 |
|
|
|
25,513 |
|
|
|
28,763 |
|
|
|
31,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
15,484 |
|
|
|
20,263 |
|
|
|
23,074 |
|
|
|
26,090 |
|
|
|
28,717 |
|
|
|
30,757 |
|
|
|
33,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
17,637 |
|
|
|
22,303 |
|
|
|
25,829 |
|
|
|
29,473 |
|
|
|
32,685 |
|
|
|
34,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
18,806 |
|
|
|
24,114 |
|
|
|
28,165 |
|
|
|
32,421 |
|
|
|
35,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
19,919 |
|
|
|
25,770 |
|
|
|
30,336 |
|
|
|
34,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
21,089 |
|
|
|
27,309 |
|
|
|
31,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
22,177 |
|
|
|
28,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
23,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
2007 | |
| |
Net Reserves Held (undiscounted)
|
|
$ |
21,520 |
|
|
$ |
26,315 |
|
|
$ |
26,711 |
|
|
$ |
26,971 |
|
|
$ |
27,428 |
|
|
$ |
30,846 |
|
|
$ |
37,744 |
|
|
$ |
48,807 |
|
|
$ |
59,586 |
|
|
$ |
64,894 |
|
|
$ |
71,717 |
|
Undiscounted Liability as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
21,563 |
|
|
|
25,897 |
|
|
|
26,358 |
|
|
|
26,979 |
|
|
|
31,112 |
|
|
|
32,913 |
|
|
|
40,931 |
|
|
|
53,486 |
|
|
|
59,533 |
|
|
|
64,238 |
|
|
|
|
|
|
Two years later
|
|
|
21,500 |
|
|
|
25,638 |
|
|
|
27,023 |
|
|
|
30,696 |
|
|
|
33,363 |
|
|
|
37,583 |
|
|
|
49,463 |
|
|
|
55,009 |
|
|
|
60,126 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
21,264 |
|
|
|
26,169 |
|
|
|
29,994 |
|
|
|
32,732 |
|
|
|
37,964 |
|
|
|
46,179 |
|
|
|
51,497 |
|
|
|
56,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
21,485 |
|
|
|
28,021 |
|
|
|
31,192 |
|
|
|
36,210 |
|
|
|
45,203 |
|
|
|
48,427 |
|
|
|
52,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
22,405 |
|
|
|
28,607 |
|
|
|
33,910 |
|
|
|
41,699 |
|
|
|
47,078 |
|
|
|
49,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
22,720 |
|
|
|
30,632 |
|
|
|
38,087 |
|
|
|
43,543 |
|
|
|
48,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
24,209 |
|
|
|
33,861 |
|
|
|
39,597 |
|
|
|
44,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
26,747 |
|
|
|
34,986 |
|
|
|
40,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
27,765 |
|
|
|
35,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
28,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Redundancy/(Deficiency)
|
|
|
(6,584 |
) |
|
|
(9,241 |
) |
|
|
(13,506 |
) |
|
|
(17,504 |
) |
|
|
(20,845 |
) |
|
|
(19,009 |
) |
|
|
(15,220 |
) |
|
|
(7,240 |
) |
|
|
(540 |
) |
|
|
656 |
|
|
|
|
|
Remaining Reserves (Undiscounted)
|
|
|
5,008 |
|
|
|
6,930 |
|
|
|
8,261 |
|
|
|
9,815 |
|
|
|
12,617 |
|
|
|
15,228 |
|
|
|
19,139 |
|
|
|
24,751 |
|
|
|
34,974 |
|
|
|
49,376 |
|
|
|
|
|
Remaining Discount
|
|
|
418 |
|
|
|
499 |
|
|
|
591 |
|
|
|
705 |
|
|
|
851 |
|
|
|
1,005 |
|
|
|
1,155 |
|
|
|
1,319 |
|
|
|
1,563 |
|
|
|
1,937 |
|
|
|
|
|
Remaining Reserves
|
|
|
4,590 |
|
|
|
6,431 |
|
|
|
7,670 |
|
|
|
9,110 |
|
|
|
11,766 |
|
|
|
14,223 |
|
|
|
17,984 |
|
|
|
23,432 |
|
|
|
33,411 |
|
|
|
47,439 |
|
|
|
|
|
|
The following table presents the gross
liability (before discount), reinsurance recoverable and net
liability recorded at each year end and the reestimation of
these amounts as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
2007 | |
| |
Gross Liability, End of Year
|
|
$ |
32,049 |
|
|
$ |
36,973 |
|
|
$ |
37,278 |
|
|
$ |
39,222 |
|
|
$ |
42,629 |
|
|
$ |
48,173 |
|
|
$ |
53,387 |
|
|
$ |
63,431 |
|
|
$ |
79,279 |
|
|
$ |
82,263 |
|
|
$ |
87,929 |
|
Reinsurance Recoverable, End of Year
|
|
|
10,529 |
|
|
|
10,658 |
|
|
|
10,567 |
|
|
|
12,251 |
|
|
|
15,201 |
|
|
|
17,327 |
|
|
|
15,643 |
|
|
|
14,624 |
|
|
|
19,693 |
|
|
|
17,369 |
|
|
|
16,212 |
|
Net Liability, End of Year
|
|
|
21,520 |
|
|
|
26,315 |
|
|
|
26,711 |
|
|
|
26,971 |
|
|
|
27,428 |
|
|
|
30,846 |
|
|
|
37,744 |
|
|
|
48,807 |
|
|
|
59,586 |
|
|
|
64,894 |
|
|
|
71,717 |
|
Reestimated Gross Liability
|
|
|
44,844 |
|
|
|
54,284 |
|
|
|
60,212 |
|
|
|
66,308 |
|
|
|
70,680 |
|
|
|
72,234 |
|
|
|
72,944 |
|
|
|
74,434 |
|
|
|
80,941 |
|
|
|
81,695 |
|
|
|
|
|
Reestimated Reinsurance Recoverable
|
|
|
16,740 |
|
|
|
18,729 |
|
|
|
19,995 |
|
|
|
21,833 |
|
|
|
22,407 |
|
|
|
22,379 |
|
|
|
19,980 |
|
|
|
18,386 |
|
|
|
20,816 |
|
|
|
17,457 |
|
|
|
|
|
Reestimated Net Liability
|
|
|
28,104 |
|
|
|
35,555 |
|
|
|
40,217 |
|
|
|
44,475 |
|
|
|
48,273 |
|
|
|
49,855 |
|
|
|
52,964 |
|
|
|
56,048 |
|
|
|
60,125 |
|
|
|
64,238 |
|
|
|
|
|
Cumulative Gross Redundancy/(Deficiency)
|
|
|
(12,795 |
) |
|
|
(17,311 |
) |
|
|
(22,934 |
) |
|
|
(27,086 |
) |
|
|
(28,051 |
) |
|
|
(24,061 |
) |
|
|
(19,557 |
) |
|
|
(11,003 |
) |
|
|
(1,662 |
) |
|
|
568 |
|
|
|
|
|
|
8 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
Analysis of Consolidated Losses and
Loss Expense Reserve Development Excluding Asbestos and
Environmental Losses and Loss Expense Reserve
Development
The following table presents for each
calendar year the losses and loss expense reserves and the
development thereof excluding those with respect to asbestos and
environmental claims. See also Managements Discussion and
Analysis of Financial Condition and Results of
Operations Operating Review General
Insurance Operations Reserve for Losses and Loss
Expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
2007 | |
| |
Net Reserves Held
|
|
$ |
20,113 |
|
|
$ |
24,554 |
|
|
$ |
24,745 |
|
|
$ |
24,829 |
|
|
$ |
25,286 |
|
|
$ |
28,650 |
|
|
$ |
35,559 |
|
|
$ |
45,742 |
|
|
$ |
55,227 |
|
|
$ |
60,451 |
|
|
$ |
67,597 |
|
Discount (in Reserves Held)
|
|
|
619 |
|
|
|
897 |
|
|
|
1,075 |
|
|
|
1,287 |
|
|
|
1,423 |
|
|
|
1,499 |
|
|
|
1,516 |
|
|
|
1,553 |
|
|
|
2,110 |
|
|
|
2,264 |
|
|
|
2,429 |
|
Net Reserves Held (Undiscounted)
|
|
|
20,732 |
|
|
|
25,451 |
|
|
|
25,820 |
|
|
|
26,116 |
|
|
|
26,709 |
|
|
|
30,149 |
|
|
|
37,075 |
|
|
|
47,295 |
|
|
|
57,336 |
|
|
|
62,715 |
|
|
|
70,026 |
|
Paid (Cumulative) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
5,467 |
|
|
|
7,084 |
|
|
|
8,195 |
|
|
|
9,515 |
|
|
|
10,861 |
|
|
|
10,632 |
|
|
|
11,999 |
|
|
|
14,718 |
|
|
|
15,047 |
|
|
|
14,356 |
|
|
|
|
|
|
Two years later
|
|
|
9,500 |
|
|
|
12,190 |
|
|
|
14,376 |
|
|
|
16,808 |
|
|
|
17,801 |
|
|
|
18,283 |
|
|
|
21,419 |
|
|
|
23,906 |
|
|
|
24,367 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
12,618 |
|
|
|
16,214 |
|
|
|
19,490 |
|
|
|
21,447 |
|
|
|
23,430 |
|
|
|
25,021 |
|
|
|
28,129 |
|
|
|
30,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
14,972 |
|
|
|
19,732 |
|
|
|
22,521 |
|
|
|
25,445 |
|
|
|
28,080 |
|
|
|
29,987 |
|
|
|
32,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
16,983 |
|
|
|
21,630 |
|
|
|
25,116 |
|
|
|
28,643 |
|
|
|
31,771 |
|
|
|
33,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
18,014 |
|
|
|
23,282 |
|
|
|
27,266 |
|
|
|
31,315 |
|
|
|
34,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
18,972 |
|
|
|
24,753 |
|
|
|
29,162 |
|
|
|
33,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
19,960 |
|
|
|
26,017 |
|
|
|
30,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
20,779 |
|
|
|
26,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
21,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
2007 | |
| |
Net Reserves Held (undiscounted)
|
|
$ |
20,732 |
|
|
$ |
25,451 |
|
|
$ |
25,820 |
|
|
$ |
26,116 |
|
|
$ |
26,709 |
|
|
$ |
30,149 |
|
|
$ |
37,075 |
|
|
$ |
47,295 |
|
|
$ |
57,336 |
|
|
$ |
62,715 |
|
|
$ |
70,026 |
|
Undiscounted Liability as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
20,576 |
|
|
|
24,890 |
|
|
|
25,437 |
|
|
|
26,071 |
|
|
|
30,274 |
|
|
|
32,129 |
|
|
|
39,261 |
|
|
|
51,048 |
|
|
|
57,077 |
|
|
|
62,043 |
|
|
|
|
|
|
Two years later
|
|
|
20,385 |
|
|
|
24,602 |
|
|
|
26,053 |
|
|
|
29,670 |
|
|
|
32,438 |
|
|
|
35,803 |
|
|
|
46,865 |
|
|
|
52,364 |
|
|
|
57,653 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
20,120 |
|
|
|
25,084 |
|
|
|
28,902 |
|
|
|
31,619 |
|
|
|
36,043 |
|
|
|
43,467 |
|
|
|
48,691 |
|
|
|
53,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
20,301 |
|
|
|
26,813 |
|
|
|
30,014 |
|
|
|
34,102 |
|
|
|
42,348 |
|
|
|
45,510 |
|
|
|
50,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
21,104 |
|
|
|
27,314 |
|
|
|
31,738 |
|
|
|
38,655 |
|
|
|
44,018 |
|
|
|
46,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
21,336 |
|
|
|
28,345 |
|
|
|
34,978 |
|
|
|
40,294 |
|
|
|
45,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
21,836 |
|
|
|
30,636 |
|
|
|
36,283 |
|
|
|
41,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
23,441 |
|
|
|
31,556 |
|
|
|
36,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
24,261 |
|
|
|
32,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
24,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Redundancy/(Deficiency)
|
|
|
(3,856 |
) |
|
|
(6,662 |
) |
|
|
(11,069 |
) |
|
|
(15,097 |
) |
|
|
(18,492 |
) |
|
|
(16,776 |
) |
|
|
(13,065 |
) |
|
|
(6,090 |
) |
|
|
(317 |
) |
|
|
672 |
|
|
|
|
|
Remaining Reserves (undiscounted)
|
|
|
3,386 |
|
|
|
5,281 |
|
|
|
6,610 |
|
|
|
8,162 |
|
|
|
10,963 |
|
|
|
13,572 |
|
|
|
17,454 |
|
|
|
23,065 |
|
|
|
33,286 |
|
|
|
47,687 |
|
|
|
|
|
Remaining Discount
|
|
|
418 |
|
|
|
499 |
|
|
|
591 |
|
|
|
705 |
|
|
|
851 |
|
|
|
1,005 |
|
|
|
1,155 |
|
|
|
1,319 |
|
|
|
1,563 |
|
|
|
1,937 |
|
|
|
|
|
Remaining Reserves
|
|
|
2,968 |
|
|
|
4,782 |
|
|
|
6,019 |
|
|
|
7,457 |
|
|
|
10,112 |
|
|
|
12,567 |
|
|
|
16,299 |
|
|
|
21,746 |
|
|
|
31,723 |
|
|
|
45,750 |
|
|
|
|
|
|
The following table presents the gross
liability (before discount), reinsurance recoverable and net
liability recorded at each year end and the reestimation of
these amounts as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
2007 | |
| |
Gross Liability, End of Year
|
|
$ |
29,740 |
|
|
$ |
34,474 |
|
|
$ |
34,666 |
|
|
$ |
36,777 |
|
|
$ |
40,400 |
|
|
$ |
46,036 |
|
|
$ |
51,363 |
|
|
$ |
59,790 |
|
|
$ |
73,808 |
|
|
$ |
77,111 |
|
|
$ |
83,551 |
|
Reinsurance Recoverable, End of Year
|
|
|
9,008 |
|
|
|
9,023 |
|
|
|
8,846 |
|
|
|
10,661 |
|
|
|
13,691 |
|
|
|
15,887 |
|
|
|
14,288 |
|
|
|
12,495 |
|
|
|
16,472 |
|
|
|
14,396 |
|
|
|
13,525 |
|
Net Liability, End of Year
|
|
|
20,732 |
|
|
|
25,451 |
|
|
|
25,820 |
|
|
|
26,116 |
|
|
|
26,709 |
|
|
|
30,149 |
|
|
|
37,075 |
|
|
|
47,295 |
|
|
|
57,336 |
|
|
|
62,715 |
|
|
|
70,026 |
|
Reestimated Gross Liability
|
|
|
35,712 |
|
|
|
45,467 |
|
|
|
51,801 |
|
|
|
58,420 |
|
|
|
63,320 |
|
|
|
65,217 |
|
|
|
66,320 |
|
|
|
68,100 |
|
|
|
75,028 |
|
|
|
76,439 |
|
|
|
|
|
Reestimated Reinsurance Recoverable
|
|
|
11,124 |
|
|
|
13,354 |
|
|
|
14,912 |
|
|
|
17,207 |
|
|
|
18,119 |
|
|
|
18,292 |
|
|
|
16,180 |
|
|
|
14,715 |
|
|
|
17,375 |
|
|
|
14,396 |
|
|
|
|
|
Reestimated Net Liability
|
|
|
24,588 |
|
|
|
32,113 |
|
|
|
36,889 |
|
|
|
41,213 |
|
|
|
45,201 |
|
|
|
46,925 |
|
|
|
50,140 |
|
|
|
53,385 |
|
|
|
57,653 |
|
|
|
62,043 |
|
|
|
|
|
Cumulative Gross Redundancy/(Deficiency)
|
|
|
(5,972 |
) |
|
|
(10,993 |
) |
|
|
(17,135 |
) |
|
|
(21,643 |
) |
|
|
(22,920 |
) |
|
|
(19,181 |
) |
|
|
(14,957 |
) |
|
|
(8,310 |
) |
|
|
(1,220 |
) |
|
|
672 |
|
|
|
|
|
|
AIG 2007
Form 10-K
9
American International Group, Inc. and Subsidiaries
The reserve for losses and loss expenses as reported in
AIGs consolidated balance sheet at December 31, 2007
differs from the total reserve reported in the Annual Statements
filed with state insurance departments and, where appropriate,
with foreign regulatory authorities. The differences at
December 31, 2007 relate primarily to reserves for certain
foreign operations not required to be reported in the United
States for statutory reporting purposes. Further, statutory
practices in the United States require reserves to be shown net
of applicable reinsurance recoverable.
The reserve for gross losses and loss expenses is prior to
reinsurance and represents the accumulation for reported losses
and IBNR. Management reviews the adequacy of established gross
loss reserves in the manner previously described for net loss
reserves.
For further discussion regarding net reserves for losses and
loss expenses, see Managements Discussion and Analysis of
Financial Condition and Results of Operations
Operating Review General Insurance
Operations Reserve for Losses and Loss Expenses.
Life Insurance & Retirement
Services Operations
AIGs Life Insurance & Retirement Services
operations provide insurance, financial and investment-oriented
products throughout the world. Insurance-oriented products
consist of individual and group life, payout annuities
(including structured settlements), endowment and accident and
health policies. Retirement savings products consist generally
of fixed and variable annuities.
Foreign Life Insurance &
Retirement Services
In its Foreign Life Insurance & Retirement Services
businesses, AIG operates principally through ALICO, AIG Star
Life, AIG Edison Life, AIA, Nan Shan and Philamlife. ALICO is
incorporated in Delaware and all of its business is written
outside of the United States. ALICO has operations either
directly or through subsidiaries in Europe, including the U.K.,
Latin America, the Caribbean, the Middle East, South Asia and
the Far East, with Japan being the largest territory. ALICO also
conducts life insurance business through a joint venture in
Brazil. AIA operates primarily in China (including Hong Kong),
Singapore, Malaysia, Thailand, Korea, Australia, New Zealand,
Vietnam, Indonesia and India. The operations in India are
conducted through a joint venture, Tata AIG Life Insurance
Company Limited. Nan Shan operates in Taiwan. Philamlife is the
largest life insurer in the Philippines. AIG Star Life and AIG
Edison Life operate in Japan. Operations in foreign countries
comprised 79 percent of Life Insurance &
Retirement Services Premiums and other considerations and
76 percent of Life Insurance & Retirement Services
operating income in 2007.
The Foreign Life Insurance & Retirement Services
companies have over 285,000 full and part-time agents, as well
as independent producers, and sell their products largely to
indigenous persons in local and foreign currencies. In addition
to the agency outlets, these companies also distribute their
products through direct marketing channels, such as mass
marketing, and through brokers and other distribution outlets,
such as financial institutions.
Domestic Life Insurance &
Retirement Services
AIGs principal Domestic Life Insurance &
Retirement Services operations include AGLA, AIG American
General, AIG Annuity, USLIFE, VALIC and AIG SunAmerica. These
companies utilize multiple distribution channels including
independent producers, brokerage, career agents and financial
institutions to offer life insurance, annuity and accident and
health products and services, as well as financial and other
investment products. The Domestic Life Insurance &
Retirement Services operations comprised 21 percent of
total Life Insurance & Retirement Services Premiums and
other considerations and 24 percent of Life
Insurance & Retirement Services operating income in
2007.
Reinsurance
AIGs General Insurance subsidiaries worldwide operate
primarily by underwriting and accepting risks for their direct
account and securing reinsurance on that portion of the risk in
excess of the limit which they wish to retain. This operating
policy differs from that of many insurance companies that will
underwrite only up to their net retention limit, thereby
requiring the broker or agent to secure commitments from other
underwriters for the remainder of the gross risk amount.
Various AIG profit centers, including DBG, AIU and AIG Risk
Finance, as well as certain Life Insurance subsidiaries, use
AIRCO as a reinsurer for certain of their businesses. In
Bermuda, AIRCO discounts reserves attributable to certain
classes of business assumed from other AIG subsidiaries.
For a further discussion of reinsurance, see
Item 1A. Risk Factors Reinsurance;
Managements Discussion and Analysis of Financial Condition
and Results of Operations Risk
Management Reinsurance; and Note 5 to
Consolidated Financial Statements.
10 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
Insurance Investment
Operations
A significant portion of AIGs General Insurance and Life
Insurance & Retirement Services revenues are derived
from AIGs insurance investment operations.
The following table summarizes the
investment results of the insurance operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Annual Average Cash and Invested Assets |
|
|
|
|
| |
|
|
|
|
|
|
Cash | |
|
|
|
Return on | |
|
|
|
|
(including | |
|
|
|
Average Cash | |
|
Return on | |
Years Ended December 31, |
|
short-term | |
|
Invested | |
|
|
|
and Invested | |
|
Average Invested | |
(in millions) |
|
investments)(a) | |
|
Assets(a) | |
|
Total | |
|
Assets(b) | |
|
Assets(c) | |
| |
General Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
5,874 |
|
|
$ |
117,050 |
|
|
$ |
122,924 |
|
|
|
5.0 |
% |
|
|
5.2 |
% |
|
2006
|
|
|
3,201 |
|
|
|
102,231 |
|
|
|
105,432 |
|
|
|
5.4 |
|
|
|
5.6 |
|
|
2005
|
|
|
2,450 |
|
|
|
86,211 |
|
|
|
88,661 |
|
|
|
4.5 |
|
|
|
4.7 |
|
|
2004
|
|
|
2,012 |
|
|
|
73,338 |
|
|
|
75,350 |
|
|
|
4.2 |
|
|
|
4.4 |
|
|
2003
|
|
|
1,818 |
|
|
|
59,855 |
|
|
|
61,673 |
|
|
|
4.2 |
|
|
|
4.3 |
|
Life Insurance & Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
25,926 |
|
|
$ |
423,473 |
|
|
$ |
449,669 |
|
|
|
5.0 |
% |
|
|
5.3 |
% |
|
2006
|
|
|
13,698 |
|
|
|
392,348 |
|
|
|
406,046 |
|
|
|
4.9 |
|
|
|
5.1 |
|
|
2005
|
|
|
11,137 |
|
|
|
356,839 |
|
|
|
367,976 |
|
|
|
5.1 |
|
|
|
5.2 |
|
|
2004
|
|
|
7,737 |
|
|
|
309,627 |
|
|
|
317,364 |
|
|
|
4.9 |
|
|
|
5.1 |
|
|
2003
|
|
|
4,680 |
|
|
|
247,608 |
|
|
|
252,288 |
|
|
|
5.3 |
|
|
|
5.4 |
|
|
|
|
(a) |
Including investment income due and accrued and real estate.
Also, includes collateral assets invested under the global
securities lending program. |
|
(b) |
Net investment income divided by the annual average sum of
cash and invested assets. |
|
(c) |
Net investment income divided by the annual average invested
assets. |
AIGs worldwide insurance investment policy places primary
emphasis on investments in government and other high quality,
fixed income securities in all of its portfolios and, to a
lesser extent, investments in high yield bonds, common stocks,
real estate, hedge funds and partnerships, in order to enhance
returns on policyholders funds and generate net investment
income. The ability to implement this policy is somewhat limited
in certain territories as there may be a lack of adequate
long-term investments or investment restrictions may be imposed
by the local regulatory authorities.
Financial Services Operations
AIGs Financial Services subsidiaries engage in diversified
activities including aircraft and equipment leasing, capital
markets, consumer finance and insurance premium finance.
Together, the Aircraft Leasing, Capital Markets and Consumer
Finance operations generate the majority of the revenues
produced by the Financial Services operations. A.I. Credit also
contributes to Financial Services income principally by
providing insurance premium financing for both AIGs
policyholders and those of other insurers.
Aircraft Leasing
Aircraft Leasing operations represent the operations of ILFC,
which generates its revenues primarily from leasing new and used
commercial jet aircraft to foreign and domestic airlines.
Revenues also result from the remarketing of commercial jets for
ILFCs own account, and remarketing and fleet management
services for airlines and financial institutions. See also
Note 2 to Consolidated Financial Statements.
Capital Markets
Capital Markets represents the operations of AIGFP, which
engages as principal in a wide variety of financial
transactions, including standard and customized financial
products involving commodities, credit, currencies, energy,
equities and rates. The credit products include credit
protection written through credit default swaps on super senior
risk tranches of diversified pools of loans and debt securities.
AIGFP also invests in a diversified portfolio of securities and
principal investments and engages in borrowing activities that
include issuing standard and structured notes and other
securities and entering into guaranteed investment agreements
(GIAs).
Consumer Finance
Consumer Finance operations include AGF as well as AIGCFG. AGF
provides a wide variety of consumer finance products, including
real estate and non-real estate loans, retail sales finance and
credit-related insurance to customers in the United States, the
U.K., Puerto Rico and the U.S. Virgin Islands. AGFs
finance receivables are primarily sourced through its branches,
although many of AGFs real estate loans are sourced
through its centralized real estate operations, which include
AGFs mortgage banking activities. AIGCFG, through its
subsidiaries, is engaged in developing a multi-product consumer
finance business with an emphasis on emerging and developing
markets.
Asset Management Operations
AIGs Asset Management operations comprise a wide variety
of investment-related services and investment products. These
ser-
AIG 2007
Form 10-K
11
American International Group, Inc. and Subsidiaries
vices and products are offered to individuals, pension funds and
institutions globally through AIGs Spread-Based Investment
business, Institutional Asset Management, and Brokerage Services
and Mutual Funds business. Also included in Asset Management
operations are the results of certain SunAmerica sponsored
partnership investments.
Spread-Based Investment Business
AIGs Spread-Based Investment business includes the results
of AIGs proprietary spread-based investment operations,
the Matched Investment Program (MIP), which was launched in
September of 2005 to replace the Guaranteed Investment Contract
(GIC) program, which is in runoff. The MIP is an investment
strategy that involves investing in various asset classes with
financing provided through third parties. This business uses
various risk mitigating strategies designed to hedge interest
rate and currency risk associated with underlying investments
and related liabilities.
Institutional Asset Management
AIGs Institutional Asset Management business, conducted
through AIG Investments, provides an array of investment
products and services globally to institutional investors,
pension funds, AIG subsidiaries and high net worth investors.
These products include traditional equity and fixed income
investments, and a wide range of alternative asset classes.
These services include investment advisory and subadvisory
services, investment monitoring and investment transaction
structuring. Within the fixed income and equity asset classes,
AIG Investments offers various forms of structured investments
aimed at achieving superior returns or capital preservation.
Within the alternative asset class, AIG Investments offers hedge
and private equity fund-of-funds, direct investments and
distressed debt investments.
AIG Global Real Estate provides a wide range of real estate
investment and management services for AIG subsidiaries, as well
as for third-party institutional investors, high net worth
investors and pension funds. Through a strategic network of
local real estate ventures, AIG Global Real Estate actively
invests in and develops office, industrial, multi-family
residential, retail, hotel and resort properties globally.
AIG Private Bank offers banking, trading and investment
management services to private clients and institutions globally.
From time to time, AIG Investments acquires alternative
investments, primarily consisting of direct controlling equity
interests in private enterprises, with the intention of
warehousing such investments until the investment or
economic benefit thereof is transferred to a fund or other
AIG-managed investment product. During the warehousing period,
AIG bears the cost and risks associated with carrying these
investments and consolidates them on its balance sheet and
records the operating results until the investments are
transferred, sold or otherwise divested. Changes in market
conditions may negatively affect the fair value of these
warehoused investments. Market conditions may impede AIG from
launching new investment products for which these warehoused
assets are being held, which could result in AIG not recovering
its investment upon transfer or divestment. In the event that
AIG is unable to transfer or otherwise divest its interest in
the warehoused investment to third parties, AIG could be
required to hold these investments indefinitely. In certain
instances, the consolidated warehoused investments are not
wholly owned by AIG. In such cases, AIG shares the risk
associated with warehousing the asset with the minority interest
investors.
Brokerage Services and Mutual Funds
AIGs Brokerage Services and Mutual Funds business,
conducted through AIG Advisor Group, Inc. and AIG SunAmerica
Asset Management Corp., provides broker-dealer related services
and mutual funds to retail investors, group trusts and corporate
accounts through an independent network of financial advisors.
AIG Advisor Group, Inc., a subsidiary of AIG Retirement
Services, Inc., is comprised of several broker-dealer entities
that provide these services to clients primarily in the U.S.
marketplace. AIG SunAmerica Asset Management Corp. manages,
advises and/or administers retail mutual funds, as well as the
underlying assets of variable annuities sold by AIG SunAmerica
and VALIC to individuals and groups throughout the United States.
Other Asset Management
Included in Other Asset Management is income or loss from
certain AIG SunAmerica sponsored partnerships and partnership
investments. Partnership assets consist of investments in a
diversified portfolio of private equity funds, affordable
housing partnerships and hedge fund investments.
Other Operations
Certain AIG subsidiaries provide insurance-related services such
as adjusting claims and marketing specialized products. Several
wholly owned foreign subsidiaries of AIG operating in countries
or jurisdictions such as Ireland, Bermuda, Barbados and
Gibraltar provide insurance and related administrative and back
office services to affiliated and unaffiliated insurance and
reinsurance companies, including captive insurance companies
unaffiliated with AIG.
AIG has several other subsidiaries that engage in various
businesses. Mt. Mansfield Company, Inc. owns and operates the
ski slopes, lifts, a school and an inn located in Stowe,
Vermont. Also reported in AIGs Other operations are
interest expense, expenses of corporate staff not attributable
to specific business segments, expenses related to efforts to
improve internal controls, corporate initiatives, certain
compensation plan expenses and the settlement costs more fully
described in Item 3. Legal Proceedings and Note 12(a)
to Consolidated Financial Statements.
Additional Investments
AIGs significant investments in partially owned companies
(which are accounted for under the equity method) include a
25.4 percent interest in The Fuji Fire and Marine Insurance
Co., Ltd., a general insurance company in Japan, a
26.0 percent interest in Tata AIG Life Insurance Company,
Ltd. and a 26.0 percent interest
12 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
in Tata AIG General Insurance Company, Ltd. in India.
Substantially all of AIGs equity interest in Allied World
Assurance Holdings, Ltd. was sold by AIG in December 2007. For a
discussion of AIGs investments in partially owned
companies, see Note 1(s) to Consolidated Financial
Statements.
Locations of Certain Assets
As of December 31, 2007, approximately 37 percent of
the consolidated assets of AIG were located in foreign countries
(other than Canada), including $4.4 billion of cash and
securities on deposit with foreign regulatory authorities.
Foreign operations and assets held abroad may be adversely
affected by political developments in foreign countries,
including tax changes, nationalization and changes in regulatory
policy, as well as by consequence of hostilities and unrest. The
risks of such occurrences and their overall effect upon AIG vary
from country to country and cannot easily be predicted. If
expropriation or nationalization does occur, AIGs policy
is to take all appropriate measures to seek recovery of such
assets. Certain of the countries in which AIGs business is
conducted have currency restrictions which generally cause a
delay in a companys ability to repatriate assets and
profits. See also Notes 1 and 2 to Consolidated Financial
Statements and Item 1A. Risk Factors Foreign
Operations.
Regulation
AIGs operations around the world are subject to regulation
by many different types of regulatory authorities, including
insurance, securities, investment advisory, banking and thrift
regulators in the United States and abroad. The regulatory
environment can have a significant effect on AIG and its
business. AIGs operations have become more diverse and
consumer-oriented, increasing the scope of regulatory
supervision and the possibility of intervention. Although AIG
cannot predict the scope or effect of such regulation on its
business, AIG expects further regulation of its domestic
consumer finance operations as a result of the current
disruption of the U.S. residential mortgage market. In addition,
the investigations into financial accounting practices that led
to two restatements of AIGs consolidated financial
statements have heightened regulatory scrutiny of AIG worldwide.
In 1999, AIG became a unitary thrift holding company within the
meaning of the Home Owners Loan Act (HOLA) when the Office
of Thrift Supervision (OTS) granted AIG approval to organize AIG
Federal Savings Bank. AIG is subject to OTS regulation,
examination, supervision and reporting requirements. In
addition, the OTS has enforcement authority over AIG and its
subsidiaries. Among other things, this permits the OTS to
restrict or prohibit activities that are determined to be a
serious risk to the financial safety, soundness or stability of
AIGs subsidiary savings association, AIG Federal Savings
Bank.
Under prior law, a unitary savings and loan holding company,
such as AIG, was not restricted as to the types of business in
which it could engage, provided that its savings association
subsidiary continued to be a qualified thrift lender. The
Gramm-Leach-Bliley Act of 1999 (GLBA) provides that no company
may acquire control of an OTS regulated institution after
May 4, 1999 unless it engages only in the financial
activities permitted for financial holding companies under the
law or for multiple savings and loan holding companies. The
GLBA, however, grandfathered the unrestricted authority for
activities with respect to a unitary savings and loan holding
company existing prior to May 4, 1999, so long as its
savings association subsidiary continues to be a qualified
thrift lender under the HOLA. As a unitary savings and loan
holding company whose application was pending as of May 4,
1999, AIG is grandfathered under the GLBA and generally is not
restricted under existing laws as to the types of business
activities in which it may engage, provided that AIG Federal
Savings Bank continues to be a qualified thrift lender under the
HOLA.
Certain states require registration and periodic reporting by
insurance companies that are licensed in such states and are
controlled by other corporations. Applicable legislation
typically requires periodic disclosure concerning the
corporation that controls the registered insurer and the other
companies in the holding company system and prior approval of
intercorporate services and transfers of assets (including in
some instances payment of dividends by the insurance subsidiary)
within the holding company system. AIGs subsidiaries are
registered under such legislation in those states that have such
requirements.
AIGs insurance subsidiaries, in common with other
insurers, are subject to regulation and supervision by the
states and by other jurisdictions in which they do business.
Within the United States, the method of such regulation varies
but generally has its source in statutes that delegate
regulatory and supervisory powers to an insurance official. The
regulation and supervision relate primarily to approval of
policy forms and rates, the standards of solvency that must be
met and maintained, including risk-based capital, the licensing
of insurers and their agents, the nature of and limitations on
investments, restrictions on the size of risks that may be
insured under a single policy, deposits of securities for the
benefit of policyholders, requirements for acceptability of
reinsurers, periodic examinations of the affairs of insurance
companies, the form and content of reports of financial
condition required to be filed, and reserves for unearned
premiums, losses and other purposes. In general, such regulation
is for the protection of policyholders rather than the equity
owners of these companies.
AIG has taken various steps to enhance the capital positions of
the Domestic General Insurance companies. AIG entered into
capital maintenance agreements with the Domestic General
Insurance companies that set forth procedures through which AIG
will provide ongoing capital support. Also, in order to allow
the Domestic General Insurance companies to record as an
admitted asset at December 31, 2007 certain reinsurance
ceded to
non-U.S. reinsurers
(which has the effect of increasing the statutory surplus of
such Domestic General Insurance companies), AIG obtained and
entered into reimbursement agreements for approximately
$1.8 billion of letters of credit issued by several
commercial banks in favor of certain Domestic General Insurance
companies.
In the U.S., Risk-Based Capital (RBC) is designed to
measure the adequacy of an insurers statutory surplus in
relation to the risks inherent in its business. Thus,
inadequately capitalized general and life insurance companies
may be identified. The U.S. RBC formula develops a
risk-adjusted target level of statutory
AIG 2007
Form 10-K
13
American International Group, Inc. and Subsidiaries
surplus by applying certain factors to various asset, premium
and reserve items. Higher factors are applied to more risky
items and lower factors are applied to less risky items. Thus,
the target level of statutory surplus varies not only as a
result of the insurers size, but also based on the risk
profile of the insurers operations.
The RBC Model Law provides for four incremental levels of
regulatory attention for insurers whose surplus is below the
calculated RBC target. These levels of attention range in
severity from requiring the insurer to submit a plan for
corrective action to placing the insurer under regulatory
control.
The statutory surplus of each of AIGs Domestic General
Insurance and Life Insurance subsidiaries exceeded their RBC
target levels as of December 31, 2007.
To the extent that any of AIGs insurance entities would
fall below prescribed levels of statutory surplus, it would be
AIGs intention to provide appropriate capital or other
types of support to that entity.
A substantial portion of AIGs General Insurance business
and a majority of its Life Insurance business is carried on in
foreign countries. The degree of regulation and supervision in
foreign jurisdictions varies. Generally, AIG, as well as the
underwriting companies operating in such jurisdictions, must
satisfy local regulatory requirements. Licenses issued by
foreign authorities to AIG subsidiaries are subject to
modification or revocation by such authorities, and these
subsidiaries could be prevented from conducting business in
certain of the jurisdictions where they currently operate. In
the past, AIG has been allowed to modify its operations to
conform with new licensing requirements in most jurisdictions.
In addition to licensing requirements, AIGs foreign
operations are also regulated in various jurisdictions with
respect to currency, policy language and terms, advertising,
amount and type of security deposits, amount and type of
reserves, amount and type of capital to be held, amount and type
of local investment and the share of profits to be returned to
policyholders on participating policies. Some foreign countries
regulate rates on various types of policies. Certain countries
have established reinsurance institutions, wholly or partially
owned by the local government, to which admitted insurers are
obligated to cede a portion of their business on terms that may
not always allow foreign insurers, including AIG subsidiaries,
full compensation. In some countries, regulations governing
constitution of technical reserves and remittance balances may
hinder remittance of profits and repatriation of assets.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Capital
Resources and Liquidity Regulation and Supervision
and Note 15 to Consolidated Financial Statements.
Competition
AIGs Insurance, Financial Services and Asset Management
businesses operate in highly competitive environments, both
domestically and overseas. Principal sources of competition are
insurance companies, banks, investment banks and other non-bank
financial institutions.
The insurance industry in particular is highly competitive.
Within the United States, AIGs General Insurance
subsidiaries compete with approximately 3,400 other stock
companies, specialty insurance organizations, mutual companies
and other underwriting organizations. AIGs subsidiaries
offering Life Insurance & Retirement Services compete
in the United States with approximately 2,100 life insurance
companies and other participants in related financial services
fields. Overseas, AIG subsidiaries compete for business with
foreign insurance operations of the larger U.S. insurers,
global insurance groups and local companies in particular areas
in which they are active.
Directors and Executive Officers of
AIG
All directors of AIG are elected for one-year terms at the
annual meeting of shareholders. All executive officers are
elected to one-year terms, but serve at the pleasure of the
Board of Directors.
Except as hereinafter noted, each of the executive officers has,
for more than five years, occupied an executive position with
AIG or companies that are now its subsidiaries. Other than the
employment contracts between AIG and Messrs. Sullivan and
Bensinger, there are no other arrangements or understandings
between any executive officer and any other person pursuant to
which the executive officer was elected to such position. From
January 2000 until joining AIG in May 2004, Dr. Frenkel
served as Chairman of Merrill Lynch International, Inc. Prior to
joining AIG in September 2006, Ms. Kelly served as
Executive Vice President and General Counsel of MCI/ WorldCom.
Previously, she was Senior Vice President and General Counsel of
Sears, Roebuck and Co. from 1999 to 2003. From June 2004 until
joining AIG in May 2007, Mr. Kaslow was a managing partner
of QuanStar Group, LLC (an advisory services firm), and, from
January 2002 until May 2004, Mr. Kaslow was Senior
Executive Vice President of Human Resources for Vivendi
Universal (an entertainment and telecommunications company).
14 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
Set forth below is information concerning the directors and
executive officers of AIG as of February 28, 2008.
|
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|
|
|
|
|
|
|
|
Served as |
|
|
Director or |
Name |
|
Title |
|
Age |
|
Officer Since |
|
Stephen F. Bollenbach
|
|
Director |
|
65 |
|
2008 |
Marshall A. Cohen
|
|
Director |
|
72 |
|
1992 |
Martin S. Feldstein
|
|
Director |
|
68 |
|
1987 |
Ellen V. Futter
|
|
Director |
|
58 |
|
1999 |
Stephen L. Hammerman
|
|
Director |
|
69 |
|
2005 |
Richard C. Holbrooke
|
|
Director |
|
66 |
|
2001 |
Fred H. Langhammer
|
|
Director |
|
64 |
|
2006 |
George L. Miles, Jr.
|
|
Director |
|
66 |
|
2005 |
Morris W. Offit
|
|
Director |
|
71 |
|
2005 |
James F. Orr III
|
|
Director |
|
64 |
|
2006 |
Virginia M. Rometty
|
|
Director |
|
50 |
|
2006 |
Martin J. Sullivan
|
|
Director, President and Chief Executive Officer |
|
53 |
|
2002 |
Michael H. Sutton
|
|
Director |
|
67 |
|
2005 |
Edmund S. W. Tse
|
|
Director, Senior Vice Chairman Life Insurance |
|
70 |
|
1996 |
Robert B. Willumstad
|
|
Director and Chairman |
|
62 |
|
2006 |
Frank G. Zarb
|
|
Director |
|
73 |
|
2001 |
Jacob A. Frenkel
|
|
Vice Chairman Global Economic Strategies |
|
64 |
|
2004 |
Frank G. Wisner
|
|
Vice Chairman External Affairs |
|
69 |
|
1997 |
Steven J. Bensinger
|
|
Executive Vice President and Chief Financial Officer |
|
53 |
|
2002 |
Anastasia D. Kelly
|
|
Executive Vice President, General Counsel and Senior
Regulatory
and Compliance Officer |
|
58 |
|
2006 |
Rodney O. Martin, Jr.
|
|
Executive Vice President Life Insurance |
|
55 |
|
2002 |
Kristian P. Moor
|
|
Executive Vice President Domestic General Insurance |
|
48 |
|
1998 |
Win J. Neuger
|
|
Executive Vice President and Chief Investment Officer |
|
58 |
|
1995 |
Robert M. Sandler
|
|
Executive Vice President Domestic Personal Lines |
|
65 |
|
1980 |
Nicholas C. Walsh
|
|
Executive Vice President Foreign General Insurance |
|
57 |
|
2005 |
Jay S. Wintrob
|
|
Executive Vice President Retirement Services |
|
50 |
|
1999 |
William N. Dooley
|
|
Senior Vice President Financial Services |
|
55 |
|
1992 |
David L. Herzog
|
|
Senior Vice President and Comptroller |
|
48 |
|
2005 |
Andrew J. Kaslow
|
|
Senior Vice President and Chief Human Resources Officer |
|
57 |
|
2007 |
Robert E. Lewis
|
|
Senior Vice President and Chief Risk Officer |
|
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Brian T. Schreiber
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Senior Vice President Strategic Planning |
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2002 |
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AIG 2007
Form 10-K
15
American International Group, Inc. and Subsidiaries
Item 1A.
Risk Factors
Casualty Insurance Underwriting and
Reserves
Casualty insurance liabilities are difficult to predict and
may exceed the related reserves for losses and loss
expenses. Although AIG annually reviews the adequacy of the
established reserve for losses and loss expenses, there can be
no assurance that AIGs loss reserves will not develop
adversely and have a material effect on AIGs results of
operations. Estimation of ultimate net losses, loss expenses and
loss reserves is a complex process for long-tail casualty lines
of business, which include excess and umbrella liability,
D&O, professional liability, medical malpractice, workers
compensation, general liability, products liability and related
classes, as well as for asbestos and environmental exposures.
Generally, actual historical loss development factors are used
to project future loss development. However, there can be no
assurance that future loss development patterns will be the same
as in the past. Moreover, any deviation in loss cost trends or
in loss development factors might not be discernible for an
extended period of time subsequent to the recording of the
initial loss reserve estimates for any accident year. Thus,
there is the potential for reserves with respect to a number of
years to be significantly affected by changes in loss cost
trends or loss development factors that were relied upon in
setting the reserves. These changes in loss cost trends or loss
development factors could be attributable to changes in
inflation or in the judicial environment, or in other social or
economic phenomena affecting claims, such as the effects that
the recent disruption in the credit markets could have on
reported claims under D&O or professional liability
coverages. See also Managements Discussion and Analysis of
Financial Condition and Results of Operations
Operating Review General Insurance
Operations Reserve for Losses and Loss Expenses.
Credit Market Environment
AIGs businesses may continue to be adversely affected
by the current disruption in the global credit markets and
repricing of credit risk. During the second half of 2007,
disruption in the global credit markets, coupled with the
repricing of credit risk, and the U.S. housing market
deterioration created increasingly difficult conditions in the
financial markets. These conditions have resulted in greater
volatility, less liquidity, widening of credit spreads and a
lack of price transparency in certain markets. These conditions
continue to adversely affect Mortgage Guarantys results of
operations and the fair value of the AIGFP super senior credit
default swap portfolio and contribute to higher levels of
finance receivables delinquencies at AGF and to the severe and
rapid decline in the fair value of certain investment
securities, particularly those backed by U.S. residential
mortgage loans. It is difficult to predict how long these
conditions will exist and how AIGs markets, products and
businesses will continue to be adversely affected. Accordingly,
these conditions could adversely affect AIGs consolidated
financial condition or results of operations in future periods.
In addition, litigation and regulatory or governmental
investigations and inquiries have been commenced against AIG
related to these events and AIG may become subject to further
litigation and regulatory or governmental scrutiny as a result
of these events.
Risk Management
AIG is exposed to a number of significant risks, and
AIGs risk management processes and controls may not be
fully effective in mitigating AIGs risk exposures in all
market conditions and to all types of risk. The major risks
to which AIG is exposed include: credit risk, market risk,
operational risk, liquidity risk and insurance risk. AIG has
devoted significant resources to the development and
implementation of risk management processes and controls across
AIGs operations, including by establishing review and
oversight committees to monitor risks, setting limits and
identifying risk mitigating strategies and techniques.
Nonetheless, these procedures may not be fully effective in
mitigating risk exposure in all market conditions, some of which
change rapidly and severely. A failure of AIGs risk
management processes or the ineffectiveness of AIGs risk
mitigating strategies and techniques could adversely affect,
perhaps materially, AIGs consolidated results of
operations, liquidity or financial condition, result in
regulatory action or litigation or damage AIGs reputation.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations Risk Management.
Liquidity
AIGs liquidity could be impaired by an inability to
access the capital markets or by unforeseen significant outflows
of cash. This situation may arise due to circumstances that
AIG may be unable to control, such as a general market
disruption or an operational problem that affects third parties
or AIG. In addition, this situation may arise due to
circumstances specific to AIG, such as a decline in its credit
ratings. AIG depends on dividends, distributions and other
payments from its subsidiaries to fund dividend payments and to
fund payments on AIGs obligations, including debt
obligations. Regulatory and other legal restrictions may limit
AIGs ability to transfer funds freely, either to or from
its subsidiaries. In particular, many of AIGs
subsidiaries, including AIGs insurance subsidiaries, are
subject to laws and regulations that authorize regulatory bodies
to block or reduce the flow of funds to the parent holding
company, or that prohibit such transfers altogether in certain
circumstances. These laws and regulations may hinder AIGs
ability to access funds that AIG may need to make payments on
its obligations. See also Item 1. Business
Regulation.
Some of AIGs investments are relatively illiquid and
would be difficult to sell, or to sell at acceptable prices, if
AIG required cash in amounts greater than its customary
needs. AIGs investments in certain securities,
including certain structured securities, direct private
equities, limited partnerships, hedge funds, mortgage loans,
flight equipment, finance receivables and real estate are
relatively illiquid. These asset classes represented
approximately 23 percent of the carrying value of AIGs
total cash and invested assets as of December 31, 2007. In
addition, the current disruption in the credit markets has
affected the liquidity of other AIG portfolios
16 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
including the residential mortgage-backed securities portfolio.
If AIG requires significant amounts of cash on short notice in
excess of normal cash requirements or is required to post or
return collateral in connection with its investment portfolio,
derivative transactions or securities lending activities, then
AIG may have difficulty selling these investments or terminating
these transactions in a timely manner or may be forced to sell
or terminate them for less than what AIG might otherwise have
been able to, or both. Although AIGFP has no current intent to
do so, if AIGFP sells or closes out its derivative transactions
prior to maturity, the effect could be significant to AIGs
overall liquidity.
AIGs liquidity may be adversely affected by
requirements to post collateral. Certain of the credit
default swaps written by AIGFP contain collateral posting
requirements. The amount of collateral required to be posted for
most of these transactions is determined based on the value of
the security or loan referenced in the documentation for the
credit default swap. Continued declines in the values of these
referenced securities or loans will increase the amount of
collateral AIGFP must post which could impair AIGs
liquidity.
See also Managements Discussion and Analysis of Financial
Condition and Results of Operations Capital
Resources and Liquidity Liquidity.
Investment Concentration
Concentration of AIGs investment portfolios in any
particular segment of the economy may have adverse effects.
Any concentration of AIGs investment portfolios in any
particular industry, group of related industries, asset classes,
such as residential mortgage-backed securities and other
asset-backed securities, or geographic sector could have an
adverse effect on the investment portfolios and consequently on
AIGs consolidated results of operations or financial
condition. While AIG seeks to mitigate this risk by having a
broadly diversified portfolio, events or developments that have
a negative effect on any particular industry, asset class, group
of related industries or geographic region may have a greater
adverse effect on the investment portfolios to the extent that
the portfolios are concentrated. Further, AIGs ability to
sell assets relating to such particular groups of related assets
may be limited if other market participants are seeking to sell
at the same time.
Credit Ratings
Ratings actions regarding AIG could adversely affect
AIGs business and its consolidated results of
operations. Following AIGs filing with the SEC on
February 11, 2008 of a Current Report on
Form 8-K regarding
the valuation of AIGFPs super senior credit default swap
portfolio and reporting the conclusion by AIGs independent
auditors that AIG had a material weakness in internal control
over financial reporting and oversight relating to this
valuation, the following credit rating actions were taken:
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Standard & Poors, a division of The McGraw-Hill
Companies, Inc. (S&P) affirmed its AA
counterparty credit ratings on AIG and its AA+
counterparty credit and financial strength ratings on AIGs
core subsidiaries, but revised the rating outlook to negative.
In addition, S&P revised its rating outlook on ILFCs
corporate credit rating (AA-) to negative. A negative ratings
outlook by S&P indicates that a rating may be lowered, but
is not necessarily a precursor of a ratings change. |
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Moodys Investors Service (Moodys) changed its rating
outlook for AIG and its subsidiaries that have substantial
exposure to the U.S. subprime mortgage market or whose ratings
rely on significant explicit or implicit support from AIG to
negative. Moodys rates AIG Aa2 and nearly all
of its insurance subsidiaries either Aa1 or
Aa2. A negative ratings outlook by Moodys
indicates that a rating may be lowered, but is not necessarily a
precursor of a ratings change. |
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Fitch Ratings (Fitch) placed AIGs and its
subsidiaries long-term debt ratings (AA), including ILFC
(A+) and AGF (A+), on Rating Watch Negative. Rating Watch
Negative indicates that a rating has been placed on active
rating watch status. Fitch indicated that it expects to resolve
the Rating Watch after it reviews AIGs 2007 audited
financial statements. |
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A.M. Best Company (A.M. Best) placed most of its financial
strength and issuer credit ratings on AIGs domestic Life
Insurance and Retirement Services (A++) and Domestic General
Insurance subsidiaries (including Transatlantic) (A+), as well
as AIGs issuer credit rating (AA), under review with
negative implications. A.M. Best indicated that following a
detailed review of AIGs 2007 audited financial statements
and further discussion with AIG management, it will re-evaluate
the under review rating status. |
Financial strength and credit ratings by the major ratings
agencies are an important factor in establishing the competitive
position of insurance companies and other financial institutions
and affect the availability and cost of borrowings. Financial
strength ratings measure an insurance companys ability to
meet its obligations to contract holders and policyholders, help
to maintain public confidence in a companys products,
facilitate marketing of products and enhance a companys
competitive position. Credit ratings measure a companys
ability to repay its obligations and directly affect the cost
and availability to that company of unsecured financing.
AIGs ratings have historically provided it with a
competitive advantage. However, a ratings downgrade could
adversely affect AIGs business and its consolidated
results of operations in a number of ways, including:
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increasing AIGs interest expense; |
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reducing AIGFPs ability to compete in the structured
products and derivatives businesses; |
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reducing the competitive advantage of AIGs insurance
subsidiaries, which may result in reduced product sales; |
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adversely affecting relationships with agents and sales
representatives; |
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in the case of a downgrade of AGF or ILFC, increasing their
interest expense and reducing their ability to compete in their
respective businesses; and |
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triggering the application of a termination provision in certain
of AIGs contracts, principally agreements entered into by
AIGFP and assumed reinsurance contracts entered into by
Transatlantic. |
AIG 2007
Form 10-K
17
American International Group, Inc. and Subsidiaries
In the event of a downgrade of AIG, AIG would be required to
post additional collateral. It is estimated that, as of the
close of business on February 14, 2008, based on AIGs
outstanding municipal GIAs and financial derivatives
transactions as of such date, a further downgrade of AIGs
long-term senior debt ratings to Aa3 by Moodys or AA- by
S&P would permit counterparties to call for approximately
$1.39 billion of additional collateral. Further, additional
downgrades could result in requirements for substantial
additional collateral, which could have a material effect on how
AIG manages its liquidity. For a further discussion of
AIGs credit ratings and the potential effect of posting
collateral on AIGs liquidity, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Capital Resources and
Liquidity Credit Ratings and Liquidity.
Catastrophe Exposures
The occurrence of catastrophic events could adversely affect
AIGs consolidated financial condition or results of
operations. The occurrence of events such as hurricanes,
earthquakes, pandemic disease, acts of terrorism and other
catastrophes could adversely affect AIGs consolidated
financial condition or results of operations, including by
exposing AIGs businesses to the following:
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widespread claim costs associated with property, workers
compensation, mortality and morbidity claims; |
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loss resulting from the value of invested assets declining to
below the amount required to meet the policy and contract
liabilities; and |
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loss resulting from actual policy experience emerging adversely
in comparison to the assumptions made in the product pricing
related to mortality, morbidity, termination and expenses. |
Reinsurance
Reinsurance may not be available or affordable. AIG
subsidiaries are major purchasers of reinsurance and utilize
reinsurance as part of AIGs overall risk management
strategy. Reinsurance is an important risk management tool to
manage transaction and insurance line risk retention, and to
mitigate losses that may arise from catastrophes. Market
conditions beyond AIGs control determine the availability
and cost of the reinsurance purchased by AIG subsidiaries. For
example, reinsurance may be more difficult to obtain after a
year with a large number of major catastrophes. Accordingly, AIG
may be forced to incur additional expenses for reinsurance or
may be unable to obtain sufficient reinsurance on acceptable
terms, in which case AIG would have to accept an increase in
exposure risk, reduce the amount of business written by its
subsidiaries or seek alternatives.
Reinsurance subjects AIG to the credit risk of its reinsurers
and may not be adequate to protect AIG against losses.
Although reinsurance makes the reinsurer liable to the AIG
subsidiary to the extent the risk is ceded subject to the terms
and conditions of the reinsurance contracts in place, it does
not relieve the AIG subsidiary of the primary liability to its
policyholders. Accordingly, AIG bears credit risk with respect
to its subsidiaries reinsurers to the extent not mitigated
by collateral or other credit enhancements. A reinsurers
insolvency or inability or refusal to make timely payments under
the terms of its agreements with the AIG subsidiaries could have
a material adverse effect on AIGs results of operations
and liquidity. See also Managements Discussion and
Analysis of Financial Condition and Results of
Operations Risk Management Reinsurance.
Adjustments to Life Insurance &
Retirement Services Deferred Policy
Acquisition Costs
Interest rate fluctuations and other events may require AIG
subsidiaries to accelerate the amortization of deferred policy
acquisition costs (DAC) which could adversely affect
AIGs consolidated financial condition or results of
operations. DAC represents the costs that vary with and are
related primarily to the acquisition of new and renewal
insurance and annuity contracts. When interest rates rise,
policy loans and surrenders and withdrawals of life insurance
policies and annuity contracts may increase as policyholders
seek to buy products with perceived higher returns, requiring
AIG subsidiaries to accelerate the amortization of DAC. To the
extent such amortization exceeds surrender or other charges
earned upon surrender and withdrawals of certain life insurance
policies and annuity contracts, AIGs results of operations
could be negatively affected.
DAC for both insurance-oriented and investment-oriented products
as well as retirement services products is reviewed for
recoverability, which involves estimating the future
profitability of current business. This review involves
significant management judgment. If the actual emergence of
future profitability were to be substantially lower than
estimated, AIG could be required to accelerate its DAC
amortization and such acceleration could adversely affect
AIGs results of operations. See also Managements
Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Estimates and
Notes 1 and 6 to Consolidated Financial Statements.
Use of Estimates
If actual experience differs from managements estimates
used in the preparation of financial statements, AIGs
consolidated results of operations or financial condition could
be adversely affected. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires the application of
accounting policies that often involve a significant degree of
judgment. AIG considers that its accounting policies that are
most dependent on the application of estimates and assumptions,
and therefore viewed as critical accounting estimates, are those
described in Managements Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Estimates. These accounting estimates
require the use of assumptions, some of which are highly
uncertain at the time of estimation. For example, recent market
volatility and declines in liquidity have made it more difficult
to value certain of AIGs invested assets and the
obligations and collateral relating to certain financial
instruments issued or held by AIG, such as
18 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
AIGFPs super senior credit default swap portfolio. To the
extent actual experience differs from the assumptions used,
AIGs consolidated results of operations or financial
condition would be directly affected, perhaps materially.
Legal Proceedings
Significant legal proceedings may adversely affect AIGs
results of operations. AIG is party to numerous legal
proceedings and regulatory or governmental investigations. It is
possible that the effect of these unresolved matters could be
material to AIGs consolidated results of operations for an
individual reporting period. For a discussion of these
unresolved matters, see Item 3. Legal Proceedings.
Foreign Operations
Foreign operations expose AIG to risks that may affect its
operations, liquidity and financial condition. AIG provides
insurance, investment and other financial products and services
to both businesses and individuals in more than 130 countries
and jurisdictions. A substantial portion of AIGs General
Insurance business and a majority of its Life Insurance &
Retirement Services business is conducted outside the United
States. Operations outside of the United States, particularly
those in developing nations, may be affected by regional
economic downturns, changes in foreign currency exchange rates,
political upheaval, nationalization and other restrictive
government actions, which could also affect other AIG operations.
The degree of regulation and supervision in foreign
jurisdictions varies. Generally, AIG, as well as its
subsidiaries operating in such jurisdictions, must satisfy local
regulatory requirements. Licenses issued by foreign authorities
to AIG subsidiaries are subject to modification and revocation.
Thus, AIGs insurance subsidiaries could be prevented from
conducting future business in certain of the jurisdictions where
they currently operate. Adverse actions from any single country
could adversely affect AIGs results of operations,
liquidity and financial condition depending on the magnitude of
the event and AIGs net financial exposure at that time in
that country.
Regulation
AIG is subject to extensive regulation in the jurisdictions
in which it conducts its businesses. AIGs operations
around the world are subject to regulation by different types of
regulatory authorities, including insurance, securities,
investment advisory, banking and thrift regulators in the United
States and abroad. AIGs operations have become more
diverse and consumer-oriented, increasing the scope of
regulatory supervision and the possibility of intervention. In
particular, AIGs consumer lending business is subject to a
broad array of laws and regulations governing lending practices
and permissible loan terms, and AIG would expect increased
regulatory oversight relating to this business.
The regulatory environment could have a significant effect on
AIG and its businesses. Among other things, AIG could be fined,
prohibited from engaging in some of its business activities or
subject to limitations or conditions on its business activities.
Significant regulatory action against AIG could have material
adverse financial effects, cause significant reputational harm
or harm business prospects. New laws or regulations or changes
in the enforcement of existing laws or regulations applicable to
clients may also adversely affect AIG and its businesses.
A Material Weakness
A material weakness in internal control over financial
reporting and oversight relating to the AIGFP valuation of its
super senior credit default swap portfolio could adversely
affect the accuracy or timing of future regulatory filings.
AIGs management has concluded that a material weakness
relating to the internal control over financial reporting and
oversight relating to the fair value valuation of the AIGFP
super senior credit default swap portfolio existed as of
December 31, 2007. Until remediated, this weakness could
adversely affect the accuracy or timing of future filings with
the SEC and other regulatory authorities. A discussion of this
material weakness and AIGs remediation efforts can be
found in Item 9A. Controls and Procedures
Managements Report on Internal Control Over Financial
Reporting.
Employee Error and Misconduct
Employee error and misconduct may be difficult to detect and
prevent and may result in significant losses. Losses may
result from, among other things, fraud, errors, failure to
document transactions properly or to obtain proper internal
authorization or failure to comply with regulatory requirements.
There have been a number of highly publicized cases involving
fraud or other misconduct by employees in the financial services
industry in recent years, and AIG runs the risk that employee
misconduct could occur. It is not always possible to deter or
prevent employee misconduct and the controls that AIG has in
place to prevent and detect this activity may not be effective
in all cases.
Aircraft Suppliers
There are limited suppliers of aircraft and engines. The
supply of jet transport aircraft, which ILFC purchases and
leases, is dominated by two airframe manufacturers, Boeing and
Airbus, and a limited number of engine manufacturers. As a
result, ILFC is dependent on the manufacturers success in
remaining financially stable, producing aircraft and related
components which meet the airlines demands, both in type
and quantity, and fulfilling their contractual obligations to
ILFC. Competition between the manufacturers for market share is
intense and may lead to instances of deep discounting for
certain aircraft types and could negatively affect ILFCs
competitive pricing.
Item 1B.
Unresolved Staff Comments
There are no material unresolved written comments that were
received from the SEC staff 180 days or more before the end
of AIGs fiscal year relating to AIGs periodic or
current reports under the Exchange Act.
AIG 2007
Form 10-K
19
American International Group, Inc. and Subsidiaries
Item 2.
Properties
AIG and its subsidiaries operate from approximately 2,100
offices in the United States, 6 offices in Canada and numerous
offices in approximately 100 foreign countries. The offices in
Greensboro and Winston-Salem, North Carolina; Springfield,
Illinois; Amarillo, Ft. Worth, Houston and Lewisville, Texas;
Wilmington, Delaware; San Juan, Puerto Rico; Tampa, Florida;
Livingston, New Jersey; Evansville, Indiana; Nashville,
Tennessee; 70 Pine Street, 72 Wall Street and 175 Water Street
in New York, New York; and offices in more than 30 foreign
countries and jurisdictions including Bermuda, Chile, Hong Kong,
the Philippines, Japan, the U.K., Singapore, Malaysia,
Switzerland, Taiwan and Thailand are located in buildings owned
by AIG and its subsidiaries. The remainder of the office space
utilized by AIG subsidiaries is leased.
Item 3.
Legal Proceedings
General
AIG and its subsidiaries, in common with the insurance industry
in general, are subject to litigation, including claims for
punitive damages, in the normal course of their business. See
also Note 12(a) to Consolidated Financial Statements, as
well as the discussion and analysis of Reserve for Losses and
Loss Expenses under Operating Review General
Insurance Operations in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Litigation Arising from Operations. AIG and its
subsidiaries, in common with the insurance and financial
services industries in general, are subject to litigation,
including claims for punitive damages, in the normal course of
their business. In AIGs insurance operations, litigation
arising from claims settlement activities is generally
considered in the establishment of AIGs reserve for losses
and loss expenses. However, the potential for increasing jury
awards and settlements makes it difficult to assess the ultimate
outcome of such litigation.
Litigation Arising from Insurance Operations
Caremark. AIG and certain of its subsidiaries have been
named defendants in two putative class actions in state court in
Alabama that arise out of the 1999 settlement of class and
derivative litigation involving Caremark Rx, Inc. (Caremark).
The plaintiffs in the second-filed action have intervened in the
first-filed action, and the second-filed action has been
dismissed. An excess policy issued by a subsidiary of AIG with
respect to the 1999 litigation was expressly stated to be
without limit of liability. In the current actions, plaintiffs
allege that the judge approving the 1999 settlement was misled
as to the extent of available insurance coverage and would not
have approved the settlement had he known of the existence
and/or unlimited nature of the excess policy. They further
allege that AIG, its subsidiaries, and Caremark are liable for
fraud and suppression for misrepresenting and/or concealing the
nature and extent of coverage. In addition, the
intervenor-plaintiffs allege that various lawyers and law firms
who represented parties in the underlying class and derivative
litigation (the Lawyer Defendants) are also liable
for fraud and suppression, misrepresentation, and breach of
fiduciary duty. The complaints filed by the plaintiffs and the
intervenor-plaintiffs request compensatory damages for the 1999
class in the amount of $3.2 billion, plus punitive damages.
AIG and its subsidiaries deny the allegations of fraud and
suppression and have asserted that information concerning the
excess policy was publicly disclosed months prior to the
approval of the settlement. AIG and its subsidiaries further
assert that the current claims are barred by the statute of
limitations and that plaintiffs assertions that the
statute was tolled cannot stand against the public disclosure of
the excess coverage. The plaintiffs and intervenor-plaintiffs,
in turn, have asserted that the disclosure was insufficient to
inform them of the nature of the coverage and did not start the
running of the statute of limitations. On November 26,
2007, the trial court issued an order that dismissed the
intervenors complaint against the Lawyer Defendants and
entered a final judgment in favor of the Lawyer Defendants. The
intervenors are appealing the dismissal of the Lawyer Defendants
and have requested a stay of all trial court proceedings pending
the appeal. If the motion to stay is granted, no further
proceedings at the trial court level will occur until the appeal
is resolved. If the motion to stay is denied, the next step will
be to proceed with class discovery so that the trial court can
determine, under standards mandated by the Alabama Supreme
Court, whether the action should proceed as a class action. AIG
cannot reasonably estimate either the likelihood of its
prevailing in these actions or the potential damages in the
event liability is determined.
Litigation Arising from Insurance Operations
Gunderson. A subsidiary of AIG has been named as a defendant
in a putative class action lawsuit in the 14th Judicial District
Court for the State of Louisiana (Gunderson). The
Gunderson complaint alleges failure to comply with
certain provisions of the Louisiana Any Willing Provider Act
(the Act) relating to discounts taken by defendants on bills
submitted by Louisiana medical providers and hospitals that
provided treatment or services to workers compensation claimants
and seeks monetary penalties and injunctive relief. On
July 20, 2006, the court denied defendants motion for
summary judgment and granted plaintiffs partial motion for
summary judgment, holding that the AIG subsidiary was a
group purchaser and, therefore, potentially subject
to liability under the Act. On November 28, 2006, the court
issued an order certifying a class of providers and hospitals.
In an unrelated action also arising under the Act, a Louisiana
appellate court ruled that the district court lacked
jurisdiction to adjudicate the claims at issue. In response,
defendants in Gunderson filed an exception for lack of
subject matter jurisdiction. On January 19, 2007, the court
denied the motion, holding that it has jurisdiction over the
putative class claims. The AIG subsidiary appealed the class
certification and jurisdictional rulings. While the appeal was
pending, the AIG subsidiary settled the lawsuit. On
January 25, 2008, plaintiffs and the AIG subsidiary agreed
to resolve the lawsuit on a class-wide basis for approximately
$29 million. The court has preliminarily approved the
settlement and will hold a final approval hearing on
May 29, 2008. In the event that the settlement is not
finally approved, AIG believes that it has meritorious defenses
to
20 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
plaintiffs claims and expects that the ultimate resolution
of this matter will not have a material adverse effect on
AIGs consolidated financial condition or results of
operations for any period.
2006 Regulatory Settlements. In February 2006, AIG
reached a resolution of claims and matters under investigation
with the United States Department of Justice (DOJ), the
Securities and Exchange Commission (SEC), the Office of the New
York Attorney General (NYAG) and the New York State
Department of Insurance (DOI). AIG recorded an after-tax charge
of $1.15 billion relating to these settlements in the
fourth quarter of 2005.
The settlements resolved investigations conducted by the SEC,
NYAG and DOI in connection with the accounting, financial
reporting and insurance brokerage practices of AIG and its
subsidiaries, as well as claims relating to the underpayment of
certain workers compensation premium taxes and other
assessments. These settlements did not, however, resolve
investigations by regulators from other states into insurance
brokerage practices related to contingent commissions and other
broker-related conduct, such as alleged bid rigging. Nor did the
settlements resolve any obligations that AIG may have to state
guarantee funds in connection with any of these matters.
As a result of these settlements, AIG made payments or placed
amounts in escrow in 2006 totaling approximately
$1.64 billion, $225 million of which represented fines
and penalties. Amounts held in escrow totaling
$347 million, including interest thereon, are included in
other assets at December 31, 2007. At that date,
approximately $330 million of the funds were escrowed for
settlement of claims resulting from the underpayment by AIG of
its residual market assessments for workers compensation. On May
24, 2007, The National Workers Compensation Reinsurance Pool, on
behalf of its participant members, filed a lawsuit against AIG
with respect to the underpayment of such assessments. On
August 6, 2007, the court denied AIGs motion seeking
to dismiss or stay the complaint or in the alternative, to
transfer to the Southern District of New York. On
December 26, 2007, the court denied AIGs motion to
dismiss the complaint. AIG filed its answer on January 22,
2008. On February 5, 2008, following agreement of the
parties, the court entered an order staying all proceedings
through March 3, 2008. In addition, a similar lawsuit filed
by the Minnesota Workers Compensation Reinsurance Association
and the Minnesota Workers Compensation Insurers Association is
pending. On August 6, 2007, AIG moved to dismiss the
complaint and that motion is under review. A purported class
action was filed in South Carolina Federal Court on
January 25, 2008 against AIG and certain of its
subsidiaries, on behalf of a class of employers that obtained
workers compensation insurance from AIG companies and allegedly
paid inflated premiums as a result of AIGs alleged
underreporting of workers compensation premiums. AIG cannot
currently estimate whether the amount ultimately required to
settle these claims will exceed the funds escrowed or otherwise
accrued for this purpose.
AIG has settled litigation that was filed by the Minnesota
Attorney General with respect to claims by the Minnesota
Department of Revenue and the Minnesota Special Compensation
Fund.
The National Association of Insurance Commissioners has formed a
Market Analysis Working Group directed by the State of Indiana,
which has commenced its own investigation into the
underreporting of workers compensation premiums. In early 2008,
AIG was informed that the Market Analysis Working Group had been
disbanded in favor of a multi-state targeted market conduct exam
focusing on workers compensation insurance.
The remaining escrowed funds, which amounted to $17 million at
December 31, 2007, are set aside for settlements for
certain specified AIG policyholders. As of February 20,
2008, eligible policyholders entitled to receive approximately
$359 million (or 95 percent) of the excess casualty
fund had opted to receive settlement payments in exchange for
releasing AIG and its subsidiaries from liability relating to
certain insurance brokerage practices. Amounts remaining in the
excess casualty fund may be used by AIG to settle claims from
other policyholders relating to such practices through
February 29, 2008 (originally set for January 31, 2008
and later extended), after which they will be distributed pro
rata to participating policyholders.
In addition to the escrowed funds, $800 million was deposited
into a fund under the supervision of the SEC as part of the
settlements to be available to resolve claims asserted against
AIG by investors, including the shareholder lawsuits described
herein.
Also, as part of the settlements, AIG agreed to retain, for a
period of three years, an independent consultant to conduct a
review that will include, among other things, the adequacy of
AIGs internal control over financial reporting, the
policies, procedures and effectiveness of AIGs regulatory,
compliance and legal functions and the remediation plan that AIG
has implemented as a result of its own internal review.
Other than as described above, at the current time, AIG cannot
predict the outcome of the matters described above, or estimate
any potential additional costs related to these matters.
Private Litigation
Securities Actions. Beginning in October 2004, a number
of putative securities fraud class action suits were filed
against AIG and consolidated as In re American International
Group, Inc. Securities Litigation. Subsequently, a separate,
though similar, securities fraud action was also brought against
AIG by certain Florida pension funds. The lead plaintiff in the
class action is a group of public retirement systems and pension
funds benefiting Ohio state employees, suing on behalf of
themselves and all purchasers of AIGs publicly traded
securities between October 28, 1999 and April 1, 2005.
The named defendants are AIG and a number of present and former
AIG officers and directors, as well as
C.V. Starr & Co., Inc. (Starr), Starr
International Company, Inc. (SICO), General Reinsurance
Corporation, and PricewaterhouseCoopers LLP (PwC), among others.
The lead plaintiff alleges, among other things, that AIG:
(1) concealed that it engaged in anti-competitive conduct
through alleged payment of contingent commissions to brokers and
participation in illegal bid-rigging; (2) concealed that it
used income smoothing products and other techniques
to inflate its earnings; (3) concealed that it marketed and
sold income smoothing insurance products to other
companies; and (4) misled investors about the scope of
AIG 2007
Form 10-K
21
American International Group, Inc. and Subsidiaries
government investigations. In addition, the lead plaintiff
alleges that AIGs former Chief Executive Officer
manipulated AIGs stock price. The lead plaintiff asserts
claims for violations of Sections 11 and 15 of the
Securities Act of 1933, Section 10(b) of the Exchange Act,
and Rule 10b-5
promulgated thereunder, Section 20(a) of the Exchange Act,
and Section 20A of the Exchange Act. In April 2006, the
court denied the defendants motions to dismiss the second
amended class action complaint and the Florida complaint. In
December 2006, a third amended class action complaint was filed,
which does not differ substantially from the prior complaint.
Fact and class discovery is currently ongoing. On
February 20, 2008, the lead plaintiff filed a motion for
class certification.
ERISA Action. Between November 30, 2004 and
July 1, 2005, several Employee Retirement Income Security
Act of 1974 (ERISA) actions were filed on behalf of
purported class of participants and beneficiaries of three
pension plans sponsored by AIG or its subsidiaries. A
consolidated complaint filed on September 26, 2005 alleges
a class period between September 30, 2000 and May 31,
2005 and names as defendants AIG, the members of AIGs
Retirement Board and the Administrative Boards of the plans at
issue, and four present or former members of AIGs Board of
Directors. The factual allegations in the complaint are
essentially identical to those in the securities actions
described above. The parties have reached an agreement in
principle to settle this matter for an amount within AIGs
insurance coverage limits.
Securities Action Oregon State Court. On
February 27, 2008, The State of Oregon, by and through the
Oregon State Treasurer, and the Oregon Public Employee
Retirement Board, on behalf of the Oregon Public Employee
Retirement Fund, filed a lawsuit against American International
Group, Inc. for damages arising out of plaintiffs purchase
of AIG common stock at prices that allegedly were inflated.
Plaintiffs allege, among other things, that AIG: (1) made
false and misleading statements concerning its accounting for a
$500 million transaction with General Re;
(2) concealed that it marketed and misrepresented its
control over off-shore entities in order to improve financial
results; (3) improperly accounted for underwriting losses
as investment losses in connection with transactions involving
CAPCO Reinsurance Company, Ltd. and Union Excess;
(4) misled investors about the scope of government
investigations; and (5) engaged in market manipulation
through its then Chairman and CEO Maurice R. Greenberg. The
complaint asserts claims for violations of Oregon Securities
Law, and seeks compensatory damages in an amount in excess of
$15 million, and prejudgement interest and costs and fees.
Derivative Actions Southern District of New York.
On November 20, 2007, two purported shareholder derivative
actions were filed in the Southern District of New York naming
as defendants the then-current directors of AIG and certain
senior officers of AIG and its subsidiaries. Plaintiffs assert
claims for breach of fiduciary duty, waste of corporate assets
and unjust enrichment, as well as violations of
Section 10(b) of the Exchange Act and
Rule 10b-5
promulgated thereunder, and Section 20(a) of the Exchange
Act, among other things, in connection with AIGs public
disclosures regarding its exposure to what the lawsuits describe
as the subprime market crisis. The actions were consolidated as
In re American International Group, Inc. 2007 Derivative
Litigation. On February 15, 2008, plaintiffs filed a
consolidated amended complaint alleging the same causes of
action.
Between October 25, 2004 and July 14, 2005, seven
separate derivative actions were filed in the Southern District
of New York, five of which were consolidated into a single
action. The New York derivative complaint contains nearly the
same types of allegations made in the securities fraud and ERISA
actions described above. The named defendants include current
and former officers and directors of AIG, as well as Marsh &
McLennan Companies, Inc. (Marsh), SICO, Starr, ACE Limited and
subsidiaries (ACE), General Reinsurance Corporation, PwC, and
certain employees or officers of these entity defendants.
Plaintiffs assert claims for breach of fiduciary duty, gross
mismanagement, waste of corporate assets, unjust enrichment,
insider selling, auditor breach of contract, auditor
professional negligence and disgorgement from AIGs former
Chief Executive Officer and Chief Financial Officer of
incentive-based compensation and AIG share proceeds under
Section 304 of the Sarbanes-Oxley Act, among others.
Plaintiffs seek, among other things, compensatory damages,
corporate governance reforms, and a voiding of the election of
certain AIG directors. AIGs Board of Directors has
appointed a special committee of independent directors (special
committee) to review the matters asserted in the operative
consolidated derivative complaint. The court has entered an
order staying the derivative case in the Southern District of
New York pending resolution of the consolidated derivative
action in the Delaware Chancery Court (discussed below). The
court also has entered an order that termination of certain
named defendants from the Delaware derivative action applies to
the New York derivative action without further order of the
court. On October 17, 2007, plaintiffs and those AIG
officer and director defendants against whom the shareholder
plaintiffs in the Delaware action are no longer pursuing claims
filed a stipulation providing for all claims in the New York
action against such defendants to be dismissed with prejudice.
Former directors and officers Maurice R. Greenberg and Howard I.
Smith have asked the court to refrain from so ordering this
stipulation.
Derivative Actions Delaware Chancery Court.
From October 2004 to April 2005, AIG shareholders filed five
derivative complaints in the Delaware Chancery Court. All of
these derivative lawsuits were consolidated into a single action
as In re American International Group, Inc. Consolidated
Derivative Litigation. The amended consolidated complaint
named 43 defendants (not including nominal defendant AIG) who,
like the New York consolidated derivative litigation, were
current and former officers and directors of AIG, as well as
other entities and certain of their current and former employees
and directors. The factual allegations, legal claims and relief
sought in the Delaware action are similar to those alleged in
the New York derivative actions, except that shareholder
plaintiffs in the Delaware derivative action assert claims only
under state law. Earlier in 2007, the Court approved an
agreement that AIG be realigned as plaintiff, and, on
June 13,
22 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
2007, acting on the direction of the special committee, AIG
filed an amended complaint against former directors and officers
Maurice R. Greenberg and Howard I. Smith, alleging breach of
fiduciary duty and indemnification. Also on June 13, 2007,
the special committee filed a motion to terminate the litigation
as to certain defendants, while taking no action as to others.
Defendants Greenberg and Smith filed answers to AIGs
complaint and brought third-party complaints against certain
current and former AIG directors and officers, PwC and
Regulatory Insurance Services, Inc. On September 28, 2007,
AIG and the shareholder plaintiffs filed a combined amended
complaint in which AIG continued to assert claims against
defendants Greenberg and Smith and took no position as to the
claims asserted by the shareholder plaintiffs in the remainder
of the combined amended complaint. In that pleading, the
shareholder plaintiffs are no longer pursuing claims against
certain AIG officers and directors. In November 2007, the
shareholder plaintiffs moved to sever their claims to a separate
action. AIG joined the motion to the extent that, among other
things, the claims against defendants Greenberg and Smith would
remain in prosecution in the pending action. In addition, a
number of parties, including AIG, filed motions to stay
discovery. On February 12, 2008, the court granted
AIGs motion to stay discovery pending the resolution of
claims against AIG in the New York consolidated securities
action. The court also denied plaintiffs motion to sever
and directed the parties to coordinate a briefing schedule for
the motions to dismiss.
A separate derivative lawsuit was filed in December 2002 in the
Delaware Chancery Court against twenty directors and executives
of AIG as well as against AIG as a nominal defendant that
alleges, among other things, that the directors of AIG breached
the fiduciary duties of loyalty and care by approving the
payment of commissions to Starr and of rental and service fees
to SICO and the executives breached their duty of loyalty by
causing AIG to enter into contracts with Starr and SICO and
their fiduciary duties by usurping AIGs corporate
opportunity. The complaint further alleges that the Starr
agencies did not provide any services that AIG was not capable
of providing itself, and that the diversion of commissions to
these entities was solely for the benefit of Starrs
owners. The complaint also alleged that the service fees and
rental payments made to SICO and its subsidiaries were improper.
Under the terms of a stipulation approved by the Court on
February 16, 2006, the claims against the outside
independent directors were dismissed with prejudice, while the
claims against the other directors were dismissed without
prejudice. On October 31, 2005, defendants Greenberg,
Matthews, Smith, SICO and Starr filed motions to dismiss the
amended complaint. In an opinion dated June 21, 2006, the
Court denied defendants motion to dismiss, except with
respect to plaintiffs challenge to payments made to Starr
before January 1, 2000. On July 21, 2006, plaintiff
filed its second amended complaint, which alleges that, between
January 1, 2000 and May 31, 2005, individual
defendants breached their duty of loyalty by causing AIG to
enter into contracts with Starr and SICO and breached their
fiduciary duties by usurping AIGs corporate opportunity.
Starr is charged with aiding and abetting breaches of fiduciary
duty and unjust enrichment for its acceptance of the fees. SICO
is no longer named as a defendant. On April 20, 2007, the
individual defendants and Starr filed a motion seeking leave of
the Court to assert a cross-claim against AIG and a third-party
complaint against PwC and the directors previously dismissed
from the action, as well as certain other AIG officers and
employees. On June 13, 2007, the Court denied the
individual defendants motion to file a third-party
complaint, but granted the proposed cross-claim against AIG. On
June 27, 2007, Starr filed its cross-claim against AIG,
alleging one count that includes contribution, unjust enrichment
and setoff. AIG has filed an answer and moved to dismiss
Starrs cross-claim to the extent it seeks affirmative
relief, as opposed to a reduction in the judgment amount. On
November 15, 2007, the court granted AIGs motion to
dismiss the cross-claim by Starr to the extent that it sought
affirmative relief from AIG. On November 21, 2007,
shareholder plaintiffs submitted a motion for leave to file
their Third Amended Complaint in order to add Thomas Tizzio as a
defendant. On February 14, 2008, the court granted this
motion and allowed Mr. Tizzio until April 2008 to take
additional discovery. Document discovery and depositions are
otherwise complete.
Policyholder Actions. After the NYAG filed its complaint
against insurance broker Marsh, policyholders brought multiple
federal antitrust and Racketeer Influenced and Corrupt
Organizations Act (RICO) class actions in jurisdictions
across the nation against insurers and brokers, including AIG
and a number of its subsidiaries, alleging that the insurers and
brokers engaged in a broad conspiracy to allocate customers,
steer business, and rig bids. These actions, including 24
complaints filed in different federal courts naming AIG or an
AIG subsidiary as a defendant, were consolidated by the judicial
panel on multi-district litigation and transferred to the United
States District Court for the District of New Jersey for
coordinated pretrial proceedings. The consolidated actions have
proceeded in that court in two parallel actions, In re
Insurance Brokerage Antitrust Litigation (the First
Commercial Complaint) and In re Employee Benefit
Insurance Brokerage Antitrust Litigation (the First
Employee Benefits Complaint, and, together with the First
Commercial Complaint, the multi-district litigation).
The plaintiffs in the First Commercial Complaint are
nineteen corporations, individuals and public entities that
contracted with the broker defendants for the provision of
insurance brokerage services for a variety of insurance needs.
The broker defendants are alleged to have placed insurance
coverage on the plaintiffs behalf with a number of
insurance companies named as defendants, including AIG
subsidiaries. The First Commercial Complaint also named
ten brokers and fourteen other insurers as defendants (two of
which have since settled). The First Commercial Complaint
alleges that defendants engaged in a widespread conspiracy
to allocate customers through bid-rigging and
steering practices. The First Commercial
Complaint also alleges that the insurer defendants permitted
brokers to place business with AIG subsidiaries through
wholesale intermediaries affiliated with or owned by those same
brokers rather than placing the business with AIG subsidiaries
directly. Finally, the First Commercial Complaint alleges
that the insurer defendants entered into agreements with broker
defendants that tied insurance placements to reinsurance
placements in order to provide additional
AIG 2007
Form 10-K
23
American International Group, Inc. and Subsidiaries
compensation to each broker. Plaintiffs assert that the
defendants violated the Sherman Antitrust Act, RICO, the
antitrust laws of 48 states and the District of Columbia, and
are liable under common law breach of fiduciary duty and unjust
enrichment theories. Plaintiffs seek treble damages plus
interest and attorneys fees as a result of the alleged
RICO and Sherman Antitrust Act violations.
The plaintiffs in the First Employee Benefits Complaint
are nine individual employees and corporate and municipal
employers alleging claims on behalf of two separate nationwide
purported classes: an employee class and an employer class that
acquired insurance products from the defendants from
August 26, 1994 to the date of any class certification. The
First Employee Benefits Complaint names AIG, as well as
eleven brokers and five other insurers, as defendants. The
activities alleged in the First Employee Benefits
Complaint, with certain exceptions, track the allegations of
contingent commissions, bid-rigging and tying made in the
First Commercial Complaint.
On October 3, 2006, Judge Hochberg of the District of New
Jersey reserved in part and denied in part motions filed by the
insurer defendants and broker defendants to dismiss the
multi-district litigation. The Court also ordered the plaintiffs
in both actions to file supplemental statements of particularity
to elaborate on the allegations in their complaints. Plaintiffs
filed their supplemental statements on October 25, 2006,
and the AIG defendants, along with other insurer and broker
defendants in the two consolidated actions, filed renewed
motions to dismiss on November 30, 2006. On
February 16, 2007, the case was transferred to Judge
Garrett E. Brown, Chief Judge of the District of New Jersey. On
April 5, 2007, Chief Judge Brown granted the
defendants renewed motions to dismiss the First
Commercial Complaint and First Employee Benefits
Complaint with respect to the antitrust and RICO claims. The
claims were dismissed without prejudice and the plaintiffs were
given 30 days, later extended to 45 days, to file
amended complaints. On April 11, 2007, the Court stayed all
proceedings, including all discovery, that are part of the
multi-district litigation until any renewed motions to dismiss
the amended complaints are resolved.
A number of complaints making allegations similar to those in
the First Commercial Complaint have been filed against
AIG and other defendants in state and federal courts around the
country. The defendants have thus far been successful in having
the federal actions transferred to the District of New Jersey
and consolidated into the multi-district litigation. The AIG
defendants have also sought to have state court actions making
similar allegations stayed pending resolution of the
multi-district litigation proceeding. In one state court action
pending in Florida, the trial court recently decided not to
grant an additional stay, but instead to allow the case to
proceed. Defendants filed their motions to dismiss, and on
September 24, 2007, the court denied the motions with
respect to the state antitrust, RICO, and common law claims and
granted the motions with respect to both the Florida insurance
bad faith claim against AIG (with prejudice) and the punitive
damages claim (without prejudice). Discovery in this action is
ongoing.
Plaintiffs filed amended complaints in both In re Insurance
Brokerage Antitrust Litigation (the Second Commercial
Complaint) and In re Employee Benefit Insurance Brokerage
Antitrust Litigation (the Second Employee Benefits
Complaint) along with revised particularized statements in
both actions on May 22, 2007. The allegations in the
Second Commercial Complaint and the Second Employee
Benefits Complaint are substantially similar to the
allegations in the First Commercial Complaint and First
Employee Benefits Complaint, respectively. The complaints
also attempt to add several new parties and delete others; the
Second Commercial Complaint adds two new plaintiffs and
twenty seven new defendants (including three new AIG
defendants), and the Second Employee Benefits Complaint
adds eight new plaintiffs and nine new defendants (including
two new AIG defendants). The defendants filed motions to dismiss
the amended complaints and to strike the newly added parties.
The Court granted (without leave to amend) defendants
motions to dismiss the federal antitrust and RICO claims on
August 31, 2007 and September 28, 2007, respectively.
The Court declined to exercise supplemental jurisdiction over
the state law claims in the Second Commercial Complaint
and therefore dismissed it in its entirety. On
January 14, 2008, the court granted defendants motion
for summary judgment on the ERISA claims in the Second Employee
Benefits Complaint and subsequently dismissed the remaining
state law claims without prejudice, thereby dismissing the
Second Employee Benefits Complaint in its entirety. On
February 12, 2008, plaintiffs filed a notice of appeal to
the United States Court of Appeals for the Third Circuit with
respect to the dismissal of the Second Employee Benefits
Complaint. Plaintiffs previously appealed the dismissal of the
Second Commercial Complaint to the United States Court of
Appeals for the Third Circuit on October 10, 2007. Several
similar actions that were consolidated before Chief Judge Brown
are still pending in the District Court. Those actions are
currently stayed pending a decision by the court on whether they
will proceed during the appeal of the dismissal of the Second
Commercial Complaint and the Second Employee Benefits Complaint.
On August 24, 2007, the Ohio Attorney General filed a
complaint in the Ohio Court of Common Pleas against AIG and a
number of its subsidiaries, as well as several other broker and
insurer defendants, asserting violation of Ohios antitrust
laws. The complaint, which is similar to the Second
Commercial Complaint, alleges that AIG and the other broker
and insurer defendants conspired to allocate customers, divide
markets, and restrain competition in commercial lines of
casualty insurance sold through the broker defendant. The
complaint seeks treble damages on behalf of Ohio public
purchasers of commercial casualty insurance, disgorgement on
behalf of both public and private purchasers of commercial
casualty insurance, as well as a $500 per day penalty for each
day of conspiratorial conduct. AIG, along with other
co-defendants, moved to dismiss the complaint on
November 16, 2007. Discovery is stayed in the case pending
a ruling on the motion to dismiss or until May 15, 2008,
whichever occurs first.
SICO. In July, 2005, SICO filed a complaint against AIG
in the Southern District of New York, claiming that AIG had
refused to provide SICO access to certain artwork and asked the
court to order AIG immediately to release the property to SICO.
AIG filed
24 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
an answer denying SICOs allegations and setting forth
defenses to SICOs claims. In addition, AIG filed
counterclaims asserting breach of contract, unjust enrichment,
conversion, breach of fiduciary duty, a constructive trust and
declaratory judgment, relating to SICOs breach of its
commitment to use its AIG shares only for the benefit of AIG and
AIG employees. Fact and expert discovery has been concluded and
SICOs motion for summary judgment is pending.
Regulatory Investigations. Regulators from several states
have commenced investigations into insurance brokerage practices
related to contingent commissions and other industry wide
practices as well as other broker-related conduct, such as
alleged bid-rigging. In addition, various federal, state and
foreign regulatory and governmental agencies are reviewing
certain transactions and practices of AIG and its subsidiaries
in connection with industry wide and other inquiries. AIG has
cooperated, and will continue to cooperate, in producing
documents and other information in response to subpoenas and
other requests. On January 29, 2008, AIG reached settlement
agreements with nine states and the District of Columbia. The
settlement agreements call for AIG to pay a total of
$12.5 million to be allocated among the ten jurisdictions
and also require AIG to continue to maintain certain producer
compensation disclosure and ongoing compliance initiatives. AIG
will also continue to cooperate with these states in their
ongoing investigations. AIG has not admitted liability under the
settlement agreements and continues to deny the allegations.
Nevertheless, AIG agreed to settle in order to avoid the expense
and uncertainty of protracted litigation. The settlement
agreements, which remain subject to court approvals, were
reached with the Attorneys General of the States of Florida,
Hawaii, Maryland, Michigan, Oregon, Texas and West Virginia, the
Commonwealths of Massachusetts and Pennsylvania, and the
District of Columbia, the Florida Department of Financial
Services, and the Florida Office of Insurance Regulation. The
agreement with the Texas Attorney General also settles
allegations of anticompetitive conduct relating to AIGs
relationship with Allied World Assurance Company and includes an
additional settlement payment of $500,000 related thereto.
Wells Notices. AIG understands that some of its employees
have received Wells notices in connection with previously
disclosed SEC investigations of certain of AIGs
transactions or accounting practices. Under SEC procedures, a
Wells notice is an indication that the SEC staff has made a
preliminary decision to recommend enforcement action that
provides recipients with an opportunity to respond to the SEC
staff before a formal recommendation is finalized. It is
possible that additional current and former employees could
receive similar notices in the future as the regulatory
investigations proceed.
Effect on AIG
In the opinion of AIG management, AIGs ultimate liability
for the unresolved litigation and investigation matters referred
to above is not likely to have a material adverse effect on
AIGs consolidated financial condition, although it is
possible that the effect would be material to AIGs
consolidated results of operations for an individual reporting
period.
Item 4.
Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders
during the fourth quarter of 2007.
AIG 2007
Form 10-K
25
American International Group, Inc. and Subsidiaries
Part II
Item 5.
Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
AIGs common stock is listed on the New York Stock
Exchange, as well as on the stock exchanges in Paris and Tokyo.
The following table presents the high
and low closing sales prices and the dividends paid per share of
AIGs common stock on the New York Stock Exchange Composite
Tape, for each quarter of 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2007 |
|
2006 |
|
|
| |
|
| |
|
|
|
|
Dividends | |
|
|
|
Dividends | |
|
|
High | |
|
Low | |
|
Paid | |
|
High | |
|
Low | |
|
Paid | |
| |
First quarter
|
|
$ |
72.15 |
|
|
$ |
66.77 |
|
|
$ |
0.165 |
|
|
$ |
70.83 |
|
|
$ |
65.35 |
|
|
$ |
0.150 |
|
Second quarter
|
|
|
72.65 |
|
|
|
66.49 |
|
|
|
0.165 |
|
|
|
66.54 |
|
|
|
58.67 |
|
|
|
0.150 |
|
Third quarter
|
|
|
70.44 |
|
|
|
61.64 |
|
|
|
0.200 |
|
|
|
66.48 |
|
|
|
57.76 |
|
|
|
0.165 |
|
Fourth quarter
|
|
|
70.11 |
|
|
|
51.33 |
|
|
|
0.200 |
|
|
|
72.81 |
|
|
|
66.30 |
|
|
|
0.165 |
|
|
The approximate number of holders of common stock as of
January 31, 2008, based upon the number of record holders,
was 56,500.
Subject to the dividend preference of any of AIGs serial
preferred stock that may be outstanding, the holders of shares
of common stock are entitled to receive such dividends as may be
declared by AIGs Board of Directors from funds legally
available therefor.
In February 2007, AIGs Board of Directors adopted a new
dividend policy, which took effect with the dividend that was
declared in the second quarter of 2007. Under ordinary
circumstances, AIGs plan is to increase its common stock
dividend by approximately 20 percent annually. The payment
of any dividend, however, is at the discretion of AIGs
Board of Directors, and the future payment of dividends will
depend on various factors, including the performance of
AIGs businesses, AIGs consolidated financial
condition, results of operations and liquidity and the existence
of investment opportunities.
For a discussion of certain restrictions on the payment of
dividends to AIG by some of its insurance subsidiaries, see
Note 14 to Consolidated Financial Statements.
The following table summarizes
AIGs stock repurchases for the three-month period ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Maximum Number | |
|
|
Total Number | |
|
of Shares that | |
|
|
of Shares | |
|
May Yet Be | |
|
|
Total Number | |
|
|
|
Purchased as Part | |
|
Purchased Under the | |
|
|
of Shares | |
|
Average Price | |
|
of Publicly Announced | |
|
Plans or Programs | |
Period |
|
Purchased(a)(b) | |
|
Paid per Share | |
|
Plans or Programs | |
|
at End of Month(b) | |
| |
October 1 - 31, 2007
|
|
|
13,964,098 |
|
|
$ |
66.12 |
|
|
|
13,964,098 |
|
|
|
|
|
November 1 - 30, 2007
|
|
|
5,709,067 |
|
|
|
61.56 |
|
|
|
5,709,067 |
|
|
|
|
|
December 1 - 31, 2007
|
|
|
1,584,199 |
|
|
|
55.58 |
|
|
|
1,584,199 |
|
|
|
|
|
|
Total
|
|
|
21,257,364 |
|
|
$ |
64.11 |
|
|
|
21,257,364 |
|
|
|
|
|
|
|
|
(a) |
Reflects date of delivery. Does not include
49,583 shares delivered or attested to in satisfaction of
the exercise price by holders of AIG employee stock options
exercised during the three months ended December 31, 2007
or 23,300 shares purchased by ILFC to satisfy obligations
under employee benefit plans. |
|
(b) |
In February 2007, AIGs Board of Directors increased
AIGs share repurchase program by authorizing the
repurchase of shares with an aggregate purchase price of
$8 billion. In November 2007, AIGs Board of Directors
authorized the repurchase of an additional $8 billion in
common stock. A balance of $10.9 billion remained for
purchases under the program as of December 31, 2007,
although $912 million of that amount has been advanced by
AIG to purchase shares under the program and an additional
$1 billion was required to be advanced in January 2008 to
meet commitments that existed at December 31, 2007. |
AIG does not expect to purchase additional shares under its
share repurchase program for the foreseeable future, other than
to meet commitments that existed at December 31, 2007.
AIGs table of equity compensation plans previously
approved by security holders and equity compensation plans not
previously approved by security holders will be included in
AIGs Definitive Proxy Statement in connection with its
2008 Annual Meeting of Shareholders, which will be filed with
the SEC within 120 days of AIGs fiscal year end.
26 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
Performance Graph
The following Performance Graph compares the cumulative total
shareholder return on AIG common stock for a five-year period
(December 31, 2002 to December 31, 2007) with the
cumulative total return of the Standard & Poors
500 stock index (which includes AIG) and a peer group of
companies consisting of nine insurance companies to which AIG
compares its business and operations: ACE Limited, Aflac
Incorporated, The Chubb Corporation, The Hartford Financial
Services Group, Inc., Lincoln National Corporation, MetLife,
Inc., Prudential Financial, Inc., The Travelers Companies, Inc.
(formerly The St. Paul Travelers Companies, Inc.) and XL Capital
Ltd.
FIVE-YEAR CUMULATIVE TOTAL SHAREHOLDER
RETURNS
Value of $100 Invested on
December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
2007 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
AIG
|
|
$ |
100.00 |
|
|
$ |
115.02 |
|
|
$ |
114.43 |
|
|
$ |
119.98 |
|
|
$ |
127.24 |
|
|
$ |
104.67 |
|
S&P 500
|
|
|
100.00 |
|
|
|
128.68 |
|
|
|
142.69 |
|
|
|
149.70 |
|
|
|
173.34 |
|
|
|
182.86 |
|
Peer Group
|
|
|
100.00 |
|
|
|
126.10 |
|
|
|
145.73 |
|
|
|
179.22 |
|
|
|
207.37 |
|
|
|
216.60 |
|
AIG 2007
Form 10-K
27
American International Group, Inc. and Subsidiaries
Item 6.
Selected Financial Data
American International Group, Inc. and
Subsidiaries
Selected Consolidated Financial Data
The Selected Consolidated Financial
Data should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and
accompanying notes included elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Years Ended December 31, | |
(in millions, except per share data) |
|
2007 | |
|
2006(a) | |
|
2005(a) | |
|
2004(a) | |
|
2003(a) | |
| |
Revenues(b)(c)(d):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations
|
|
$ |
79,302 |
|
|
$ |
74,213 |
|
|
$ |
70,310 |
|
|
$ |
66,704 |
|
|
$ |
54,874 |
|
|
Net investment income
|
|
|
28,619 |
|
|
|
26,070 |
|
|
|
22,584 |
|
|
|
19,007 |
|
|
|
16,024 |
|
|
Net realized capital gains (losses)
|
|
|
(3,592 |
) |
|
|
106 |
|
|
|
341 |
|
|
|
44 |
|
|
|
(442 |
) |
|
Unrealized market valuation losses on AIGFP super senior credit
default swap portfolio
|
|
|
(11,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
17,207 |
|
|
|
12,998 |
|
|
|
15,546 |
|
|
|
12,068 |
|
|
|
9,145 |
|
Total revenues
|
|
|
110,064 |
|
|
|
113,387 |
|
|
|
108,781 |
|
|
|
97,823 |
|
|
|
79,601 |
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred policy losses and benefits
|
|
|
66,115 |
|
|
|
60,287 |
|
|
|
64,100 |
|
|
|
58,600 |
|
|
|
46,362 |
|
|
Insurance acquisition and other operating expenses
|
|
|
35,006 |
|
|
|
31,413 |
|
|
|
29,468 |
|
|
|
24,378 |
|
|
|
21,332 |
|
Total benefits and expenses
|
|
|
101,121 |
|
|
|
91,700 |
|
|
|
93,568 |
|
|
|
82,978 |
|
|
|
67,694 |
|
Income before income taxes, minority interest and cumulative
effect of accounting changes
(b)(c)(d)(e)(f)
|
|
|
8,943 |
|
|
|
21,687 |
|
|
|
15,213 |
|
|
|
14,845 |
|
|
|
11,907 |
|
Income taxes
|
|
|
1,455 |
|
|
|
6,537 |
|
|
|
4,258 |
|
|
|
4,407 |
|
|
|
3,556 |
|
Income before minority interest and cumulative effect of
accounting changes
|
|
|
7,488 |
|
|
|
15,150 |
|
|
|
10,955 |
|
|
|
10,438 |
|
|
|
8,351 |
|
Minority interest
|
|
|
(1,288 |
) |
|
|
(1,136 |
) |
|
|
(478 |
) |
|
|
(455 |
) |
|
|
(252 |
) |
Income before cumulative effect of accounting changes
|
|
|
6,200 |
|
|
|
14,014 |
|
|
|
10,477 |
|
|
|
9,983 |
|
|
|
8,099 |
|
Cumulative effect of accounting changes, net of tax
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
(144 |
) |
|
|
9 |
|
Net income
|
|
|
6,200 |
|
|
|
14,048 |
|
|
|
10,477 |
|
|
|
9,839 |
|
|
|
8,108 |
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting changes
|
|
|
2.40 |
|
|
|
5.38 |
|
|
|
4.03 |
|
|
|
3.83 |
|
|
|
3.10 |
|
|
|
Cumulative effect of accounting changes, net of tax
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
|
Net income
|
|
|
2.40 |
|
|
|
5.39 |
|
|
|
4.03 |
|
|
|
3.77 |
|
|
|
3.10 |
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting changes
|
|
|
2.39 |
|
|
|
5.35 |
|
|
|
3.99 |
|
|
|
3.79 |
|
|
|
3.07 |
|
|
|
Cumulative effect of accounting changes, net of tax
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
(0.06 |
) |
|
|
|
|
|
|
Net income
|
|
|
2.39 |
|
|
|
5.36 |
|
|
|
3.99 |
|
|
|
3.73 |
|
|
|
3.07 |
|
Dividends declared per common share
|
|
|
0.77 |
|
|
|
0.65 |
|
|
|
0.63 |
|
|
|
0.29 |
|
|
|
0.24 |
|
|
Year-end balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,060,505 |
|
|
|
979,410 |
|
|
|
853,048 |
|
|
|
801,007 |
|
|
|
675,602 |
|
|
Long-term
borrowings(g)
|
|
|
162,935 |
|
|
|
135,316 |
|
|
|
100,314 |
|
|
|
86,653 |
|
|
|
73,881 |
|
|
Commercial paper and extendible commercial notes
|
|
|
13,114 |
|
|
|
13,363 |
|
|
|
9,535 |
|
|
|
10,246 |
|
|
|
6,468 |
|
|
Total liabilities
|
|
|
964,604 |
|
|
|
877,542 |
|
|
|
766,545 |
|
|
|
721,135 |
|
|
|
606,180 |
|
|
Shareholders equity
|
|
$ |
95,801 |
|
|
$ |
101,677 |
|
|
$ |
86,317 |
|
|
$ |
79,673 |
|
|
$ |
69,230 |
|
|
|
|
(a) |
Certain reclassifications have been made to prior period
amounts to conform to the current period presentation. |
|
(b) |
In 2007, 2006, 2005, 2004 and 2003, includes
other-than-temporary impairment charges of $4.7 billion,
$944 million, $598 million, $684 million and
$1.5 billion, respectively. Also includes gains (losses)
from hedging activities that did not qualify for hedge
accounting treatment under FAS 133, including the related
foreign exchange gains and losses. In 2007, 2006, 2005, 2004 and
2003, respectively, the effect was $(1.44) billion,
$(1.87) billion, $2.02 billion, $385 million and
$(1.50) billion in revenues and $(1.44) billion,
$(1.87) billion, $2.02 billion, $671 million and
$(1.22) billion in operating income. These amounts result
primarily from interest rate and foreign currency derivatives
that are effective economic hedges of investments and
borrowings. These gains (losses) in 2007 include a
$380 million out of period charge to reverse net gains
recognized on transfers of available for sale securities among
legal entities consolidated within AIGFP. The gains (losses) in
2006 include an out of period charge of $223 million
related to the remediation of the material weakness in internal
control over the accounting for certain derivative transactions
under FAS 133. In the first quarter of 2007, AIG began applying
hedge accounting for certain transactions, primarily in its
Capital Markets operations. In the second quarter of 2007, AGF
and ILFC began applying hedge accounting to most of their
derivatives hedging interest rate and foreign exchange risks
associated with their floating rate and foreign currency
denominated borrowings. |
|
(c) |
In 2006, includes the effect of out of period adjustments
related to the accounting for UCITS. The effect was an increase
of $490 million in both revenues and operating income for
General Insurance and an increase of $240 million and
$169 million in revenues and operating income,
respectively, for Life Insurance & Retirement
Services. |
|
(d) |
In 2007, includes an unrealized market valuation loss of
$11.5 billion on AIGFPs super senior credit default
swap portfolio and an other-than-temporary impairment charge of
$643 million on AIGFPs available for sale investment
securities reported in other income. |
|
(e) |
Includes current year catastrophe-related losses of
$276 million in 2007, $3.28 billion in 2005 and
$1.16 billion in 2004. There were no significant
catastrophe-related losses in 2006 and 2003. |
|
(f) |
Reduced by fourth quarter charges of $1.8 billion and
$850 million in 2005 and 2004, respectively, related to the
annual review of General Insurance loss and loss adjustment
reserves. In 2006, 2005 and 2004, changes in estimates for
asbestos and environmental reserves were $198 million,
$873 million and $850 million, respectively. |
|
(g) |
Includes that portion of long-term debt maturing in less than
one year. See also Note 11 to Consolidated Financial
Statements. |
28 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of Operations
Item 7.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
Throughout this Managements Discussion and Analysis of
Financial Condition and Results of Operations, AIG presents its
operations in the way it believes will be most meaningful.
Statutory underwriting profit (loss) and combined ratios are
presented in accordance with accounting principles prescribed by
insurance regulatory authorities because these are standard
measures of performance used in the insurance industry and thus
allow more meaningful comparisons with AIGs insurance
competitors. AIG has also incorporated into this discussion a
number of cross-references to additional information included
throughout this Annual Report on
Form 10-K to
assist readers seeking additional information related to a
particular subject.
|
|
|
|
|
|
Index |
|
Page | |
| |
Cautionary Statement Regarding
Projections and Other Information About Future Events
|
|
|
29 |
|
Overview of Operations and Business Results
|
|
|
30 |
|
Outlook
|
|
|
30 |
|
Consolidated Results
|
|
|
34 |
|
Segment Results
|
|
|
36 |
|
Capital Resources
|
|
|
37 |
|
Liquidity
|
|
|
38 |
|
Critical Accounting Estimates
|
|
|
38 |
|
Operating Review
|
|
|
40 |
|
General Insurance Operations
|
|
|
40 |
|
|
General Insurance Results
|
|
|
41 |
|
|
Reserve for Losses and Loss Expenses
|
|
|
47 |
|
Life Insurance & Retirement Services Operations
|
|
|
62 |
|
|
Life Insurance & Retirement Services Results
|
|
|
63 |
|
|
Deferred Policy Acquisition Costs and Sales Inducement Assets
|
|
|
78 |
|
Financial Services Operations
|
|
|
81 |
|
Asset Management Operations
|
|
|
86 |
|
Other Operations
|
|
|
88 |
|
Capital Resources and Liquidity
|
|
|
88 |
|
Borrowings
|
|
|
89 |
|
Shareholders Equity
|
|
|
97 |
|
Liquidity
|
|
|
99 |
|
Invested Assets
|
|
|
101 |
|
Investment Strategy
|
|
|
102 |
|
Valuation of Invested Assets
|
|
|
108 |
|
Portfolio Review
|
|
|
109 |
|
|
Other-than-temporary impairments
|
|
|
109 |
|
|
Unrealized gains and losses
|
|
|
111 |
|
Risk Management
|
|
|
112 |
|
Overview
|
|
|
112 |
|
Corporate Risk Management
|
|
|
112 |
|
|
Credit Risk Management
|
|
|
113 |
|
|
Market Risk Management
|
|
|
115 |
|
|
Operational Risk Management
|
|
|
116 |
|
|
Insurance Risk Management
|
|
|
116 |
|
Segment Risk Management
|
|
|
118 |
|
|
Insurance Operations
|
|
|
118 |
|
|
Financial Services
|
|
|
121 |
|
|
Asset Management
|
|
|
126 |
|
Economic Capital
|
|
|
126 |
|
Recent Accounting Standards
|
|
|
127 |
|
Cautionary Statement Regarding
Projections and Other Information About Future Events
This Annual Report on
Form 10-K and
other publicly available documents may include, and AIGs
officers and representatives may from time to time make,
projections concerning financial information and statements
concerning future economic performance and events, plans and
objectives relating to management, operations, products and
services, and assumptions underlying these projections and
statements. These projections and statements are not historical
facts but instead represent only AIGs belief regarding
future events, many of which, by their nature, are inherently
uncertain and outside AIGs control. These projections and
statements may address, among other things, the status and
potential future outcome of the current regulatory and civil
proceedings against AIG and their potential effect on AIGs
businesses, financial condition, results of operations, cash
flows and liquidity, AIGs exposures to subprime mortgages,
monoline insurers and the residential real estate market and
AIGs strategy for growth, product development, market
position, financial results and reserves. It is possible that
AIGs actual results and financial condition may differ,
possibly materially, from the anticipated results and financial
condition indicated in these projections and statements. Factors
that could cause AIGs actual results to differ, possibly
materially, from those in the specific projections and
statements are discussed throughout this Managements
Discussion and Analysis of Financial Condition and Results of
Operations and in Item 1A. Risk Factors of this Annual
Report on
Form 10-K. AIG is
not under any obligation (and expressly disclaims any such
obligations) to update or alter any projection or other
statement, whether written or oral, that may be made from time
to time, whether as a result of new information, future events
or otherwise.
AIG 2007
Form 10-K
29
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
Overview of Operations and Business
Results
AIG identifies its reportable segments by product or service
line, consistent with its management structure. AIGs major
product and service groupings are General Insurance, Life
Insurance & Retirement Services, Financial Services and
Asset Management. Through these operating segments, AIG provides
insurance, financial and investment products and services to
both businesses and individuals in more than 130 countries and
jurisdictions. This geographic, product and service
diversification is one of AIGs major strengths and sets it
apart from its competitors. AIGs Other category consists
of items not allocated to AIGs operating segments.
AIGs subsidiaries serve commercial, institutional and
individual customers through an extensive property-casualty and
life insurance and retirement services network. In the United
States, AIG companies are the largest underwriters of commercial
and industrial insurance and are among the largest life
insurance and retirement services operations as well. AIGs
Financial Services businesses include commercial aircraft and
equipment leasing, capital markets operations and consumer
finance, both in the United States and abroad. AIG also provides
asset management services to institutions and individuals. As
part of its Spread-Based Investment activities, and to finance
its operations, AIG issues various debt instruments in the
public and private markets.
AIGs operating performance reflects implementation of
various long-term strategies and defined goals in its various
operating segments. A primary goal of AIG in managing its
General Insurance operations is to achieve an underwriting
profit. To achieve this goal, AIG must be disciplined in its
risk selection, and premiums must be adequate and terms and
conditions appropriate to cover the risks accepted and expenses
incurred.
AIG has commenced a realignment to simplify its Foreign General
Insurance operations, many of which were historically conducted
through branches of U.S. companies. On October 8, 2007, AIU
Insurance Company announced the conversion of its existing China
branches into AIG General Insurance Company China Limited, the
first non-Chinese owned general insurance company established in
China. This subsidiary assumed the existing business portfolio,
assets and liabilities of the China branches. On
October 15, 2007, AIG General Insurance (Taiwan) Co., Ltd.
(AIGGI Taiwan) announced the completion of its merger with AIU
Insurance Company Taiwan Branch. On December 1, 2007,
Landmark Insurance Company Limited, a U.K. subsidiary, assumed
all of the insurance liabilities of the U.K. branch of New
Hampshire Insurance Company and changed its name to AIG U.K.
Ltd. On January 1, 2008, AIU Insurance Company ceased
participating in the Domestic General Insurance pooling
arrangement. These ongoing simplification efforts are expected
to result in better utilization of capital and a lower effective
tax rate.
A central focus of AIG operations in recent years has been the
development and expansion of distribution channels. In 2007, AIG
continued to expand its distribution channels, which now include
banks, credit card companies, television-media home shopping,
affinity groups, direct response, worksite marketing and
e-commerce.
AIG patiently builds relationships in markets around the world
where it sees long-term growth opportunities. For example, the
fact that AIG has the only wholly owned foreign life insurance
operations in China, operating in 19 cities, is the result of
relationships developed over nearly 30 years. AIGs
more recent extensions of operations into India, Vietnam, Russia
and other emerging markets reflect the same growth strategy.
Moreover, AIG believes in investing in the economies and
infrastructures of these countries and growing with them. When
AIG companies enter a new jurisdiction, they typically offer
basic protection and savings products. As the economies evolve,
AIGs products evolve with them, to more sophisticated and
investment-oriented models.
Growth for AIG may be generated internally as well as through
acquisitions which both fulfill strategic goals and offer
adequate return on capital. In October 2007, AIG expanded its
Foreign General Insurance operations in Germany through the
acquisition of Württembergische und Badische
Versicherungs-AG (WüBA). In January 2007, American General
Finance, Inc. (AGF) expanded its operations into the U.K.
through the acquisition of Ocean Finance and Mortgages Limited,
a finance broker for home owner loans in the U.K.
Outlook
General Trends
In mid-2007, the U.S. residential mortgage market began to
experience serious disruption due to credit quality
deterioration in a significant portion of loans originated,
particularly to non-prime and subprime borrowers; evolving
changes in the regulatory environment; a slower residential
housing market; increased cost of borrowings for mortgage
participants; and illiquid credit markets.
AIG participates in the U.S. residential mortgage market in
several ways: AGF originates principally first-lien mortgage
loans and to a lesser extent second-lien mortgage loans to
buyers and owners of residential housing; United Guaranty
Corporation (UGC) provides first loss mortgage guaranty
insurance for high loan-to-value
first- and second-lien
residential mortgages; AIG insurance and financial services
subsidiaries invest in mortgage-backed securities and CDOs, in
which the underlying collateral is composed in whole or in part
of residential mortgage loans; and AIGFP provides credit
protection through credit default swaps on certain super senior
tranches of collateralized debt obligations (CDOs), a
significant majority of which have AAA underlying or subordinate
layers.
Disruption in the U.S. residential mortgage market may also
increase claim activity in the financial institution segment of
AIGs D&O and professional liability classes of
business. However, based on its review of information currently
available, AIG believes overall loss activity for the broader
D&O and professional liability classes is likely to remain
within or near the levels observed during the last several
years, which include losses related to stock options backdating
as well as to the U.S. residential mortgage market.
The operating results of AIGs consumer finance and
mortgage guaranty operations in the United States have been and
are likely
30 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
to continue to be adversely affected by the factors referred to
above. The downward cycle in the U.S. housing market is not
expected to improve until residential inventories return to a
more normal level and the mortgage credit market stabilizes. AIG
expects that this downward cycle will continue to adversely
affect UGCs operating results for the foreseeable future
and will result in a significant operating loss for UGC in 2008.
AIG also incurred substantial unrealized market valuation losses
in 2007, particularly in the fourth quarter, on AIGFPs
super senior credit default swap portfolio and substantial
other-than-temporary impairment charges on AIGs Insurance
and Financial Services available for sale securities. The
results from AIGs operations with exposure to the U.S.
residential mortgage market will be highly dependent on future
market conditions. Continuing market deterioration will cause
AIG to report additional unrealized market valuation losses and
impairment charges.
The ongoing effect of the downward cycle in the
U.S. housing market on AIGs other operations,
investment portfolio and overall consolidated financial
condition could be material if the market disruption continues
and expands beyond the residential mortgage markets, although
AIG seeks to mitigate the risks to its business by disciplined
underwriting and active risk management.
Globally, heightened regulatory scrutiny of financial services
companies in many jurisdictions has the potential to affect
future financial results through higher compliance costs. This
is particularly true in the United States, where Federal and
state authorities have commenced various investigations of the
financial services industry, and in Japan and Southeast Asia,
where financial institutions have received remediation orders
affecting consumer and policyholder rights.
In certain quarters, AIGs returns from partnerships and
other alternative investments were particularly strong, driven
by favorable equity market performance and credit conditions.
These returns may vary from period to period and AIG believes
that the particularly strong performance in certain prior
periods is not indicative of the returns to be expected from
this asset class in future periods.
AIG has recorded out of period adjustments in the last two years
due to the remediation of control deficiencies. As AIG continues
its remediation activities, AIG expects to continue to incur
expenses related to these activities and to record additional
out of period adjustments, although all known errors have been
corrected.
General Insurance
The commercial property and casualty insurance industry has
historically experienced cycles of price erosion followed by
rate strengthening as a result of catastrophes or other
significant losses that affect the overall capacity of the
industry to provide coverage. As premium rates decline, AIG will
generally experience higher current accident year loss ratios,
as the written premiums are earned. Despite industry price
erosion in commercial lines, AIG expects to continue to identify
profitable opportunities and build attractive new general
insurance businesses as a result of AIGs broad product
line and extensive distribution networks in the United States
and abroad.
Workers compensation remains under considerable pricing
pressure, as statutory rates continue to decline. Rates for
aviation, excess casualty, D&O and certain other lines of
insurance also continue to decline due to competitive pressures.
Rates for commercial property lines are also declining following
another year of relatively low catastrophe losses. Further price
erosion is expected in 2008 for the commercial lines; AIG seeks
to mitigate the decline by constantly seeking out profitable
opportunities across its diverse product lines and distribution
networks while maintaining a commitment to underwriting
discipline. There can be no assurance that price erosion will
not become more widespread or that AIGs profitability will
not deteriorate from current levels in major commercial lines.
In Foreign General Insurance, opportunities for growth exist in
the consumer lines due to increased demand in emerging markets
and the trend toward privatization of health insurance. In
commercial lines, the late 2007 acquisition of WüBa
enhances AIGs insurance offerings to small and medium
sized companies in Europe.
Through operations in Bahrain designed to comply with Islamic
law, AIG is tapping into a growing market. Islamic insurance,
called Takaful, is an alternative to conventional insurance
based on the concept of mutual assistance through pooling of
resources.
The Personal Lines automobile marketplace remains challenging
with rates declining steadily, increased spending on commissions
and advertising and favorable liability frequency trends
slowing, while severity in both liability and physical damage
are expected to increase. In addition to the deteriorating
underwriting cycle, a generally weakening economy leads to
slower growth in automobile insurance exposure units and values.
The Personal Lines business is focused on consolidation and
improving operational efficiencies to reduce costs, as well as
enhancing rating algorithms and creating a new aigdirect.com
brand, as a result of the 2007 combination of AIG Direct and
21st Century Insurance Group (21st Century) operations, to
support growth. The high net worth market continues to provide
opportunities for growth as a result of AIGs innovative
products and services specifically designed for that market.
Losses caused by catastrophes can fluctuate widely from year to
year, making comparisons of results more difficult. With respect
to catastrophe losses, AIG believes that it has taken
appropriate steps, such as careful exposure selection and
adequate reinsurance coverage, to reduce the effect of possible
future losses. The occurrence of one or more catastrophic events
of higher than anticipated frequency or severity, such as a
terrorist attack, earthquake or hurricane, that causes insured
losses, however, could have a material adverse effect on
AIGs results of operations, liquidity or financial
condition.
Life Insurance & Retirement Services
Disruption in the U.S. residential mortgage and credit markets
had a significant adverse effect on Life Insurance &
Retirement Services operating results in 2007 and will continue
to be a key factor in 2008 and beyond, especially in the
U.S.-based operations. The volatility in operating results will
be further magnified by the continuing market shift to variable
products with living benefits
AIG 2007
Form 10-K
31
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
and the adoption of FAS No. 157, Fair Value
Measurements (FAS 157). Life Insurance &
Retirement Services elected the fair value option under FAS
No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (FAS 159), for two products
beginning January 1, 2008 - a closed block of single
premium variable life business in Japan and an investment-linked
life insurance product sold principally in Asia. After adoption
on January 1, 2008, subsequent changes in fair value for
these products will be reported in operating income. The
adoption of FAS 159 for these products is expected to
result in a decrease to opening 2008 retained earnings of
approximately $600 million. For a description of these
accounting standards, see Note 1 to Consolidated Financial
Statements.
Life Insurance & Retirement Services uses
various derivative instruments to hedge cash flows related to
certain foreign currencies and fixed income related instruments.
Although these derivatives are purchased to mitigate the
economic effect of movements in foreign exchange rates and
interest rates, reported earnings may be volatile due to certain
hedges not qualifying for hedge accounting under FAS 133.
The change in fair value of derivative instruments is reported
in net realized capital gains (losses). Life Insurance &
Retirement Services engages in hedging programs that use
derivatives and other instruments to hedge the guaranteed living
benefits associated with variable products. Nevertheless,
short-term market movements will vary from long-term
expectations underlying the product pricing assumptions and may
cause volatility in reported earnings. The inclusion of risk
margins in the valuation of embedded derivatives under
FAS 157 will increase earnings volatility as differences
emerge between the change in fair value of embedded derivatives
and the change in fair value of hedging instruments. As variable
products with guaranteed living benefits continue to grow, the
reported earnings volatility associated with these programs will
likely increase.
Life Insurance & Retirement Services may
continue to experience volatility in net realized capital gains
(losses) due to other-than-temporary impairment writedowns of
the fair value of investments, primarily related to the
significant disruption in the residential mortgage and credit
markets and foreign currency related losses.
In Japan, given AIGs multi-channel,
multi-product strategy, AIG expects its Life Insurance &
Retirement Services operations to exceed industry growth in the
long term, although downward pressure on earnings growth rates
is anticipated due to the difficult market conditions. Market
conditions remain challenging as a result of increased
competition due to new market entrants, the increasing financial
strength of the domestic companies as the economy has recovered,
the effect of additional regulatory oversight, changes to the
tax deductibility of insurance premiums and the regulatory
claims review which has negatively affected consumer perceptions
of the industry. While the market shift to variable products
with living benefits will constrain fixed annuity sales, AIG is
positioned to grow annuity sales overall with its annuity
products designed to meet the needs of consumers in a range of
market conditions. In addition, AIG expects that the planned
integration of AIG Star Life and AIG Edison Life, which is
anticipated to be completed in 2009, will provide enhanced
distribution opportunities and operational efficiencies pending
regulatory approval.
Full deregulation of banks in Japan with
respect to insurance product sales became effective in December
2007, and AIG expects that it will be able to leverage its
existing bank relationships and innovative product expertise to
expand sales of both life and accident and health products in
2008. Deregulation of Japan Post is also expected to provide
additional growth opportunities during 2008 and beyond.
Although the Japanese Yen strengthened in the
fourth quarter of 2007, historical volatility of Japanese
Yen-dollar exchange rates has resulted in higher than normal
surrenders, and if that trend returns, an acceleration of the
amortization of deferred policy acquisition costs could occur.
Outside of Japan, ALICO continues to execute
its strategy of diversifying distribution channels and
developing new products. In particular, ALICOs Central and
Eastern European operations performed well and demographic and
economic conditions in these countries provide excellent
opportunities for continued growth.
AIGs operations in China continue to
expand, but AIG expects competition in China to remain strong.
AIGs success in China will depend on its ability to
execute its growth strategy. Key growth strategies in 2008
include expansion of sales and service centers, increased bank
distribution and entering into strategic alliances with key
partners. In Southeast Asia, AIGs operations are focused
on growing market share and profits in Singapore, Malaysia,
Thailand and Hong Kong with products focused on the life
savings-oriented consumer along with high net worth consumers
through the newly formed Wealth Management Group.
Domestically, AIG plans to continue expansion of its Life
Insurance & Retirement Services businesses through direct
marketing and independent agent distribution channels. The aging
population in the United States provides a growth opportunity
for a variety of products, including longevity, guaranteed
income and supplemental accident and health products. Certain
other demographic groups that have traditionally been
underserved provide additional growth opportunities. The
Domestic Life Insurance operations showed positive momentum in
the second half of 2007 resulting from new products and expanded
distribution. Domestic group life/health operations continue to
face competitors with greater scale in group benefits.
The fixed annuities business experienced a difficult year as
surrenders increased in 2007 due to both an increasing number of
policies coming out of their surrender charge period and
increased competition from bank deposit products. While
surrenders are expected to continue to be higher than normal,
the current interest rate environment should provide
opportunities for improvements in net flows during 2008. AIG
believes that improvement in net flows in the individual
variable annuity market will be driven by variable annuity
products with living benefits while the group retirement
products will continue to experience a shift from group
annuities to lower margin mutual fund products.
Since the beginning of 2000, the yield available on Taiwanese
10-year government
bonds dropped from approximately 6 percent to less than
3 percent at December 31, 2007. Yields on most
32 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
other invested assets have correspondingly dropped over the same
period. New regulatory capital requirements being developed in
Taiwan, combined with growth opportunities in bancassurance and
variable annuities with living benefits, may potentially create
a need for capital contributions in 2008 and beyond to support
local solvency requirements.
Financial Services
Within Financial Services, demand for International Lease
Finance Corporation (ILFCs) modern, fuel efficient
aircraft remains strong, and ILFC plans to increase its fleet by
purchasing 73 aircraft in 2008. However, ILFCs
margins may be adversely affected by increases in interest
rates. AIG Financial Products Corp. and AIG Trading Group Inc.
and their respective subsidiaries (collectively, AIGFP) expect
opportunities for growth across their product segments, but
AIGFP is a transaction-oriented business, and its operating
results will depend to a significant extent on actual
transaction flow, which is affected by market conditions and
other variables outside its control. AIG continues to explore
opportunities to expand its Consumer Finance operations into new
domestic and foreign markets.
The ongoing disruption in the U.S. residential mortgage and
credit markets and the recent downgrades of residential
mortgage-backed securities and CDO securities by rating agencies
continue to adversely affect the fair value of the super senior
credit default swap portfolio written by AIGFP. AIG expects that
continuing limitations on the availability of market observable
data will affect AIGs determinations of the fair value of
these derivatives, including by preventing AIG, for the
foreseeable future, from recognizing the beneficial effect of
the differential between credit spreads used to price a credit
default swap and spreads implied from prices of the CDO bonds
referenced by such swap. The fair value of these derivatives is
expected to continue to fluctuate, perhaps materially, in
response to changing market conditions, and AIGs estimates
of the value of AIGFPs super senior credit derivative
portfolio at future dates could therefore be materially
different from current estimates. AIG continues to believe that
the unrealized market valuation losses recorded on the AIGFP
super senior credit default swap portfolio are not indicative of
the losses AIGFP may realize over time. Under the terms of most
of these credit derivatives, losses to AIG would generally
result from the credit impairment of the referenced CDO bonds
that AIG would acquire in satisfying its swap obligations. Based
upon its most current analyses, AIG believes that any credit
impairment losses realized over time by AIGFP will not be
material to AIGs consolidated financial condition,
although it is possible that such realized losses could be
material to AIGs consolidated results of operations for an
individual reporting period. Except to the extent of any such
credit impairment losses, AIG expects the unrealized market
valuation losses to reverse over the remaining life of the super
senior credit default swap portfolio.
Approximately $379 billion of the $527 billion in
notional exposure on AIGFPs super senior credit default
swap portfolio as of December 31, 2007 were written to
facilitate regulatory capital relief for financial institutions
primarily in Europe. AIG expects that the majority of these
transactions will be terminated within the next 12 to 18 months
by AIGFPs counterparties as they implement models
compliant with the new Basel II Accord. As of February 26, 2008,
$54 billion in notional exposures have either been
terminated or are in the process of being terminated. AIGFP was
not required to make any payments as part of these terminations
and in certain cases was paid a fee upon termination. In light
of this experience to date and after other comprehensive
analyses, AIG did not recognize an unrealized market valuation
adjustment for this regulatory capital relief portfolio for the
year ended December 31, 2007. AIG will continue to assess
the valuation of this portfolio and monitor developments in the
marketplace. There can be no assurance that AIG will not
recognize unrealized market valuation losses from this portfolio
in future periods. These transactions contributed approximately
$210 million to AIGFPs revenues in 2007. If AIGFP is
not successful in replacing the revenues generated by these
transactions, AIGFPs operating results could be materially
adversely affected. For additional information on the AIGFP
super senior credit default swap portfolio, see Risk
Management Segment Risk Management
Financial Services Capital Markets Derivative
Transactions and Note 8 to Consolidated Financial
Statements.
In March 2007, the U.S. Treasury Department published proposed
regulations that, had they been adopted in 2007, would have had
the effect of limiting the ability of AIG to claim foreign tax
credits with respect to certain transactions entered into by
AIGFP. AIGFP is no longer a participant in those transactions
and therefore, the proposed regulations, if adopted in their
current form in 2008 or subsequent years, would not be expected
to have any material effect on AIGs ability to claim
foreign tax credits.
Effective January 1, 2008, AIGFP elected to apply the fair
value option to all eligible assets and liabilities, other than
equity method investments. The adoption of FAS 159 with
respect to elections made by AIGFP is currently being evaluated
for the effect of recently issued draft guidance by the FASB,
anticipated to be issued in final form in early 2008, and its
potential effect on AIGs consolidated financial statements.
Asset Management
In the Spread-Based Investment business, the Guaranteed
Investment Contract (GIC) portfolio continues to run off
and was replaced by the Matched Investment Program (MIP). The
results from domestic GICs and the MIP have been adversely
affected by the ongoing disruption in the credit markets, the
weakening U.S. dollar and declining interest rates. The MIP
is exposed to credit and market risk in the form of investments
in, among other asset classes, U.S. residential mortgage-backed
securities, asset-backed securities, commercial mortgage-backed
securities and single name corporate credit default swaps
entered into by the MIP. In addition, earnings volatility for
the MIP may arise from investments in bank loans that are held
for future collateralized loan obligations to be managed by AIG
Investments. The value of the investments may fluctuate
materially from period to period due to market movements, which
may result in realized and unrealized net losses. Although it is
difficult to estimate future movements in these markets,
effective hedges exist to mitigate the effect of
AIG 2007
Form 10-K
33
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
interest rate and foreign currency exchange rate disruptions.
Reported results may be volatile due to certain hedges not
qualifying for hedge accounting treatment.
In the Institutional Asset Management business, carried
interest, computed in accordance with each funds governing
agreement, is based on the investments performance over
the life of each fund. Unrealized carried interest is recognized
based on each funds performance as of the balance sheet
date. Future fund performance may negatively affect previously
recognized carried interest.
For a description of important factors that may affect the
operations and initiatives described above, see Item 1A.
Risk Factors.
Consolidated Results
The following table summarizes
AIGs consolidated revenues, income before income taxes,
minority interest and cumulative effect of accounting changes
and net income for the years ended December 31, 2007, 2006
and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Percentage Increase/(Decrease) | |
Years Ended December 31, |
|
|
|
| |
(in millions) |
|
2007 | |
|
2006 | |
|
2005 | |
|
2007 vs. 2006 | |
|
2006 vs. 2005 | |
| |
Total revenues
|
|
$ |
110,064 |
|
|
$ |
113,387 |
|
|
$ |
108,781 |
|
|
|
(3 |
)% |
|
|
4 |
% |
|
Income before income taxes, minority interest and cumulative
effect of accounting changes
|
|
|
8,943 |
|
|
|
21,687 |
|
|
|
15,213 |
|
|
|
(59 |
) |
|
|
43 |
|
|
Net income
|
|
$ |
6,200 |
|
|
$ |
14,048 |
|
|
$ |
10,477 |
|
|
|
(56 |
)% |
|
|
34 |
% |
|
Effect of Credit Market Events in the Fourth Quarter of
2007
AIG reported a net loss of $8.4 billion before tax
($5.2 billion after tax) in the fourth quarter of 2007 as a
result of severe credit market disruption. Contributing to this
loss was an $11.5 billion pre-tax charge for the unrealized
market valuation loss on AIGFPs super senior credit
default swap portfolio. Net realized capital losses totaled
$2.6 billion before tax in the fourth quarter of 2007,
arising primarily from other-than-temporary impairment charges
in AIGs investment portfolio, with an additional
$643 million impairment charge related to Financial
Services securities available for sale reported in other income.
Also contributing to the operating loss for the fourth quarter
was an operating loss of $348 million before tax from
Mortgage Guaranty from continued deterioration in the U.S.
residential housing market.
2007 and 2006 Comparison
AIGs consolidated revenues decreased in 2007 compared to
2006 as growth in Premiums and other considerations and Net
investment income in the General Insurance and Life
Insurance & Retirement Services segments were more than
offset by higher Net realized capital losses compared to 2006
and an unrealized market valuation loss of $11.5 billion on
AIGFPs super senior credit default swap portfolio recorded
in other income. Net realized capital losses of
$3.6 billion in 2007 included other-than-temporary
impairment charges of the fair value of investments of
$4.1 billion, primarily related to the significant
disruption in the residential mortgage and credit markets, and
foreign currency related losses of $500 million. Similarly,
AIG recorded in other income, other-than-temporary impairment
charges of $643 million related to its Financial Services
securities available for sale reported in other income. Total
other-than-temporary impairment charges in 2006 were
$944 million. See Invested Assets
Other-than-temporary impairments herein.
Income before income taxes, minority interest and cumulative
effect of accounting changes declined in 2007 due to the losses
described above, partially offset by the favorable effects in
2007 of the application of hedge accounting under Statement of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (FAS
133). In 2007, AIGFP applied hedge accounting to certain of its
interest rate swaps and foreign currency forward contracts
hedging its investments and borrowings. As a result, AIGFP
recognized in earnings the change in the fair value of the
hedged items attributable to the hedged risks, substantially
offsetting the gains and losses on the derivatives designated as
hedges. In 2006, AIGFP did not apply hedge accounting to any of
its assets and liabilities.
2006 and 2005 Comparison
The increase in revenues in 2006 compared to 2005 was primarily
attributable to the growth in Premiums and other considerations
and Net investment income in the General Insurance and Life
Insurance & Retirement Services segments. Revenues in the
Financial Services segment declined as a result of the effect of
hedging activities for AIGFP that did not qualify for hedge
accounting treatment under FAS 133, decreasing revenues by
$1.8 billion in 2006 and increasing revenues by
$2.0 billion in 2005.
Income before income taxes, minority interest and cumulative
effect of accounting changes increased in 2006 compared to 2005,
reflecting higher General Insurance and Life Insurance &
Retirement Services operating income. These increases were
partially offset by lower Financial Services operating income
reflecting the effects of hedging activities that did not
qualify for hedge accounting treatment under FAS 133.
Results in 2005 reflected the negative effect of
$3.3 billion (pre-tax) in catastrophe-related losses
incurred that year. Net income in 2005 also reflected the
charges related to regulatory settlements, as described in
Item 3. Legal Proceedings, and the fourth quarter
34 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
charge resulting from the annual review of General Insurance
loss and loss adjustment reserves.
Remediation
Throughout 2007 and 2006, as part of its continuing remediation
efforts, AIG recorded out of period adjustments which are
detailed below. In addition, certain revisions were made to the
Consolidated Statement of Cash Flows.
2007 Adjustments
During 2007, out of period adjustments collectively decreased
pre-tax operating income by $372 million ($399 million
after tax). The adjustments were comprised of a charge of
$380 million ($247 million after tax) to reverse net
gains on transfers of investment securities among legal entities
consolidated within AIGFP and a corresponding increase to
accumulated other comprehensive income (loss); $156 million
of additional income tax expense related to the successful
remediation of the material weakness in internal control over
income tax accounting; $142 million ($92 million after
tax) of additional expense related to insurance reserves and DAC
in connection with improvements in internal control over
financial reporting and consolidation processes;
$42 million ($29 million after tax) of additional
expense, primarily related to other remediation activities; and
$192 million ($125 million after tax) of net realized capital
gains related to foreign exchange.
2006 Adjustments
During 2006, out of period adjustments collectively increased
pre-tax operating income by $313 million ($65 million
after tax). The adjustments were comprised of $773 million
($428 million after tax) of additional investment income
related to the accounting for certain interests in unit
investment trusts (UCITS); $300 million ($145 million
after tax) of charges primarily related to the remediation of
the material weakness in internal control over the accounting
for certain derivative transactions under FAS 133;
$58 million of additional income tax expense related to the
remediation of the material weakness in internal control over
income tax accounting; $85 million ($55 million after
tax) of interest income related to interest earned on deposit
contracts; $61 million (before and after tax) of expenses
related to the Starr International Company, Inc. (SICO)
Deferred Compensation Profit Participation Plans (SICO Plans);
$59 million ($38 million after tax) of expenses
related to deferred advertising costs; and $125 million
($116 million after tax) of additional expense, primarily
related to other remediation activities.
Results in 2006 were also negatively affected by a one-time
charge relating to the C.V. Starr & Co., Inc. (Starr)
tender offer ($54 million before and after tax) and an
additional allowance for losses in AIG Credit Card Company
(Taiwan) ($88 million before and after tax), both of which
were recorded in first quarter of 2006.
Cash Flows
As part of its ongoing remediation activities, AIG has made
certain revisions to the Consolidated Statement of Cash Flows,
primarily relating to the effect of reclassifying certain
policyholders account balances, the elimination of certain
intercompany balances and revisions related to separate account
assets. Accordingly, AIG revised the previous periods presented
to conform to the revised presentation. See Note 24 to
Consolidated Financial Statements for further information.
Income Taxes
The effective tax rate declined from 30.1 percent in 2006
to 16.3 percent in 2007, primarily due to the unrealized
market valuation losses on AIGFPs super senior credit
default swap portfolio and other-than-temporary impairment
charges. These losses, which are taxed at a U.S. tax rate of 35
percent and are included in the calculation of income tax
expense, reduced AIGs overall effective tax rate. In
addition, other tax benefits, including tax exempt interest and
effects of foreign operations are proportionately larger in 2007
than in 2006 due to the decline in pre-tax income in 2007.
Furthermore, tax deductions taken in 2007 for SICO compensation
plans for which the expense had been recognized in prior years
also reduced the effective tax rate in 2007. AIG has now
completed its claims for tax refunds attributable to adjustments
made for 2004 and prior financial statements. Refund claims for
tax years 1991-1996 were filed with the Internal Revenue Service
in June 2007. Claims for tax years 1997-2004 will be filed
before September 2008.
AIG expects to receive cash tax benefits in 2008 as a result of
the unrealized market valuation losses on AIGFPs super
senior credit default swap portfolio, whether AIG is in a
regular or alternative minimum tax position.
AIG 2007
Form 10-K
35
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
The following table summarizes the net
effect of
catastrophe-related
losses for the years ended December 31, 2007 and 2005.
There were no significant catastrophe-related losses for the
year ended December 31, 2006.
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
2007 | |
|
2005 | |
| |
Pretax
|
|
$ |
276 |
|
|
$ |
3,280 |
* |
|
Net of tax and minority interest
|
|
$ |
177 |
|
|
|
2,109 |
|
|
|
|
* |
Includes $312 million in catastrophe-related losses from
partially owned companies. |
Segment Results
The following table summarizes
AIGs operations by reporting segment for the years ended
December 31, 2007, 2006 and 2005. See also Note 2 to
Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Percentage Increase/(Decrease) | |
|
|
| |
(in millions) |
|
2007 | |
|
2006(a) | |
|
2005(a) | |
|
2007 vs. 2006 | |
|
2006 vs. 2005 | |
| |
Revenues(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Insurance(c)
|
|
$ |
51,708 |
|
|
$ |
49,206 |
|
|
$ |
45,174 |
|
|
|
5 |
% |
|
|
9 |
% |
|
Life Insurance & Retirement
Services(c)(d)
|
|
|
53,570 |
|
|
|
50,878 |
|
|
|
48,020 |
|
|
|
5 |
|
|
|
6 |
|
|
Financial
Services(e)(f)
|
|
|
(1,309 |
) |
|
|
7,777 |
|
|
|
10,677 |
|
|
|
|
|
|
|
(27 |
) |
|
Asset Management
|
|
|
5,625 |
|
|
|
4,543 |
|
|
|
4,582 |
|
|
|
24 |
|
|
|
(1 |
) |
|
Other
|
|
|
457 |
|
|
|
483 |
|
|
|
344 |
|
|
|
(5 |
) |
|
|
40 |
|
|
Consolidation and eliminations
|
|
|
13 |
|
|
|
500 |
|
|
|
(16 |
) |
|
|
(97 |
) |
|
|
|
|
|
Total
|
|
$ |
110,064 |
|
|
$ |
113,387 |
|
|
$ |
108,781 |
|
|
|
(3 |
)% |
|
|
4 |
% |
|
Operating Income
(loss)(b)(g):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Insurance(c)
|
|
$ |
10,526 |
|
|
$ |
10,412 |
|
|
$ |
2,315 |
|
|
|
1 |
% |
|
|
350 |
% |
|
Life Insurance & Retirement
Services(c)(d)
|
|
|
8,186 |
|
|
|
10,121 |
|
|
|
8,965 |
|
|
|
(19 |
) |
|
|
13 |
|
|
Financial
Services(e)(f)
|
|
|
(9,515 |
) |
|
|
383 |
|
|
|
4,424 |
|
|
|
|
|
|
|
(91 |
) |
|
Asset Management
|
|
|
1,164 |
|
|
|
1,538 |
|
|
|
1,963 |
|
|
|
(24 |
) |
|
|
(22 |
) |
|
Other(h)
|
|
|
(2,140 |
) |
|
|
(1,435 |
) |
|
|
(2,765 |
) |
|
|
|
|
|
|
|
|
|
Consolidation and eliminations
|
|
|
722 |
|
|
|
668 |
|
|
|
311 |
|
|
|
8 |
|
|
|
115 |
|
|
Total
|
|
$ |
8,943 |
|
|
$ |
21,687 |
|
|
$ |
15,213 |
|
|
|
(59 |
)% |
|
|
43 |
% |
|
|
|
(a) |
Certain reclassifications have been made to prior period
amounts to conform to the current period presentation. |
(b) |
In 2007, 2006 and 2005, includes other-than-temporary
impairment charges of $4.7 billion, $944 million and
$598 million, respectively. Also includes gains (losses)
from hedging activities that did not qualify for hedge
accounting treatment under FAS 133, including the related
foreign exchange gains and losses. In 2007, 2006, and 2005,
respectively, the effect was $(1.44) billion,
$(1.87) billion and $2.02 billion in both revenues and
operating income. These amounts result primarily from interest
rate and foreign currency derivatives that are effective
economic hedges of investments and borrowings. These gains
(losses) in 2007 include a $380 million out of period
charge to reverse net gains recognized on transfers of available
for sale securities among legal entities consolidated within
AIGFP. The gains (losses) in 2006 include an out of period
charge of $223 million related to the remediation of the
material weakness in internal control over the accounting for
certain derivative transactions under FAS 133. |
|
|
(c) |
In 2006, includes the effect of out of period adjustments
related to the accounting for UCITS. In 2006, the effect was an
increase of $490 million in both revenues and operating
income for General Insurance and an increase of
$240 million and $169 million in revenues and
operating income, respectively, for Life Insurance &
Retirement Services. |
|
(d) |
In 2007, 2006 and 2005, includes other-than-temporary
impairment charges of $2.8 billion, $641 million and
$425 million, respectively, for Life Insurance &
Retirement Services. |
|
(e) |
Includes gains (losses) from hedging activities that did not
qualify for hedge accounting treatment under FAS 133,
including the related foreign exchange gains and losses. In
2007, 2006 and 2005, respectively, the effect was
$104 million, $(1.97) billion, and $2.19 billion
in both revenues and operating income. These amounts result
primarily from interest rate and foreign currency derivatives
that are effective economic hedges of investments and
borrowings. The years ended December 31, 2007 and 2006
include out of period charges of $380 million and
$223 million, respectively, as discussed in
footnote (b). In the first quarter of 2007, AIG began
applying hedge accounting for certain transactions, primarily in
its Capital Markets operations. In the second quarter of 2007,
AGF and ILFC began applying hedge accounting to most of
their derivatives hedging interest rate and foreign exchange
risks associated with their floating rate and foreign currency
denominated borrowings. |
|
|
(f) |
In 2007, both revenues and operating income (loss) include an
unrealized market valuation loss of $11.5 billion on
AIGFPs super senior credit default swap portfolio and an
other-than-temporary impairment charge of $643 million on
AIGFPs available for sale investment securities recorded
in other income. |
|
|
(g) |
Includes current year catastrophe-related losses of
$276 million in 2007 and $3.28 billion in 2005. There
were no significant catastrophe-related losses in 2006. |
|
(h) |
In 2005, includes current year catastrophe-related losses
from unconsolidated entities of $312 million. |
36 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
General Insurance
AIGs General Insurance operations provide property and
casualty products and services throughout the world. Revenues in
the General Insurance segment represent net premiums earned, net
investment income and net realized capital gains (losses). The
increase in General Insurance operating income in 2007 compared
to 2006 was driven by strength in the Domestic Brokerage Group
(DBG), partially offset by operating losses from the Mortgage
Guaranty business and a decrease in Personal Lines operating
income.
Life Insurance & Retirement Services
AIGs Life Insurance & Retirement Services
operations provide insurance, financial and investment-oriented
products throughout the world. Revenues in the Life
Insurance & Retirement Services operations represent
premiums and other considerations, net investment income and net
realized capital gains (losses). Foreign operations contributed
approximately 76 percent, 68 percent and
59 percent of AIGs Life Insurance &
Retirement Services operating income in 2007, 2006 and 2005,
respectively.
Life Insurance & Retirement Services operating income
declined in 2007 compared to 2006 primarily due to higher net
realized capital losses in 2007. In addition, operating income
in 2007 was negatively affected by charges related to
remediation activity in Asia; an industry wide regulatory claims
review in Japan; the effect of Statement of
Position 05-1,
Accounting by Insurance Enterprises for Deferred
Acquisition Costs in Connection with Modifications or Exchanges
of Insurance Contracts
(SOP 05-1), which
was adopted in 2007; and investment losses where a FAS 115
trading election was made (trading account).
Financial Services
AIGs Financial Services subsidiaries engage in diversified
activities including aircraft and equipment leasing, capital
markets, consumer finance and insurance premium finance.
Revenues in the Financial Services segment include interest,
realized and unrealized gains and losses, including the
unrealized market valuation losses on AIGFPs super senior
credit default swap portfolio, lease and finance charges.
Financial Services reported an operating loss in 2007 compared
to operating income in 2006, primarily due to an unrealized
market valuation loss of $11.5 billion on AIGFPs
super senior credit default swap portfolio, an
other-than-temporary impairment charge of $643 million on
AIGFPs investment portfolio of CDOs of asset-backed
securities (ABS) and a decline in operating income for AGF.
AGFs operating income declined in 2007 compared to 2006
due to reduced residential mortgage origination volume, lower
revenues from its mortgage banking activities and increases in
the provision for finance receivable losses. In 2007, AGFs
mortgage banking operations recorded a pre-tax charge of
$178 million, representing the estimated cost of
implementing the Supervisory Agreement entered into with the
Office of Thrift Supervision (OTS), which is discussed in the
Consumer Finance results of operations section.
Operating income for ILFC increased in 2007 compared to 2006,
driven to a large extent by a larger aircraft fleet, higher
lease rates and higher utilization.
In 2007, AIGFP began applying hedge accounting under
FAS 133 to certain of its interest rate swaps and foreign
currency forward contracts that hedge its investments and
borrowings and AGF and ILFC began applying hedge accounting to
most of their derivatives that hedge floating rate and foreign
currency denominated borrowings. Prior to 2007, hedge accounting
was not applied to any of AIGs derivatives and related
assets and liabilities. Accordingly, revenues and operating
income were exposed to volatility resulting from differences in
the timing of revenue recognition between the derivatives and
the hedged assets and liabilities.
Asset Management
AIGs Asset Management operations include institutional and
retail asset management, broker-dealer services and spread-based
investment businesses. Revenues in the Asset Management segment
represent investment income with respect to spread-based
products and management, advisory and incentive fees.
Asset Management operating income decreased in 2007 compared to
2006, due to realized capital losses on interest rate and
foreign currency hedge positions not qualifying for hedge
accounting and other-than-temporary impairment charges on fixed
income investments due primarily to disruptions in the U.S.
credit markets. These decreases were partially offset by higher
partnership income from the Spread-Based Investment business,
increased gains on real estate investments and a gain on the
sale of a portion of AIGs investment in Blackstone Group,
L.P. in connection with its initial public offering.
Capital Resources
At December 31, 2007, AIG had total consolidated
shareholders equity of $95.8 billion and total
consolidated borrowings of $176.0 billion. At that date,
$67.9 billion of such borrowings were subsidiary borrowings
not guaranteed by AIG.
In 2007, AIG issued an aggregate of $5.6 billion of junior
subordinated debentures in five series of securities.
Substantially all of the proceeds from these sales, net of
expenses, were used to repurchase shares of AIGs common
stock. A total of 76,361,209 shares were repurchased during
2007.
In February 2007, AIGs Board of Directors increased
AIGs share repurchase program by authorizing the
repurchase of shares with an aggregate purchase price of
$8 billion. In November 2007, AIGs Board of Directors
authorized the repurchase of an additional $8 billion in
common stock. At February 15, 2008, $10.25 billion was
available for repurchase under the aggregate authorization. AIG
did not purchase shares of its common stock under its common
stock repurchase authorization during 2006. AIG does not expect
to purchase additional shares under its share repurchase program
for the foreseeable future, other than pursuant to commitments
that existed at December 31, 2007.
AIG 2007
Form 10-K
37
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
Liquidity
AIG manages liquidity at both the subsidiary and parent company
levels. At December 31, 2007, AIGs consolidated
invested assets, primarily held by its subsidiaries, included
$65.6 billion in cash and short-term investments.
Consolidated net cash provided from operating activities in 2007
amounted to $35.2 billion. At both the subsidiary and
parent company level, liquidity management activities are
intended to preserve and enhance funding stability, flexibility,
and diversity through a wide range of potential operating
environments and market conditions. AIGs primary sources
of cash flow are dividends and other payments from its regulated
and unregulated subsidiaries, as well as issuances of debt
securities. Primary uses of cash flow are for debt service,
subsidiary funding, shareholder dividend payments and common
stock repurchases. As a result of disruption in the credit
markets during 2007, AIG took steps to enhance the liquidity of
its portfolios, including increasing the liquidity of the
collateral in the securities lending program. Management
believes that AIGs liquid assets, cash provided by
operations and access to the capital markets will enable it to
meet its anticipated cash requirements, including the funding of
increased dividends under AIGs new dividend policy.
Critical Accounting Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires the application of accounting policies that
often involve a significant degree of judgment. AIG considers
that its accounting policies that are most dependent on the
application of estimates and assumptions, and therefore viewed
as critical accounting estimates, to be those relating to
reserves for losses and loss expenses, future policy benefits
for life and accident and health contracts, recoverability of
DAC, estimated gross profits for investment-oriented products,
fair value measurements of certain financial assets and
liabilities, other-than-temporary impairments, the allowance for
finance receivable losses and flight equipment recoverability.
These accounting estimates require the use of assumptions about
matters, some of which are highly uncertain at the time of
estimation. To the extent actual experience differs from the
assumptions used, AIGs results of operations would be
directly affected.
Throughout this Managements Discussion and Analysis of
Financial Condition and Results of Operations, AIGs
critical accounting estimates are discussed in detail. The major
categories for which assumptions are developed and used to
establish each critical accounting estimate are highlighted
below.
Reserves for Losses and Loss Expenses
(General Insurance):
|
|
|
Loss trend factors: used to establish expected loss
ratios for subsequent accident years based on premium rate
adequacy and the projected loss ratio with respect to prior
accident years. |
|
Expected loss ratios for the latest accident year: in
this case, accident year 2007 for the year-end 2007 loss reserve
analysis. For low-frequency, high-severity classes such as
excess casualty, expected loss ratios generally are utilized for
at least the three most recent accident years. |
|
Loss development factors: used to project the
reported losses for each accident year to an ultimate amount. |
|
Reinsurance recoverable on unpaid losses: the expected
recoveries from reinsurers on losses that have not yet been
reported and/or settled. |
Future Policy Benefits for Life and
Accident and Health Contracts (Life Insurance &
Retirement Services):
|
|
|
Interest rates: which vary by geographical region, year
of issuance and products. |
|
Mortality, morbidity and surrender rates: based upon
actual experience by geographical region modified to allow for
variation in policy form, risk classification and distribution
channel. |
Deferred Policy Acquisition Costs (Life
Insurance & Retirement Services):
|
|
|
Recoverability: based on current and future expected
profitability, which is affected by interest rates, foreign
exchange rates, mortality experience and policy persistency. |
Deferred Policy Acquisition Costs (General
Insurance):
|
|
|
Recoverability: based upon the current terms and
profitability of the underlying insurance contracts. |
Estimated Gross Profits (Life
Insurance & Retirement Services):
|
|
|
Estimated gross profits: to be realized over the
estimated duration of the contracts (investment-oriented
products) affect the carrying value of DAC, unearned revenue
liability and associated amortization patterns under
FAS 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments
(FAS 97); and Sales Inducement Assets under American
Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 03-1, Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long- Duration
Contracts and for Separate Accounts
(SOP 03-1).
Estimated gross profits include investment income and gains and
losses on investments less required interest, actual mortality
and other expenses. |
Fair Value Measurements of Financial
Instruments:
AIG measures financial instruments in its trading and available
for sale securities portfolios, together with securities sold
but not yet purchased, certain hybrid financial instruments, and
derivative assets and liabilities at fair value. The fair value
of a financial instrument is the amount that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The degree of judgment used in measuring the fair value of
financial instruments generally correlates with the level of
pricing observability. Financial instruments with quoted prices
in active markets generally have more pricing observability and
less judgment is used in measuring fair value. Conversely,
financial instruments traded in other than active markets or
that do not have quoted prices have less observability and are
measured at fair value using valuation models or other pricing
techniques that
38 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
require more judgment. Pricing observability is affected by a
number of factors, including the type of financial instrument,
whether the financial instrument is new to the market and not
yet established, the characteristics specific to the transaction
and general market conditions.
AIG maximizes the use of observable inputs and minimizes the use
of unobservable inputs when measuring fair value. AIG obtains
market price data to value financial instruments whenever such
information is available. Market price data generally is
obtained from market exchanges or dealer quotations. The types
of instruments valued based on market price data include G-7
government and agency securities, equities listed in active
markets, investments in publicly traded mutual funds with quoted
market prices and listed derivatives.
AIG estimates the fair value of fixed income instruments not
traded in active markets by referring to traded securities with
similar attributes and using a matrix pricing methodology. This
methodology considers such factors as the issuers
industry, the securitys rating and tenor, its coupon rate,
its position in the capital structure of the issuer, and other
relevant factors. The types of fixed income instruments not
traded in active markets include
non-G-7 government
securities, municipal bonds, certain hybrid financial
instruments, most investment-grade and high-yield corporate
bonds, and most mortgage- and asset-backed products.
AIG initially estimates the fair value of equity instruments not
traded in active markets by reference to the transaction price.
This valuation is adjusted only when changes to inputs and
assumptions are corroborated by evidence such as transactions in
similar instruments, completed or pending third-party
transactions in the underlying investment or comparable
entities, subsequent rounds of financing, recapitalizations and
other transactions across the capital structure, offerings in
the equity capital markets, and changes in financial ratios or
cash flows.
For equity and fixed income instruments that are not traded in
active markets or that are subject to transfer restrictions,
valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments generally are based on
available market evidence. In the absence of such evidence,
managements best estimate is used.
AIG obtains the fair value of its investments in limited
partnerships and hedge funds from information provided by the
general partner or manager of the investments, the financial
statements of which generally are audited annually.
Derivative assets and liabilities can be exchange-traded or
traded over the counter (OTC). AIG generally values
exchange-traded derivatives within portfolios using models that
calibrate to market clearing levels and eliminate timing
differences between the closing price of the exchange-traded
derivatives and their underlying instruments.
OTC derivatives are valued using market transactions and other
market evidence whenever possible, including market-based inputs
to models, model calibration to market clearing transactions,
broker or dealer quotations or alternative pricing sources with
reasonable levels of price transparency. When models are used,
the selection of a particular model to value an OTC derivative
depends on the contractual terms of, and specific risks inherent
in, the instrument as well as the availability of pricing
information in the market. AIG generally uses similar models to
value similar instruments. Valuation models require a variety of
inputs, including contractual terms, market prices and rates,
yield curves, credit curves, measures of volatility, prepayment
rates and correlations of such inputs. For OTC derivatives that
trade in liquid markets, such as generic forwards, swaps and
options, model inputs can generally be verified and model
selection does not involve significant management judgment.
Certain OTC derivatives trade in less liquid markets with
limited pricing information, and the determination of fair value
for these derivatives is inherently more difficult. When AIG
does not have corroborating market evidence to support
significant model inputs and cannot verify the model to market
transactions, transaction price is initially used as the best
estimate of fair value. Accordingly, when a pricing model is
used to value such an instrument, the model is adjusted so that
the model value at inception equals the transaction price.
Subsequent to initial recognition, AIG updates valuation inputs
when corroborated by evidence such as similar market
transactions, third-party pricing services and/or broker or
dealer quotations, or other empirical market data. When
appropriate, valuations are adjusted for various factors such as
liquidity, bid/offer spreads and credit considerations. Such
adjustments are generally based on available market evidence. In
the absence of such evidence, managements best estimate is
used.
AIGFP employs a modified version of the Binomial Expansion
Technique (BET) model to value its super senior credit
default swap portfolio, including maturity-shortening puts that
allow the holders of the notes issued by certain multi-sector
CDOs to treat the notes as short-term eligible
2a-7 investments under
the Investment Company Act of 1940
(2a-7 Puts). The BET
model utilizes default probabilities derived from credit spreads
implied from market prices for the individual securities
included in the underlying collateral pools securing the CDOs,
as well as diversity scores, weighted average lives, recovery
rates and discount rates. The determination of some of these
inputs requires the use of judgment and estimates, particularly
in the absence of market observable data. AIGFP also employs a
Monte Carlo simulation to assist in quantifying the effect on
the valuation of the CDOs of the unique aspects of the
CDOs structure such as triggers that divert cash flows to
the most senior part of the capital structure. In the final
determination of fair value, AIGFP also considers the price
estimates for the super senior CDO notes provided by third
parties, including counterparties to these transactions, and
makes adjustments when deemed necessary. See also Risk
Management, Segment Risk Management, Financial
Services Capital Markets Derivative Transactions and
Note 8 to Consolidated Financial Statements.
Other-Than-Temporary Impairments:
AIG evaluates its investments for impairment such that a
security is considered a candidate for other-than-temporary
impairment if it meets any of the following criteria:
|
|
|
Trading at a significant (25 percent or more) discount to
par, amortized cost (if lower) or cost for an extended period of
time (nine consecutive months or longer); |
AIG 2007
Form 10-K
39
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
|
|
|
The occurrence of a discrete credit event resulting in
(i) the issuer defaulting on a material outstanding
obligation; (ii) the issuer seeking protection from
creditors under the bankruptcy laws or any similar laws intended
for court supervised reorganization of insolvent enterprises; or
(iii) the issuer proposing a voluntary reorganization
pursuant to which creditors are asked to exchange their claims
for cash or securities having a fair value substantially lower
than par value of their claims; or |
|
AIG may not realize a full recovery on its investment,
regardless of the occurrence of one of the foregoing events. |
The above criteria also consider circumstances of a rapid and
severe market valuation decline, such as that experienced in
current credit markets, in which AIG could not reasonably assert
that the recovery period would be temporary (severity losses).
In light of the recent significant disruption in the
U.S. residential mortgage and credit markets, particularly
in the fourth quarter, AIG has recognized an
other-than-temporary impairment charge (severity loss) of
$2.2 billion (including $643 million related to
AIGFPs available for sale investment securities recorded
in other income), primarily from certain residential
mortgage-backed
securities and other structured securities. Even while retaining
their investment grade ratings, such securities were priced at a
severe discount to cost. Notwithstanding AIGs intent and
ability to hold such securities indefinitely, and despite
structures which indicate that a substantial amount of the
securities should continue to perform in accordance with their
original terms, AIG concluded that it could not reasonably
assert that the recovery period would be temporary.
At each balance sheet date, AIG evaluates its securities
holdings with unrealized losses. When AIG does not intend to
hold such securities until they have recovered their cost basis,
AIG records the unrealized loss in income. If a loss is
recognized from a sale subsequent to a balance sheet date
pursuant to changes in circumstances, the loss is recognized in
the period in which the intent to hold the securities to
recovery no longer existed.
In periods subsequent to the recognition of an
other-than-temporary impairment charge for fixed maturity
securities, which is not credit or foreign exchange related, AIG
generally accretes into income the discount or amortizes the
reduced premium resulting from the reduction in cost basis over
the remaining life of the security.
Allowance for Finance Receivable Losses
(Financial Services):
|
|
|
Historical defaults and delinquency
experience: utilizing factors, such as delinquency
ratio, allowance ratio, charge-off ratio, and charge-off
coverage. |
|
Portfolio characteristics: portfolio composition and
consideration of the recent changes to underwriting criteria and
portfolio seasoning. |
|
External factors: consideration of current economic
conditions, including levels of unemployment and personal
bankruptcies. |
|
Migration analysis: empirical technique measuring
historical movement of similar finance receivables through
various levels of repayment, delinquency, and loss categories to
existing finance receivable pools. |
Flight Equipment Recoverability (Financial
Services):
|
|
|
Expected undiscounted future net cash flows: based upon
current lease rates, projected future lease rates and estimated
terminal values of each aircraft based on
third-party information. |
Operating Review
General Insurance Operations
AIGs General Insurance subsidiaries write substantially
all lines of commercial property and casualty insurance and
various personal lines both domestically and abroad.
As previously noted, AIG believes it should present and discuss
its financial information in a manner most meaningful to its
financial statement users. Accordingly, in its General Insurance
business, AIG uses certain regulatory measures, where AIG has
determined these measurements to be useful and meaningful.
A critical discipline of a successful general insurance business
is the objective to produce profit from underwriting activities
taking into account costs of capital. AIG views underwriting
results to be critical in the overall evaluation of performance.
Statutory underwriting profit is derived by reducing net
premiums earned by net losses and loss expenses incurred and net
expenses incurred. Statutory accounting generally requires
immediate expense recognition and ignores the matching of
revenues and expenses as required by GAAP. That is, for
statutory purposes, expenses (including acquisition costs) are
recognized immediately, not over the same period that the
revenues are earned. Thus, statutory expenses exclude changes in
DAC.
GAAP provides for the recognition of certain acquisition
expenses at the same time revenues are earned, the accounting
principle of matching. Therefore, acquisition expenses are
deferred and amortized over the period the related net premiums
written are earned. DAC is reviewed for recoverability, and such
review requires management judgment. The most comparable GAAP
measure to statutory underwriting profit is income before income
taxes, minority interest and cumulative effect of an accounting
change. A table reconciling statutory underwriting profit to
income before income taxes, minority interest and cumulative
effect of an accounting change is contained in footnote
(d) to the following table. See also Critical Accounting
Estimates herein and Notes 1 and 6 to Consolidated
Financial Statements.
AIG, along with most general insurance companies, uses the loss
ratio, the expense ratio and the combined ratio as measures of
underwriting performance. The loss ratio is the sum of losses
and loss expenses incurred divided by net premiums earned. The
expense ratio is statutory underwriting expenses divided by net
premiums written. These ratios are relative measurements that
describe, for every $100 of net premiums earned or written, the
cost of losses and statutory expenses, respectively. The
combined ratio is the sum of the loss ratio and the expense
ratio. The combined ratio presents the total cost per $100 of
premium production. A combined ratio below 100 demonstrates
underwriting profit; a combined ratio above 100 demonstrates
underwriting loss.
40 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
Net premiums written are initially deferred and earned based
upon the terms of the underlying policies. The net unearned
premium reserve constitutes deferred revenues which are
generally earned ratably over the policy period. Thus, the net
unearned premium reserve is not fully recognized in income as
net premiums earned until the end of the policy period.
The underwriting environment varies from country to country, as
does the degree of litigation activity. Regulation, product type
and competition have a direct effect on pricing and consequently
on profitability as reflected in underwriting profit and
statutory general insurance ratios.
General Insurance Results
General Insurance operating income is
comprised of statutory underwriting profit (loss), changes in
DAC, net investment income and net realized capital gains and
losses. Operating income, as well as net premiums written, net
premiums earned, net investment income and net realized capital
gains (losses) and statutory ratios in 2007, 2006 and 2005 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Percentage Increase/(Decrease) | |
|
|
| |
(in millions, except ratios) |
|
2007 | |
|
2006 | |
|
2005 | |
|
2007 vs. 2006 | |
|
2006 vs. 2005 | |
| |
Net premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
24,112 |
|
|
$ |
24,312 |
|
|
$ |
23,104 |
|
|
|
(1 |
)% |
|
|
5 |
% |
|
|
Transatlantic
|
|
|
3,953 |
|
|
|
3,633 |
|
|
|
3,466 |
|
|
|
9 |
|
|
|
5 |
|
|
|
Personal Lines
|
|
|
4,808 |
|
|
|
4,654 |
|
|
|
4,653 |
|
|
|
3 |
|
|
|
|
|
|
|
Mortgage Guaranty
|
|
|
1,143 |
|
|
|
866 |
|
|
|
628 |
|
|
|
32 |
|
|
|
38 |
|
|
Foreign General Insurance
|
|
|
13,051 |
|
|
|
11,401 |
|
|
|
10,021 |
|
|
|
14 |
|
|
|
14 |
|
|
Total
|
|
$ |
47,067 |
|
|
$ |
44,866 |
|
|
$ |
41,872 |
|
|
|
5 |
% |
|
|
7 |
% |
|
Net premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
23,849 |
|
|
$ |
23,910 |
|
|
$ |
22,567 |
|
|
|
|
% |
|
|
6 |
% |
|
|
Transatlantic
|
|
|
3,903 |
|
|
|
3,604 |
|
|
|
3,385 |
|
|
|
8 |
|
|
|
6 |
|
|
|
Personal Lines
|
|
|
4,695 |
|
|
|
4,645 |
|
|
|
4,634 |
|
|
|
1 |
|
|
|
|
|
|
|
Mortgage Guaranty
|
|
|
886 |
|
|
|
740 |
|
|
|
533 |
|
|
|
20 |
|
|
|
39 |
|
|
Foreign General Insurance
|
|
|
12,349 |
|
|
|
10,552 |
|
|
|
9,690 |
|
|
|
17 |
|
|
|
9 |
|
|
Total
|
|
$ |
45,682 |
|
|
$ |
43,451 |
|
|
$ |
40,809 |
|
|
|
5 |
% |
|
|
6 |
% |
|
Net investment
income(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
3,879 |
|
|
$ |
3,411 |
|
|
$ |
2,403 |
|
|
|
14 |
% |
|
|
42 |
% |
|
|
Transatlantic
|
|
|
470 |
|
|
|
435 |
|
|
|
343 |
|
|
|
8 |
|
|
|
27 |
|
|
|
Personal Lines
|
|
|
231 |
|
|
|
225 |
|
|
|
217 |
|
|
|
3 |
|
|
|
4 |
|
|
|
Mortgage Guaranty
|
|
|
158 |
|
|
|
140 |
|
|
|
123 |
|
|
|
13 |
|
|
|
14 |
|
|
|
Intercompany adjustments and eliminations net
|
|
|
6 |
|
|
|
1 |
|
|
|
1 |
|
|
|
500 |
|
|
|
|
|
|
Foreign General Insurance
|
|
|
1,388 |
|
|
|
1,484 |
|
|
|
944 |
|
|
|
(6 |
) |
|
|
57 |
|
|
Total
|
|
$ |
6,132 |
|
|
$ |
5,696 |
|
|
$ |
4,031 |
|
|
|
8 |
% |
|
|
41 |
% |
|
Net realized capital gains (losses)
|
|
$ |
(106 |
) |
|
$ |
59 |
|
|
$ |
334 |
|
|
|
|
% |
|
|
|
% |
|
Operating income
(loss)(a)(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
7,305 |
|
|
$ |
5,845 |
|
|
$ |
(820 |
) |
|
|
25 |
% |
|
|
|
% |
|
|
Transatlantic
|
|
|
661 |
|
|
|
589 |
|
|
|
(39 |
) |
|
|
12 |
|
|
|
|
|
|
|
Personal Lines
|
|
|
67 |
|
|
|
432 |
|
|
|
195 |
|
|
|
(84 |
) |
|
|
122 |
|
|
|
Mortgage Guaranty
|
|
|
(637 |
) |
|
|
328 |
|
|
|
363 |
|
|
|
|
|
|
|
(10 |
) |
|
Foreign General Insurance
|
|
|
3,137 |
|
|
|
3,228 |
|
|
|
2,601 |
|
|
|
(3 |
) |
|
|
24 |
|
Reclassifications and eliminations
|
|
|
(7 |
) |
|
|
(10 |
) |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
10,526 |
|
|
$ |
10,412 |
|
|
$ |
2,315 |
|
|
|
1 |
% |
|
|
350 |
% |
|
AIG 2007
Form 10-K
41
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Percentage Increase/(Decrease) | |
|
|
| |
(in millions, except ratios) |
|
2007 | |
|
2006 | |
|
2005 | |
|
2007 vs. 2006 | |
|
2006 vs. 2005 | |
| |
Statutory underwriting profit (loss)
(b)(d):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
3,404 |
|
|
$ |
2,322 |
|
|
$ |
(3,403 |
) |
|
|
47 |
% |
|
|
|
% |
|
|
Transatlantic
|
|
|
165 |
|
|
|
129 |
|
|
|
(434 |
) |
|
|
28 |
|
|
|
|
|
|
|
Personal Lines
|
|
|
(191 |
) |
|
|
204 |
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty
|
|
|
(849 |
) |
|
|
188 |
|
|
|
249 |
|
|
|
|
|
|
|
(24 |
) |
|
Foreign General Insurance
|
|
|
1,544 |
|
|
|
1,565 |
|
|
|
1,461 |
|
|
|
(1 |
) |
|
|
7 |
|
|
Total
|
|
$ |
4,073 |
|
|
$ |
4,408 |
|
|
$ |
(2,165 |
) |
|
|
(8 |
)% |
|
|
|
% |
|
Domestic General
Insurance(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
71.2 |
|
|
|
69.6 |
|
|
|
90.1 |
|
|
|
|
|
|
|
|
|
|
Expense ratio
|
|
|
20.8 |
|
|
|
21.4 |
|
|
|
21.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
92.0 |
|
|
|
91.0 |
|
|
|
111.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign General
Insurance(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
50.6 |
|
|
|
48.9 |
|
|
|
52.0 |
|
|
|
|
|
|
|
|
|
|
Expense
ratio(c)
|
|
|
34.9 |
|
|
|
33.6 |
|
|
|
31.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
85.5 |
|
|
|
82.5 |
|
|
|
83.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
65.6 |
|
|
|
64.6 |
|
|
|
81.1 |
|
|
|
|
|
|
|
|
|
|
Expense ratio
|
|
|
24.7 |
|
|
|
24.5 |
|
|
|
23.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
90.3 |
|
|
|
89.1 |
|
|
|
104.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Includes the effect of out-of-period adjustments related to
the accounting for UCITS in 2006. For DBG, the effect was an
increase of $66 million, and for Foreign General Insurance,
the effect was an increase of $424 million. |
|
(b) |
Catastrophe-related losses increased the consolidated General
Insurance combined ratio in 2007 and 2005 by 0.60 points
and 7.06 points, respectively. There were no significant
catastrophe-related losses in 2006. Catastrophe-related losses
in 2007 and 2005 by reporting unit were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2005 |
| |
|
|
Insurance | |
|
Net | |
|
Insurance | |
|
Net | |
|
|
Related | |
|
Reinstatement | |
|
Related | |
|
Reinstatement | |
(in millions) |
|
Losses | |
|
Premium Cost | |
|
Losses | |
|
Premium Cost | |
| |
Reporting Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
113 |
|
|
$ |
(13 |
) |
|
$ |
1,811 |
|
|
$ |
136 |
|
|
Transatlantic
|
|
|
11 |
|
|
|
(1 |
) |
|
|
463 |
|
|
|
45 |
|
|
Personal Lines
|
|
|
61 |
|
|
|
14 |
|
|
|
112 |
|
|
|
2 |
|
|
Mortgage Guaranty
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
Foreign General Insurance
|
|
|
90 |
|
|
|
1 |
|
|
|
229 |
|
|
|
80 |
|
|
Total
|
|
$ |
275 |
|
|
$ |
1 |
|
|
$ |
2,625 |
|
|
$ |
263 |
|
|
|
|
(c) |
Includes amortization of advertising costs. |
42 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
|
|
(d) |
Statutory underwriting profit (loss) is a measure that
U.S. domiciled insurance companies are required to report
to their regulatory authorities. The following table reconciles
statutory underwriting profit (loss) to operating income for
General Insurance for the years ended December 31, 2007,
2006 and 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Domestic | |
|
|
|
Foreign | |
|
|
|
|
Brokerage | |
|
|
|
Personal | |
|
Mortgage | |
|
General | |
|
Reclassifications | |
|
|
(in millions) |
|
Group | |
|
Transatlantic | |
|
Lines | |
|
Guaranty | |
|
Insurance | |
|
and Eliminations | |
|
Total | |
| |
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory underwriting profit (loss)
|
|
$ |
3,404 |
|
|
$ |
165 |
|
|
$ |
(191 |
) |
|
$ |
(849 |
) |
|
$ |
1,544 |
|
|
$ |
|
|
|
$ |
4,073 |
|
|
Increase in DAC
|
|
|
97 |
|
|
|
17 |
|
|
|
29 |
|
|
|
57 |
|
|
|
227 |
|
|
|
|
|
|
|
427 |
|
|
Net investment income
|
|
|
3,879 |
|
|
|
470 |
|
|
|
231 |
|
|
|
158 |
|
|
|
1,388 |
|
|
|
6 |
|
|
|
6,132 |
|
|
Net realized capital gains (losses)
|
|
|
(75 |
) |
|
|
9 |
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(22 |
) |
|
|
(13 |
) |
|
|
(106 |
) |
|
|
|
Operating income (loss)
|
|
$ |
7,305 |
|
|
$ |
661 |
|
|
$ |
67 |
|
|
$ |
(637 |
) |
|
$ |
3,137 |
|
|
$ |
(7 |
) |
|
$ |
10,526 |
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory underwriting profit (loss)
|
|
$ |
2,322 |
|
|
$ |
129 |
|
|
$ |
204 |
|
|
$ |
188 |
|
|
$ |
1,565 |
|
|
$ |
|
|
|
$ |
4,408 |
|
|
Increase in DAC
|
|
|
14 |
|
|
|
14 |
|
|
|
2 |
|
|
|
3 |
|
|
|
216 |
|
|
|
|
|
|
|
249 |
|
|
Net investment income
|
|
|
3,411 |
|
|
|
435 |
|
|
|
225 |
|
|
|
140 |
|
|
|
1,484 |
|
|
|
1 |
|
|
|
5,696 |
|
|
Net realized capital gains (losses)
|
|
|
98 |
|
|
|
11 |
|
|
|
1 |
|
|
|
(3 |
) |
|
|
(37 |
) |
|
|
(11 |
) |
|
|
59 |
|
|
|
|
Operating income (loss)
|
|
$ |
5,845 |
|
|
$ |
589 |
|
|
$ |
432 |
|
|
$ |
328 |
|
|
$ |
3,228 |
|
|
$ |
(10 |
) |
|
$ |
10,412 |
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory underwriting profit (loss)
|
|
$ |
(3,403 |
) |
|
$ |
(434 |
) |
|
$ |
(38 |
) |
|
$ |
249 |
|
|
$ |
1,461 |
|
|
$ |
|
|
|
$ |
(2,165 |
) |
|
Increase (decrease) in DAC
|
|
|
(21 |
) |
|
|
14 |
|
|
|
19 |
|
|
|
(8 |
) |
|
|
111 |
|
|
|
|
|
|
|
115 |
|
|
Net investment income
|
|
|
2,403 |
|
|
|
343 |
|
|
|
217 |
|
|
|
123 |
|
|
|
944 |
|
|
|
1 |
|
|
|
4,031 |
|
|
Net realized capital gains (losses)
|
|
|
201 |
|
|
|
38 |
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
85 |
|
|
|
14 |
|
|
|
334 |
|
|
|
|
Operating income (loss)
|
|
$ |
(820 |
) |
|
$ |
(39 |
) |
|
$ |
195 |
|
|
$ |
363 |
|
|
$ |
2,601 |
|
|
$ |
15 |
|
|
$ |
2,315 |
|
|
AIG transacts business in most major
foreign currencies. The following table summarizes the effect of
changes in foreign currency exchange rates on the growth of
General Insurance net premiums written for the years ended
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
2007 | |
|
2006 | |
|
Growth in original currency*
|
|
|
3.5 |
% |
|
|
7.4 |
% |
Foreign exchange effect
|
|
|
1.4 |
|
|
|
(0.2 |
) |
|
Growth as reported in U.S. dollars
|
|
|
4.9 |
% |
|
|
7.2 |
% |
|
* Computed using a constant exchange rate for each
period.
2007 and 2006 Comparison
General Insurance operating income increased in 2007 compared to
2006 due to growth in net investment income, partially offset by
a decline in underwriting profit and Net realized capital
losses. The 2007 combined ratio increased to 90.3, an increase
of 1.2 points compared to 2006, primarily due to an
increase in the loss ratio of 1.0 points. The loss ratio
for accident year 2007 recorded in 2007 was 2.3 points
higher than the loss ratio recorded in 2006 for accident year
2006. Increases in Mortgage Guaranty losses accounted for a
2.1 point increase in the 2007 accident year loss ratio.
The downward cycle in the U.S. housing market is not
expected to improve until residential inventories return to a
more normal level, and AIG expects that this downward cycle will
continue to adversely affect Mortgage Guarantys loss
ratios for the foreseeable future. The higher accident year loss
ratio was partially offset by favorable development on prior
years, which reduced incurred losses by $606 million and
$53 million in 2007 and 2006, respectively. Additional
favorable loss development of $50 million (recognized in
consolidation and related to certain asbestos settlements)
reduced overall incurred losses.
General Insurance net premiums written increased in 2007
compared to 2006, reflecting growth in Foreign General Insurance
from both established and new distribution channels, and the
effect of changes in foreign currency exchange rates as well as
growth in Mortgage Guaranty, primarily from international
business.
General Insurance net investment income increased in 2007 by
$436 million. Interest and dividend income increased
$714 million in 2007 compared to 2006 as fixed maturities
and equity securities increased by $11.6 billion and the
average yield increased 10 basis points. Income from
partnership investments increased $159 million in 2007
compared to 2006, primarily due to improved returns on
underlying investments and higher levels of invested assets.
Investment expenses in 2007 declined $60 million compared
to 2006, primarily due to decreased interest expense on deposit
liabilities. These increases to net investment income were
partially offset by $490 million of income from an out of
period UCITS adjustment recorded in 2006. Net realized capital
losses in 2007 include other-than-temporary impairment charges
of $276 million compared to $77 million in 2006. See
also Capital Resources and Liquidity and Invested Assets herein.
In order to better align financial reporting with the manner in
which AIGs chief operating decision makers manage their
businesses, commencing in 2007, the foreign aviation business,
which was historically reported in DBG, is now reported as part
of Foreign General Insurance, and the oil rig and marine
businesses, which were historically reported in Foreign General
Insurance, are now reported as part of DBG. Prior period amounts
have been revised to conform to the current presentation.
2006 and 2005 Comparison
General Insurance operating income increased in 2006 compared to
2005 due to growth in net premiums, a reduction in both
AIG 2007
Form 10-K
43
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
catastrophe losses and prior accident year development, and
growth in Net investment income. The combined ratio improved to
89.1, a reduction of 15.6 points from 2005, including an
improvement in the loss ratio of 16.5 points. The reduction in
catastrophe losses represented 6.9 points and the reduction in
prior year adverse development represented 11.5 points of the
overall reduction. Net premiums written increased
$3.0 billion or 7 percent in 2006 compared to 2005.
Domestic General Insurance accounted for $1.6 billion of
the increase as property rates improved and submission activity
increased due to the strength of AIGs capacity, commitment
to difficult markets and diverse product offerings. Foreign
General Insurance contributed $1.4 billion to the increase
in net premiums written. In 2005, Domestic General Insurance net
premiums written increased by $300 million and Foreign
General Insurance net premiums written decreased by the same
amount as a result of the commutation of the Richmond
reinsurance contract. The commutation partially offset the
increase in Domestic General Insurance net premiums written in
2006 compared to 2005 and increased Foreign General Insurance
net premiums written in 2006 compared to 2005.
In 2006, certain adjustments were made in conjunction with the
remediation of the material weakness relating to balance sheet
account reconciliations which increased earned premiums by
$189 million and increased other expenses by
$415 million. The combined effect of these adjustments
increased the expense ratio by 0.9 points and decreased the loss
ratio by 0.3 points.
General Insurance net investment income increased
$1.67 billion in 2006 to $5.7 billion on higher levels
of invested assets, strong cash flows, slightly higher yields
and increased partnership income, and included increases from
out of period adjustments of $490 million related to the
accounting for certain interests in UCITS, $43 million
related to partnership income and $85 million related to
interest earned on a DBG deposit contract. See also Capital
Resources and Liquidity Liquidity and Invested
Assets herein.
DBG Results
2007 and 2006 Comparison
DBGs operating income increased in 2007 compared to 2006
primarily due to growth in both net investment income and
underwriting profit. The improvement is also reflected in the
combined ratio, which declined 4.5 points in 2007 compared
to 2006, primarily due to an improvement in the loss ratio of
3.3 points. Catastrophe-related losses increased the 2007
loss ratio by 0.4 points. The loss ratio for accident year
2007 recorded in 2007 was 0.9 points lower than the loss
ratio recorded in 2006 for accident year 2006. The loss ratio
for accident year 2006 has improved in each quarter since
September 30, 2006. As a result, the 2007 accident year
loss ratio is 2.8 points higher than the 2006 accident year
loss ratio, reflecting reductions in 2006 accident year losses
recorded through December 31, 2007. Prior year development
reduced incurred losses by $390 million in 2007 and
increased incurred losses by $175 million in 2006,
accounting for 2.4 points of the improvement in the loss
ratio.
DBGs net premiums written declined in 2007 compared to
2006 as ceded premiums as a percentage of gross written premiums
increased to 24 percent in 2007 compared to 23 percent
in 2006, primarily due to additional reinsurance for property
risks to manage catastrophe exposures.
DBGs expense ratio decreased to 18.7 in 2007 compared to
19.8 in 2006, primarily due to the 2006 charge related to the
remediation of the material weakness in internal control over
certain balance sheet reconciliations that accounted for
2.1 points of the decline. The decline was partially offset
by increases in operating expenses for marketing initiatives and
operations.
DBGs net investment income increased in 2007 compared to
2006, as interest income increased $384 million in 2007, on
growth in the bond portfolio resulting from investment of
operating cash flows. Income from partnership investments
increased $159 million in 2007 compared to 2006, primarily
due to improved returns on the underlying investments. Other
investment income declined $163 million in 2007 compared to
2006, primarily due to out of period adjustments of
$194 million recorded in 2006. DBG recorded net realized
capital losses in 2007 compared to net realized capital gains in
2006 primarily due to other-than-temporary impairment charges of
$213 million in 2007 compared to $73 million in 2006.
2006 and 2005 Comparison
DBGs operating income was $5.85 billion in 2006
compared to a loss of $820 million in 2005, an improvement
of $6.67 billion. The improvement is also reflected in the
combined ratio, which declined to 89.9 in 2006 compared to 114.6
in 2005 primarily due to an improvement in the loss ratio of
24.9 points. The reduction in prior year adverse development and
the reduction in catastrophe losses and related reinstatement
premiums accounted for 20.7 points and 8.3 points, respectively,
of the improvement.
DBGs net premiums written increased in 2006 compared to
2005 as property rates improved and submission activity
increased due to the strength of AIGs capacity, commitment
to difficult markets and diverse product offerings. Net premiums
written in 2005 were reduced by $136 million due to
reinstatement premiums related to catastrophes, offset by
increases of $300 million for the Richmond commutation and
$147 million related to an accrual for workers compensation
premiums for payroll not yet reported by insured employers. The
combined effect of these items reduced the growth rate for net
premiums written by 1.3 percent.
The loss ratio in 2006 declined 24.9 points to 70.2. The 2005
loss ratio was negatively affected by catastrophe-related losses
of $1.8 billion and related reinstatement premiums of
$136 million. Adverse development on reserves for loss and
loss adjustment expenses declined to $175 million in 2006
compared to $4.9 billion in 2005, accounting for 20.7
points of the decrease in the loss ratio.
DBGs expense ratio increased to 19.8 in 2006 compared to
19.5 in 2005, primarily due to an increase in other expenses
that amounted to $498 million in 2006 (including out of
period charges of $356 million) compared to
$372 million in 2005. This increase added 0.4 points to the
expense ratio.
44 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
DBGs net investment income increased by $1.0 billion
in 2006 compared to 2005, as interest income increased
$482 million on growth in the bond portfolio resulting from
investment of operating cash flows and capital contributions.
Partnership income increased from 2005 due to improved
performance of the underlying investments, including initial
public offering activity. Net investment income in 2006 included
increases relating to out of period adjustments of
$109 million for the accounting for UCITS and partnerships
and $85 million related to interest earned on a deposit
contract that did not exist in the prior year.
Transatlantic Results
2007 and 2006 Comparison
Transatlantics net premiums written and net premiums
earned increased in 2007 compared to 2006 due to increases in
both domestic and international operations. The increase in
statutory underwriting profit in 2007 compared to 2006 reflects
improved underwriting results in Domestic operations. Operating
income increased in 2007 compared to 2006 due principally to
increased net investment income and improved underwriting
results.
2006 and 2005 Comparison
Transatlantics net premiums written and net premiums
earned increased in 2006 compared to 2005 due primarily to
increased writings in domestic operations. Operating income
increased in 2006 compared to 2005 due largely to lower
catastrophe losses and net ceded reinstatement premiums, and
increased net investment income.
Personal Lines Results
2007 and 2006 Comparison
Personal Lines operating income in 2007 decreased by
$365 million compared to 2006, largely due to an increase
in incurred losses from a number of sources, leading to an
overall increase in the loss ratio of 6.8 points. Prior year net
adverse reserve development contributed 2.5 points of this
increase in the loss ratio, as Personal Lines experienced
$7 million in net adverse development (including
$64 million in adverse development from businesses placed
in runoff), compared to $111 million of favorable
development in 2006. An additional 1.6 point increase in the
loss ratio resulted from $61 million of losses and
$14 million of reinstatement premiums due to the California
wildfires. In addition, an increase in the loss ratio recorded
in 2007 for accident year 2007 compared to the loss ratio
recorded in 2006 for accident year 2006 of 2.7 points resulted,
in part, from an increased frequency of large losses in the
Private Client Group and average automobile premiums declining
faster than loss trends.
Operating income also declined due to increased expenses. The
expense ratio increased 1.1 points in 2007 compared to
2006, primarily due to $63 million of transaction and
integration costs associated with the 2007 acquisition of the
minority interest in 21st Century.
Net premiums written increased in 2007 compared to 2006 due to
continued growth in the Private Client Group and increased new
business production in the aigdirect.com business partially
offset by a reduction in the Agency Auto business.
On September 27, 2007, AIG completed its previously
announced acquisition of 21st Century, paying
$759 million to acquire the remaining 39.2 percent of
the shares of 21st Century that it did not previously own.
As a result of the acquisition, the AIG Direct and
21st Century operations have been combined as aigdirect.com.
Under the purchase method of accounting, the assets and
liabilities of 21st Century that were acquired were
adjusted to their estimated fair values as of the date of the
acquisition, and goodwill of $342 million was recorded. A
customer relationship intangible asset, initially valued at
$119 million, was also established.
2006 and 2005 Comparison
Personal Lines operating income increased $237 million in
2006 compared to 2005 reflecting a reduction in the loss ratio
of 5.8 points. Favorable development on prior accident years
reduced incurred losses by $111 million in 2006 compared to
an increase of $14 million in 2005, accounting for 2.7
points of the decrease in the loss ratio. The 2005
catastrophe-related losses of $112 million added 2.4 points
to the loss ratio. The loss ratio for the 2006 accident year
improved 0.7 points primarily due to the termination of The
Robert Plan relationship effective December 31, 2005 and
growth in the Private Client Group. The improvement in the loss
ratio was partially offset by an increase in the expense ratio
of 0.6 points primarily due to investments in people and
technology, national expansion efforts and lower response rates.
Net premiums written were flat in 2006 compared to 2005, with
growth in the Private Client Group and Agency Auto divisions
offset by termination of The Robert Plan relationship. Growth in
the Private Client Group spans multiple products, with a
continued penetration of the high net worth market, strong brand
promotion and innovative loss prevention programs.
Mortgage Guaranty Results
2007 and 2006 Comparison
Mortgage Guarantys operating loss in 2007 was
$637 million compared to operating income of
$328 million in 2006 as the deteriorating
U.S. residential housing market adversely affected losses
incurred for both the domestic first- and second-lien
businesses. Domestic first- and second-lien losses incurred
increased 362 percent and 346 percent respectively,
compared to 2006, resulting in loss ratios of 122.0 and
357.0, respectively, in 2007. Increases in domestic losses
incurred resulted in an overall loss ratio of 168.6 in 2007
compared to 47.2 in 2006. Prior year development reduced
incurred losses in 2007 by $25 million compared to a
reduction of $115 million in 2006, which accounted for
12.7 points of the increase in the loss ratio.
Net premiums written increased in 2007 compared to 2006
primarily due to growth in the international markets, accounting
for 19 percent of the increase in net premiums written. In
addition
AIG 2007
Form 10-K
45
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
the increased use of mortgage insurance for credit enhancement
as well as better persistency resulted in an increase in
domestic first-lien premiums. UGC has taken steps to strengthen
its underwriting guidelines and increase rates. It also
discontinued new production for certain programs in the
second-lien business beginning in the fourth quarter of 2006.
However, UGC will continue to receive renewal premiums on that
portfolio for the life of the loans, estimated to be three to
five years, and will continue to be exposed to possible losses
from future defaults.
The expense ratio in 2007 was 21.2, down from 23.4 in 2006 as
premium growth offset the effect of increased expenses related
to UGCs international expansion and the employment of
additional operational resources in the second-lien business.
UGC domestic mortgage risk in force totaled $29.8 billion
as of December 31, 2007 and the
60-day delinquency
ratio was 3.7 percent (based on number of policies,
consistent with mortgage industry practice) compared to domestic
mortgage risk in force of $24.9 billion and a delinquency
ratio of 2.1 percent at December 31, 2006.
Approximately 81 percent of the domestic mortgage risk is
secured by first-lien, owner-occupied properties.
2006 and 2005 Comparison
Mortgage Guaranty operating income declined in 2006 from 2005
due primarily to unfavorable loss experience on third-party
originated second-lien business with a credit quality lower than
typical for UGC and a softening U.S. housing market. This
increased Mortgage Guarantys consolidated loss ratio in
2006 to 47.2 compared to 26.0 in 2005. The writing of this
second-lien coverage, which began in 2005, was discontinued as
of year end 2006. Losses in the second-lien business have been
mitigated by a policy year aggregate limitation provision that
is typically established for each lender.
Net premiums written increased due to growth in the domestic
second-lien and international businesses as well as improved
persistency in the domestic first-lien business. The expense
ratio remained flat as premium growth covered increased expenses
related to expansion internationally and continued investment in
risk management resources.
Foreign General Insurance
Results
2007 and 2006 Comparison
Foreign General Insurance operating income decreased in 2007
compared to 2006, due primarily to decreases in Net investment
income and statutory underwriting profit. Net investment income
in 2006 included income of $424 million from out of period
UCITS adjustments. Statutory underwriting profit decreased due
to losses from the June 2007 U.K. floods, an increase in severe
but non-catastrophic losses and higher frequency of non-severe
losses compared to 2006, partially offset by higher favorable
loss development on prior accident years.
Net premiums written increased 14 percent (10 percent
in original currency) in 2007 compared to 2006, reflecting
growth in commercial and consumer lines driven by new business
from both established and new distribution channels, including
Central Insurance Co. Ltd. in Taiwan acquired in late 2006. Net
premiums written for commercial lines increased due to new
business in the U.K. and Europe and decreases in the use of
reinsurance, partially offset by declines in premium rates.
Growth in consumer lines in Latin America, Asia and Europe also
contributed to the increase. Net premiums written for the
Lloyds syndicate Ascot (Ascot) and Aviation declined due
to rate decreases and increased market competition.
The 2007 loss ratio increased a total of 1.7 points compared to
2006. Losses of $90 million from the June 2007 U.K. floods
added 0.7 points to the loss ratio and higher severe but
non-catastrophic losses and higher loss frequency for personal
accident business in Japan and personal lines business in Asia
and Latin America added 1.6 points to the loss ratio.
Partially offsetting these increases was favorable loss
development on prior accident years of $286 million in 2007
compared to $183 million in 2006, which decreased the loss
ratio by 0.6 points.
The 2007 expense ratio increased 1.3 points compared to 2006.
This increase reflected the cost of realigning certain legal
entities through which Foreign General Insurance operates and
the increased significance of consumer lines of business, which
have higher acquisition costs. These factors contributed
0.7 points to the 2007 expense ratio. AIG expects the
expense ratio to increase in 2008 due to the continued cost of
realigning certain legal entities through which Foreign General
Insurance operates.
Net investment income decreased in 2007 compared to 2006 as the
2006 period included the out of period UCITS adjustments, which
more than offset increases resulting from higher interest rates,
increased cash flows and mutual fund income. Mutual fund income
was $93 million higher than 2006 reflecting improved
performance in the equity markets in 2007. Partnership income
was essentially unchanged.
2006 and 2005 Comparison
Foreign General Insurance operating income increased in 2006
compared to 2005 due to out of period UCITS adjustments in 2006,
the absence of significant catastrophe-related losses in 2006,
rate increases and lower current accident year losses by Ascot
on its U.S. book of business and lower asbestos and
environmental reserve increases. These increases were partially
offset by lower favorable loss development from prior accident
years and adverse loss development on the 2005 hurricanes.
Statutory underwriting profit increased $104 million in
2006 compared to 2005. Catastrophes in 2005 resulted in losses
of $229 million and reinstatement premiums of
$80 million.
Net premiums written increased 14 percent (15 percent
in original currency) in 2006 compared to 2005, reflecting
growth in both commercial and consumer lines driven by new
business from both established and new distribution channels,
including a wholly owned insurance company in Vietnam and
Central Insurance Co., Ltd. in Taiwan. Ascot also contributed to
the growth in net premiums written as a result of rate increases
on its U.S. business. Consumer lines in Latin America and
commercial lines in Europe, including the U.K., also contributed
to the increase. Net premiums written in 2005 were reduced by
reinstatement premiums related to catastrophes and a portfolio
46 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
transfer of unearned premium reserves to DBG related to the
Richmond commutation, accounting for 4 percent of the
increase in 2006 compared to 2005.
The loss ratio decreased 3.1 points in 2006 compared to 2005, as
the absence of significant catastrophes in 2006 resulted in a
decrease in the loss ratio of 2.8 points. The loss ratio also
decreased due to rate increases and lower current year losses by
Ascot on its U.S. book of business and lower asbestos and
environmental reserve increases. These declines were partially
offset by lower favorable loss development from prior accident
years and adverse development on 2005 hurricanes.
The expense ratio increased 1.8 points in 2006 compared to
2005 due to a $59 million out of period adjustment for
amortization of deferred advertising costs and a premium
reduction of $61 million related to reconciliation
remediation activities, in aggregate accounting for 0.7 points
of the increase in the expense ratio. The expense ratio also
increased due to growth in consumer business lines, which have
higher acquisition expenses but historically lower loss ratios.
Net investment income increased $540 million in 2006
compared to 2005 primarily due to a $424 million out of
period UCITS adjustment.
Reserve for Losses and Loss Expenses
The following table presents the
components of the General Insurance gross reserve for losses and
loss expenses (loss reserves) as of December 31, 2007 and
2006 by major lines of business on a statutory Annual Statement
basis(a):
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
2007 | |
|
2006(b) | |
| |
Other liability occurrence
|
|
$ |
20,580 |
|
|
$ |
19,327 |
|
Workers compensation
|
|
|
15,568 |
|
|
|
13,612 |
|
Other liability claims made
|
|
|
13,878 |
|
|
|
12,513 |
|
Auto liability
|
|
|
6,068 |
|
|
|
6,070 |
|
International
|
|
|
7,036 |
|
|
|
6,006 |
|
Property
|
|
|
4,274 |
|
|
|
5,499 |
|
Reinsurance
|
|
|
3,127 |
|
|
|
2,979 |
|
Medical malpractice
|
|
|
2,361 |
|
|
|
2,347 |
|
Products liability
|
|
|
2,416 |
|
|
|
2,239 |
|
Accident and health
|
|
|
1,818 |
|
|
|
1,693 |
|
Commercial multiple peril
|
|
|
1,900 |
|
|
|
1,651 |
|
Aircraft
|
|
|
1,623 |
|
|
|
1,629 |
|
Fidelity/surety
|
|
|
1,222 |
|
|
|
1,148 |
|
Mortgage Guaranty/Credit
|
|
|
1,426 |
|
|
|
567 |
|
Other
|
|
|
2,203 |
|
|
|
2,719 |
|
|
Total
|
|
$ |
85,500 |
|
|
$ |
79,999 |
|
|
|
|
(a) |
Presented by lines of business pursuant to statutory
reporting requirements as prescribed by the National Association
of Insurance Commissioners. |
|
(b) |
Allocations among various lines were revised based on the
2007 presentation. |
AIGs gross reserve for losses and loss expenses represents
the accumulation of estimates of ultimate losses, including
estimates for incurred but not yet reported reserves (IBNR) and
loss expenses. The methods used to determine loss reserve
estimates and to establish the resulting reserves are
continually reviewed and updated by management. Any adjustments
resulting therefrom are reflected in operating income currently.
Because loss reserve estimates are subject to the outcome of
future events, changes in estimates are unavoidable given that
loss trends vary and time is often required for changes in
trends to be recognized and confirmed. Reserve changes that
increase previous estimates of ultimate cost are referred to as
unfavorable or adverse development or reserve strengthening.
Reserve changes that decrease previous estimates of ultimate
cost are referred to as favorable development.
Estimates for mortgage guaranty insurance losses and loss
adjustment expense reserves are based on notices of mortgage
loan delinquencies and estimates of delinquencies that have been
incurred but have not been reported by loan servicers, based
upon historical reporting trends. Mortgage Guaranty establishes
reserves using a percentage of the contractual liability (for
each delinquent loan reported) that is based upon past
experience regarding certain loan factors such as age of the
delinquency, dollar amount of the loan and type of mortgage
loan. Because mortgage delinquencies and claims payments are
affected primarily by macroeconomic events, such as changes in
home price appreciation, interest rates and unemployment, the
determination of the ultimate loss cost requires a high degree
of judgment. AIG believes it has provided appropriate reserves
for currently delinquent loans. Consistent with industry
practice, AIG does not establish a reserve for loans that are
not currently delinquent, but that may become delinquent in
future periods.
At December 31, 2007, General Insurance net loss reserves
increased $6.66 billion from 2006 to $69.29 billion.
The net loss reserves represent loss reserves reduced by
reinsurance recoverable, net of an allowance for unrecoverable
reinsurance and applicable discount for future investment income.
The following table classifies the
components of the General Insurance net loss reserve by business
unit as of December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
2007 | |
|
2006 | |
| |
DBG(a)
|
|
$ |
47,392 |
|
|
$ |
44,119 |
|
Transatlantic
|
|
|
6,900 |
|
|
|
6,207 |
|
Personal
Lines(b)
|
|
|
2,417 |
|
|
|
2,440 |
|
Mortgage Guaranty
|
|
|
1,339 |
|
|
|
460 |
|
Foreign General
Insurance(c)
|
|
|
11,240 |
|
|
|
9,404 |
|
|
Total Net Loss Reserve
|
|
$ |
69,288 |
|
|
$ |
62,630 |
|
|
|
|
(a) |
At December 31, 2007 and 2006, respectively, DBG loss
reserves include approximately $3.13 billion and
$3.33 billion ($3.34 billion and $3.66 billion,
respectively, before discount), related to business written by
DBG but ceded to AIRCO and reported in AIRCOs statutory
filings. DBG loss reserves also include approximately
$590 million and $535 million related to business
included in AIUOs statutory filings at December 31,
2007 and 2006, respectively. |
|
(b) |
At December 31, 2007 and 2006, respectively, Personal
Lines loss reserves include $894 million and
$861 million related to business ceded to DBG and reported
in DBGs statutory filings. |
|
(c) |
At December 31, 2007 and 2006, respectively, Foreign
General Insurance loss reserves include approximately
$3.02 billion and $2.75 billion related to business
reported in DBGs statutory filings. |
AIG 2007
Form 10-K
47
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
The DBG net loss reserve of $47.4 billion is comprised
principally of the business of AIG subsidiaries participating in
the American Home Assurance Company (American Home)/ National
Union Fire Insurance Company of Pittsburgh, Pa. (National Union)
pool (10 companies) and the surplus lines pool (Lexington,
AIG Excess Liability Insurance Company and Landmark Insurance
Company).
DBG cedes a quota share percentage of its other liability
occurrence and products liability occurrence business to AIRCO.
The quota share percentage ceded was 15 percent in 2007 and
20 percent in 2006 and covered all business written in
these years for these lines by participants in the American
Home/ National Union pool. AIRCOs loss reserves relating
to these quota share cessions from DBG are recorded on a
discounted basis. As of December 31, 2007, AIRCO carried a
discount of approximately $210 million applicable to the
$3.34 billion in undiscounted reserves it assumed from the
American Home/ National Union pool via this quota share cession.
AIRCO also carries approximately $540 million in net loss
reserves relating to Foreign General Insurance business. These
reserves are carried on an undiscounted basis.
The companies participating in the American Home/ National Union
pool have maintained a participation in the business written by
AIU for decades. As of December 31, 2007, these AIU
reserves carried by participants in the American Home/ National
Union pool totaled approximately $3.02 billion. The
remaining Foreign General Insurance reserves are carried by
AIUO, AIRCO, and other smaller AIG subsidiaries domiciled
outside the United States. Statutory filings in the United
States by AIG companies reflect all the business written by
U.S. domiciled entities only, and therefore exclude
business written by AIUO, AIRCO, and all other internationally
domiciled subsidiaries. The total reserves carried at
December 31, 2007 by AIUO and AIRCO were approximately
$5.16 billion and $3.67 billion, respectively.
AIRCOs $3.67 billion in total general insurance
reserves consist of approximately $3.13 billion from
business assumed from the American Home/ National Union pool and
an additional $540 million relating to Foreign General
Insurance business.
Discounting of Reserves
At December 31, 2007, AIGs overall General Insurance
net loss reserves reflect a loss reserve discount of
$2.43 billion, including tabular and non-tabular
calculations. The tabular workers compensation discount is
calculated using a 3.5 percent interest rate and the
1979-81 Decennial Mortality Table. The non-tabular workers
compensation discount is calculated separately for companies
domiciled in New York and Pennsylvania, and follows the
statutory regulations for each state. For New York companies,
the discount is based on a five percent interest rate and the
companies own payout patterns. For Pennsylvania companies,
the statute has specified discount factors for accident years
2001 and prior, which are based on a six percent interest rate
and an industry payout pattern. For accident years 2002 and
subsequent, the discount is based on the yield of
U.S. Treasury securities ranging from one to twenty years
and the companys own payout pattern, with the future
expected payment for each year using the interest rate
associated with the corresponding Treasury security yield for
that time period. The discount is comprised of the following:
$794 million tabular discount for workers
compensation in DBG; $1.42 billion non-tabular
discount for workers compensation in DBG; and,
$210 million non-tabular discount for other
liability occurrence and products liability occurrence in AIRCO.
The total undiscounted workers compensation loss reserve carried
by DBG is approximately $13.3 billion as of
December 31, 2007. The other liability occurrence and
products liability occurrence business in AIRCO that is assumed
from DBG is discounted based on the yield of U.S. Treasury
securities ranging from one to twenty years and the DBG payout
pattern for this business. The undiscounted reserves assumed by
AIRCO from DBG totaled approximately $3.34 billion at
December 31, 2007.
Results of the Reserving
Process
Management believes that the General Insurance net loss reserves
are adequate to cover General Insurance net losses and loss
expenses as of December 31, 2007. While AIG regularly
reviews the adequacy of established loss reserves, there can be
no assurance that AIGs ultimate loss reserves will not
develop adversely and materially exceed AIGs loss reserves
as of December 31, 2007. In the opinion of management, such
adverse development and resulting increase in reserves is not
likely to have a material adverse effect on AIGs
consolidated financial condition, although it could have a
material adverse effect on AIGs consolidated results of
operations for an individual reporting period. See also
Item 1A. Risk Factors Casualty Insurance and
Underwriting Reserves.
48 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
The following table presents the
reconciliation of net loss reserves for 2007, 2006 and 2005 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
2007 | |
|
2006 | |
|
2005 | |
| |
Net reserve for losses and loss expenses at beginning of year
|
|
$ |
62,630 |
|
|
$ |
57,476 |
|
|
$ |
47,254 |
|
Foreign exchange effect
|
|
|
955 |
|
|
|
741 |
|
|
|
(628 |
) |
Acquisitions(a)
|
|
|
317 |
|
|
|
55 |
|
|
|
|
|
|
Losses and loss expenses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
30,261 |
|
|
|
27,805 |
|
|
|
28,426 |
|
Prior years, other than accretion of discount
|
|
|
(656 |
) |
|
|
(53 |
) |
|
|
4,680 (b |
) |
Prior years, accretion of discount
|
|
|
327 |
|
|
|
300 |
|
|
|
(15 |
) |
|
Losses and loss expenses incurred
|
|
|
29,932 |
|
|
|
28,052 |
|
|
|
33,091 |
|
|
Losses and loss expenses paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
9,684 |
|
|
|
8,368 |
|
|
|
7,331 |
|
Prior years
|
|
|
14,862 |
|
|
|
15,326 |
|
|
|
14,910 |
|
|
Losses and loss expenses paid
|
|
|
24,546 |
|
|
|
23,694 |
|
|
|
22,241 |
|
|
Net reserve for losses and loss expenses at end of year
|
|
$ |
69,288 |
|
|
$ |
62,630 |
|
|
$ |
57,476 |
|
|
|
|
(a) |
Reflects the opening balance with respect to the acquisitions
of WüBa and the Central Insurance Co., Ltd. in 2007 and
2006, respectively. |
|
(b) |
Includes fourth quarter charge of $1.8 billion. |
The following tables summarize
development, (favorable) or unfavorable, of incurred losses
and loss expenses for prior years (other than accretion of
discount):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
2007 | |
|
2006 | |
|
2005 | |
| |
Prior Accident Year Development by Reporting Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
(390 |
) |
|
$ |
175 |
|
|
$ |
4,878 |
|
Personal Lines
|
|
|
7 |
|
|
|
(111 |
) |
|
|
14 |
|
UGC
|
|
|
(25 |
) |
|
|
(115 |
) |
|
|
(103 |
) |
Foreign General Insurance
|
|
|
(286 |
) |
|
|
(183 |
) |
|
|
(378 |
) |
|
Sub total
|
|
|
(694 |
) |
|
|
(234 |
) |
|
|
4,411 |
|
Transatlantic
|
|
|
88 |
|
|
|
181 |
|
|
|
269 |
|
Asbestos settlements*
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
Prior years, other than accretion of discount
|
|
$ |
(656 |
) |
|
$ |
(53 |
) |
|
$ |
4,680 |
|
|
|
|
* |
Represents the effect of settlements of certain asbestos
liabilities. |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
2007 | |
|
2006 | |
|
2005 | |
| |
Prior Accident Year Development by Major Class of Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess casualty (DBG)
|
|
$ |
73 |
|
|
$ |
102 |
|
|
$ |
1,191 |
|
D&O and related management liability (DBG)
|
|
|
(305 |
) |
|
|
(20 |
) |
|
|
1,627 |
|
Excess workers compensation (DBG)
|
|
|
(14 |
) |
|
|
74 |
|
|
|
983 |
|
Reinsurance (Transatlantic)
|
|
|
88 |
|
|
|
181 |
|
|
|
269 |
|
Asbestos and environmental (primarily DBG)
|
|
|
18 |
|
|
|
208 |
|
|
|
930 |
|
All other, net
|
|
|
(516 |
) |
|
|
(598 |
) |
|
|
(320 |
) |
|
Prior years, other than accretion of discount
|
|
$ |
(656 |
) |
|
$ |
(53 |
) |
|
$ |
4,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Calendar Year |
Accident Year | |
|
| |
(in millions) |
|
2007 | |
|
2006 | |
|
2005 | |
| |
Prior Accident Year Development
by Accident Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
(1,248 |
) |
|
|
|
|
|
|
|
|
|
2005
|
|
|
(446 |
) |
|
$ |
(1,576 |
) |
|
|
|
|
|
2004
|
|
|
(428 |
) |
|
|
(511 |
) |
|
$ |
(3,853 |
) |
|
2003
|
|
|
37 |
|
|
|
(212 |
) |
|
|
(63 |
) |
|
2002
|
|
|
234 |
|
|
|
373 |
|
|
|
1,360 |
|
|
2001
|
|
|
263 |
|
|
|
29 |
|
|
|
1,749 |
|
|
2000
|
|
|
321 |
|
|
|
338 |
|
|
|
1,323 |
|
|
1999
|
|
|
47 |
|
|
|
382 |
|
|
|
944 |
|
|
1998
|
|
|
154 |
|
|
|
41 |
|
|
|
605 |
|
|
1997 & Prior
|
|
|
410 |
|
|
|
1,083 |
|
|
|
2,615 |
|
|
Prior years, other than accretion of discount
|
|
$ |
(656 |
) |
|
$ |
(53 |
) |
|
$ |
4,680 |
|
|
In determining the loss development from prior accident years,
AIG conducts analyses to determine the change in estimated
ultimate loss for each accident year for each profit center. For
example, if loss emergence for a profit center is different than
expected for certain accident years, the actuaries examine the
indicated effect such emergence would have on the reserves of
that profit center. In some cases, the higher or lower than
expected emergence may result in no clear change in the ultimate
loss estimate for the accident years in question, and no
adjustment would be made to the profit centers reserves
for prior accident years. In other cases, the higher or lower
than expected emergence may result in a larger change, either
favorable or unfavorable, than the difference between the actual
and expected loss emergence. Such additional analyses were
conducted for each profit center, as appropriate, in 2007 to
determine the loss development from prior accident years for
2007. As part of its reserving process, AIG also considers
notices of claims received with respect to emerging issues, such
as those related to the U.S. mortgage and housing market.
The loss ratios recorded by AIG in 2006 took into account the
results of the comprehensive reserve reviews that were completed
in the fourth quarter of 2005. AIGs year-end 2005 reserve
review reflected careful consideration of the reserve analyses
prepared by AIGs internal actuarial staff with the
assistance of third-party
AIG 2007
Form 10-K
49
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
actuaries. In determining the appropriate loss ratios for
accident year 2006 for each class of business, AIG gave
consideration to the loss ratios resulting from the 2005 reserve
analyses as well as all other relevant information including
rate changes, expected changes in loss costs, changes in
coverage, reinsurance or mix of business, and other factors that
may affect the loss ratios.
2007 Net Loss Development
In 2007, net loss development from prior accident years was
favorable by approximately $656 million, including
approximately $88 million of adverse development from
Transatlantic; and excluding approximately $327 million
from accretion of loss reserve discount. Excluding
Transatlantic, as well as accretion of discount, net loss
development in 2007 from prior accident years was favorable by
approximately $744 million. The overall favorable
development of $656 million consisted of approximately
$2.12 billion of favorable development from accident years
2004 through 2006, partially offset by approximately
$1.43 billion of adverse development from accident years
2002 and prior and $37 million of adverse development from
accident year 2003. In 2007, most classes of AIGs business
continued to experience favorable development for accident years
2004 through 2006. The majority of the adverse development from
accident years 2002 and prior was related to development from
excess casualty and primary workers compensation business within
DBG and from Transatlantic. The development from accident year
2003 was primarily related to adverse development from excess
casualty and primary workers compensation business within DBG
offset by favorable development from most other classes of
business. The overall favorable development of $656 million
includes approximately $305 million pertaining to the
D&O and related management liability classes of business
within DBG, consisting of approximately $335 million of
favorable development from accident years 2003 through 2006,
partially offset by approximately $30 million of adverse
development from accident years 2002 and prior. The overall
favorable development of $656 million also includes
approximately $300 million of adverse development from
primary workers compensation business within DBG. See Volatility
of Reserve Estimates and Sensitivity Analyses below.
2006 Net Loss Development
In 2006, net loss development from prior accident years was
favorable by approximately $53 million, including
approximately $198 million in net adverse development from
asbestos and environmental reserves resulting from the updated
ground up analysis of these exposures in the fourth quarter of
2006; approximately $103 million of adverse development
pertaining to the major hurricanes in 2004 and 2005; and
$181 million of adverse development from Transatlantic; and
excluding approximately $300 million from accretion of loss
reserve discount. Excluding the fourth quarter asbestos and
environmental reserve increase, catastrophes and Transatlantic,
as well as accretion of discount, net loss development in 2006
from prior accident years was favorable by approximately
$535 million. The overall favorable development of
$53 million consisted of approximately $2.30 billion
of favorable development from accident years 2003 through 2005,
partially offset by approximately $2.25 billion of adverse
development from accident years 2002 and prior. In 2006, most
classes of AIGs business continued to experience favorable
development for accident years 2003 through 2005. The adverse
development from accident years 2002 and prior reflected
development from excess casualty, workers compensation, excess
workers compensation, and post-1986 environmental liability
classes of business, all within DBG, from asbestos reserves
within DBG and Foreign General Insurance, and from Transatlantic.
2005 Net Loss Development
In 2005, net loss development from prior accident years was
adverse by approximately $4.68 billion, including
approximately $269 million from Transatlantic. This
$4.68 billion adverse development in 2005 was comprised of
approximately $8.60 billion for the 2002 and prior accident
years, partially offset by favorable development for accident
years 2003 and 2004 for most classes of business, with the
notable exception of D&O. The adverse loss development for
2002 and prior accident years was attributable to approximately
$4.0 billion of development from the D&O and related
management liability classes of business, excess casualty, and
excess workers compensation, and to approximately
$900 million of adverse development from asbestos and
environmental claims. The remaining portion of the adverse
development from 2002 and prior accident years included
approximately $520 million related to Transatlantic with
the balance spread across many other classes of business. Most
classes of business produced favorable development for accident
years 2003 and 2004, and adverse development for accident years
2001 and prior.
Net Loss Development by Class of
Business
The following is a discussion of the primary reasons for the
development in 2007, 2006 and 2005 for those classes of business
that experienced significant prior accident year developments
during the three-year period. See Asbestos and Environmental
Reserves below for a further discussion of asbestos and
environmental reserves and developments.
Excess Casualty: Excess Casualty reserves experienced
significant adverse loss development in 2005, but there was only
a relatively minor amount of adverse development in 2006 and
2007. The adverse development for all periods shown related
principally to accident years 2002 and prior, and resulted from
significant loss cost increases due to both frequency and
severity of claims. The increase in loss costs resulted
primarily from medical inflation, which increased the economic
loss component of tort claims, advances in medical care, which
extended the life span of severely injured claimants, and larger
jury verdicts, which increased the value of severe tort claims.
An additional factor affecting AIGs excess casualty
experience in recent years has been the accelerated exhaustion
of underlying primary policies for homebuilders. This has led to
increased construction defect-related claims activity on
AIGs excess policies. Many excess casualty policies were
written on a multi-year basis in the late
50 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
1990s, which limited AIGs ability to respond to emerging
market trends as rapidly as would otherwise be the case. In
subsequent years, AIG responded to these emerging trends by
increasing rates and implementing numerous policy form and
coverage changes. This led to a significant improvement in
experience beginning with accident year 2001. In 2007, a
significant portion of the adverse development from accident
years 2002 and prior also related to other latent exposures,
including pharmaceutical and product aggregate-related exposures
as well as the construction defect exposures noted above.
AIGs exposure to these latent exposures was sharply
reduced after 2002 due to significant changes in policy terms
and conditions as well as underwriting guidelines.
For the year-end 2005 loss reserve review, AIGs actuaries
responded to the continuing adverse development by further
increasing the loss development factors applicable to accident
years 1999 and subsequent by approximately 5 percent. In
addition, to more accurately estimate losses for construction
defect-related claims, a separate review was performed by AIG
claims staff for accounts with significant exposure to these
claims.
For the year-end 2006 loss reserve review, AIG claims staff
updated the separate review for accounts with significant
exposure to construction defect-related claims in order to
assist the actuaries in determining the proper reserve for this
exposure. AIGs actuaries determined that no significant
changes in the assumptions were required. Prior accident year
loss development in 2006 was adverse by approximately
$100 million, a relatively minor amount for this class of
business. However, AIG continued to experience adverse
development for this class for accident years prior to 2003.
For the year-end 2007 loss reserve review, AIG claims staff
updated its review of accounts with significant exposure to
construction defect-related claims. AIGs actuaries
determined that no significant changes in the assumptions were
required. Prior accident year loss developments in 2007 were
adverse by approximately $75 million, a minor amount for
this class of business. However, AIG continued to experience
adverse development in this class for accident years 2002 and
prior, amounting to approximately $450 million in 2007. In
addition, loss reserves developed adversely for accident year
2003 by approximately $100 million in 2007 for this class.
The loss ratio for accident year 2003 remains very favorable for
this class and has been relatively stable over the past several
years. Favorable developments in 2007 for accident years 2004
through 2006 largely offset the adverse developments from
accident years 2003 and prior. A significant portion of the
adverse development from accident years 2002 and prior related
to the latent exposures described above.
Loss reserves pertaining to the excess casualty class of
business are generally included in the other liability
occurrence line of business, with a small portion of the excess
casualty reserves included in the other liability claims made
line of business, as presented in the table above.
D&O and Related Management Liability Classes of
Business: These classes of business experienced significant
adverse development in 2005, but experienced slightly favorable
development in 2006 and more significantly favorable development
in 2007. The adverse development in 2005 related principally to
accident years 2002 and prior. This adverse development resulted
from significant loss cost escalation due to a variety of
factors, including the following: the increase in frequency and
severity of corporate bankruptcies; the increase in frequency of
financial statement restatements; the sharp rise in market
capitalization of publicly traded companies; and the increase in
the number of initial public offerings, which led to an
unprecedented number of IPO allocation/laddering suits in 2001.
In addition, extensive utilization of multi-year policies during
this period limited AIGs ability to respond to emerging
trends as rapidly as would otherwise be the case. AIG
experienced significant adverse loss development during the
period 2002 through 2005 as a result of these issues. AIG
responded to this development with rate increases and policy
form and coverage changes to better contain future loss costs in
this class of business.
For the year-end 2005 loss reserve review, AIGs actuaries
responded to the continuing adverse development by further
increasing the loss development factor assumptions. The loss
development factors applicable to 1997 and subsequent accident
years were increased by approximately 4 percent. In
addition, AIGs actuaries began to give greater weight to
loss development methods for accident years 2002 and 2003, in
order to more fully respond to the recent loss experience.
AIGs claims staff also conducted a series of
ground-up claim
projections covering all open claims for this business through
accident year 2004. AIGs actuaries benchmarked the loss
reserve indications for all accident years through 2004 to these
claim projections.
For the year-end 2006 loss reserve review, AIGs actuaries
determined that no significant changes in the assumptions were
required. Prior accident year loss development in 2006 was
favorable by approximately $20 million, an insignificant
amount for these classes. AIGs actuaries continued to
benchmark the loss reserve indications to the ground-up claim
projections provided by AIG claims staff for this class of
business. For the year-end 2006 loss reserve review, the
ground-up claim projections included all accident years through
2005.
For the year-end 2007 loss reserve review, AIGs actuaries
determined that no significant changes in the assumptions were
required. Prior accident year reserve development in 2007 was
favorable by approximately $305 million, due primarily to
favorable development from accident years 2004 and 2005, and to
a lesser extent 2003 and 2006. AIGs actuaries continued to
benchmark the loss reserve indications to the ground-up claim
projections provided by AIG claims staff for this class of
business. For the year-end 2007 loss reserve review, the
ground-up claim projections included all accident years through
2006, and included stock options backdating-related exposures
from accident year 2006. Accident year 2006 reserves developed
favorably notwithstanding the effect of claims relating to stock
options backdating, which totaled approximately
$300 million. Further, AIG is closely monitoring claims
activity in accident year 2007 relating to the
U.S. residential mortgage market, consistent with the
manner in which claims relating to stock options backdating were
monitored
AIG 2007
Form 10-K
51
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
in 2006, and believes that its reserves as of December 31,
2007 are adequate for its D&O and related management
liability classes of business.
Loss reserves pertaining to D&O and related management
liability classes of business are included in the other
liability claims made line of business, as presented in the
table above.
Excess Workers Compensation: This class of business
experienced significant adverse development in 2005, a
relatively minor amount of adverse development in 2006, and a
minor amount of favorable development in 2007. The adverse
development in 2005 related to 2002 and prior accident years.
This adverse development resulted primarily from significant
loss cost increases, primarily attributable to rapidly
increasing medical inflation and advances in medical care, which
increased the cost of covered medical care and extended the life
span of severely injured workers. The effect of these factors on
excess workers compensation claims experience is leveraged, as
frequency is increased by the rising number of claims that reach
the excess layers.
In response to the significantly adverse loss development in
2005, an additional study was conducted for the
2005 year-end actuarial reserve analysis for DBG pertaining
to the selection of loss development factors for this class of
business. Claims for excess workers compensation exhibit an
exceptionally long-tail of loss development, running for decades
from the date the loss is incurred. Thus, the adequacy of loss
reserves for this class is sensitive to the estimated loss
development factors, as such factors may be applied to many
years of loss experience. In order to better estimate the tail
development for this class, AIG claims staff conducted a
claim-by-claim projection of the expected ultimate paid loss for
each open claim for 1998 and prior accident years as these are
the primary years from which the tail factors are derived. The
objective of the study was to provide a benchmark against which
loss development factors in the tail could be evaluated. The
resulting loss development factors utilized by the actuaries in
the year-end 2005 study reflected an increase of approximately
18 percent from the factors used in the prior year study
without the benefit of the claims benchmark. In addition, the
loss cost trend assumption for excess workers compensation was
increased from approximately 2.5 percent to 6 percent
for the 2005 study.
For the year-end 2006 loss reserve review, AIG claims staff
updated the claim-by-claim projection for each open claim for
accident years 1999 and prior. These updated claims projections
were utilized by the actuaries as a benchmark for loss
development factors in the year-end 2006 study. AIGs
actuaries determined that no significant changes in the
assumptions were required. Prior accident year development in
2006 was adverse by approximately $70 million, a relatively
minor amount for this class.
For the year-end 2007 loss reserve review, AIG claims staff
again updated the
claim-by-claim
projection for each open claim for accident years 2000 and
prior. These updated claims projections were utilized by the
actuaries as a benchmark for loss development factors in the
year-end 2007 study. AIGs actuaries determined that no
significant changes in the assumptions were required. Prior
accident year development in 2007 was favorable by approximately
$15 million, an insignificant amount for this class.
Overview of Loss Reserving
Process
The General Insurance loss reserves can generally be categorized
into two distinct groups. One group is short-tail classes of
business consisting principally of property, personal lines and
certain casualty classes. The other group is long-tail casualty
classes of business which includes excess and umbrella
liability, D&O, professional liability, medical malpractice,
workers compensation, general liability, products liability, and
related classes.
Short-Tail Reserves
For operations writing short-tail coverages, such as property
coverages, the process of recording quarterly loss reserves is
generally geared toward maintaining an appropriate reserve for
the outstanding exposure, rather than determining an expected
loss ratio for current business. For example, the IBNR reserve
required for a class of property business might be expected to
approximate 20 percent of the latest years earned
premiums, and this level of reserve would generally be
maintained regardless of the loss ratio emerging in the current
quarter. The 20 percent factor would be adjusted to reflect
changes in rate levels, loss reporting patterns, known exposure
to unreported losses, or other factors affecting the particular
class of business.
Long-Tail Reserves
Estimation of ultimate net losses and loss expenses (net losses)
for long-tail casualty classes of business is a complex process
and depends on a number of factors, including the class and
volume of business involved. Experience in the more recent
accident years of long-tail casualty classes of business shows
limited statistical credibility in reported net losses because a
relatively low proportion of net losses would be reported claims
and expenses and an even smaller percentage would be net losses
paid. Therefore, IBNR would constitute a relatively high
proportion of net losses.
AIGs carried net long-tail loss reserves are tested using
loss trend factors that AIG considers appropriate for each class
of business. A variety of actuarial methods and assumptions is
normally employed to estimate net losses for long-tail casualty
classes of businesses. These methods ordinarily involve the use
of loss trend factors intended to reflect the annual growth in
loss costs from one accident year to the next. For the majority
of long-tail casualty classes of business, net loss trend
factors approximated five percent. Loss trend factors reflect
many items including changes in claims handling, exposure and
policy forms, current and future estimates of monetary inflation
and social inflation and increases in litigation and awards.
These factors are periodically reviewed and adjusted, as
appropriate, to reflect emerging trends which are based upon
past loss experience. Thus, many factors are implicitly
considered in estimating the year to year growth in loss costs.
52 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
A number of actuarial assumptions are generally made in the
review of reserves for each class of business. For longer tail
classes of business, actuarial assumptions generally are made
with respect to the following:
|
|
|
Loss trend factors which are used to establish expected loss
ratios for subsequent accident years based on the projected loss
ratio for prior accident years. |
|
Expected loss ratios for the latest accident year (i.e.,
accident year 2007 for the year-end 2007 loss reserve analysis)
and, in some cases for accident years prior to the latest
accident year. The expected loss ratio generally reflects the
projected loss ratio from prior accident years, adjusted for the
loss trend (see above) and the effect of rate changes and other
quantifiable factors on the loss ratio. For low-frequency,
high-severity classes such as excess casualty, expected loss
ratios generally are used for at least the three most recent
accident years. |
|
Loss development factors which are used to project the reported
losses for each accident year to an ultimate basis. Generally,
the actual loss development factors observed from prior accident
years would be used as a basis to determine the loss development
factors for the subsequent accident years. |
AIG records quarterly changes in loss reserves for each of its
many General Insurance classes of business. The overall change
in AIGs loss reserves is based on the sum of these classes
of business changes. For most long-tail classes of business, the
process of recording quarterly loss reserve changes involves
determining the estimated current loss ratio for each class of
coverage. This loss ratio is multiplied by the current
quarters net earned premium for that class of coverage to
determine the current accident quarters total estimated
net incurred loss and loss expense. The change in loss reserves
for the quarter for each class is thus the difference between
the net incurred loss and loss expense, estimated as described
above, and the net paid losses and loss expenses in the quarter.
Also any change in estimated ultimate losses from prior accident
years, either positive or negative, is reflected in the loss
reserve for the current quarter.
Details of the Loss Reserving
Process
The process of determining the current loss ratio for each class
of business is based on a variety of factors. These include, but
are not limited to, the following considerations: prior accident
year and policy year loss ratios; rate changes; changes in
coverage, reinsurance, or mix of business; and actual and
anticipated changes in external factors affecting results, such
as trends in loss costs or in the legal and claims environment.
The current loss ratio for each class of business reflects input
from actuarial, underwriting and claims staff and is intended to
represent managements best estimate of the current loss
ratio after reflecting all of the factors described above. At
the close of each quarter, the assumptions underlying the loss
ratios are reviewed to determine if the loss ratios based
thereon remain appropriate. This process includes a review of
the actual claims experience in the quarter, actual rate changes
achieved, actual changes in coverage, reinsurance or mix of
business, and changes in certain other factors that may affect
the loss ratio. When this review suggests that the initially
determined loss ratio is no longer appropriate, the loss ratio
for current business is changed to reflect the revised
assumptions.
A comprehensive annual loss reserve review is completed in the
fourth quarter of each year for each AIG general insurance
subsidiary. These reviews are conducted in full detail for each
class of business for each subsidiary, and thus consist of
hundreds of individual analyses. The purpose of these reviews is
to confirm the appropriateness of the reserves carried by each
of the individual subsidiaries, and therefore of AIGs
overall carried reserves. The reserve analysis for each class of
business is performed by the actuarial personnel who are most
familiar with that class of business. In completing these
detailed actuarial reserve analyses, the actuaries are required
to make numerous assumptions, including the selection of loss
development factors and loss cost trend factors. They are also
required to determine and select the most appropriate actuarial
methods to employ for each business class. Additionally, they
must determine the appropriate segmentation of data from which
the adequacy of the reserves can be most accurately tested. In
the course of these detailed reserve reviews a point estimate of
the loss reserve is determined. The sum of these point estimates
for each class of business for each subsidiary provides an
overall actuarial point estimate of the loss reserve for that
subsidiary. The ultimate process by which the actual carried
reserves are determined considers both the actuarial point
estimate and numerous other internal and external factors
including a qualitative assessment of inflation and other
economic conditions in the United States and abroad, changes in
the legal, regulatory, judicial and social environment,
underlying policy pricing, terms and conditions, and claims
handling. Loss reserve development can also be affected by
commutations of assumed and ceded reinsurance agreements.
Actuarial Methods for Major Classes of Business
In testing the reserves for each class of business, a
determination is made by AIGs actuaries as to the most
appropriate actuarial methods. This determination is based on a
variety of factors including the nature of the claims associated
with the class of business, such as frequency or severity. Other
factors considered include the loss development characteristics
associated with the claims, the volume of claim data available
for the applicable class, and the applicability of various
actuarial methods to the class. In addition to determining the
actuarial methods, the actuaries determine the appropriate loss
reserve groupings of data. For example, AIG writes a great
number of unique subclasses of professional liability. For
pricing or other purposes, it is appropriate to evaluate the
profitability of each subclass individually. However, for
purposes of estimating the loss reserves for professional
liability, it is appropriate to combine the subclasses into
larger groups. The greater degree of credibility in the claims
experience of the larger groups may outweigh the greater degree
of homogeneity of the individual subclasses. This determination
of data segmentation and actuarial methods is carefully
considered for each class of business. The segmentation and
actuarial methods chosen are those which together are expected
to produce the most accurate estimate of the loss reserves.
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Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
Actuarial methods used by AIG for most long-tail casualty
classes of business include loss development methods and
expected loss ratio methods, including Bornhuetter
Ferguson methods described below. Other methods considered
include frequency/severity methods, although these are generally
used by AIG more for pricing analysis than for loss reserve
analysis. Loss development methods utilize the actual loss
development patterns from prior accident years to project the
reported losses to an ultimate basis for subsequent accident
years. Loss development methods generally are most appropriate
for classes of business which exhibit a stable pattern of loss
development from one accident year to the next, and for which
the components of the classes have similar development
characteristics. For example, property exposures would generally
not be combined into the same class as casualty exposures, and
primary casualty exposures would generally not be combined into
the same class as excess casualty exposures. Expected loss ratio
methods are generally utilized by AIG where the reported loss
data lacks sufficient credibility to utilize loss development
methods, such as for new classes of business or for long-tail
classes at early stages of loss development.
Expected loss ratio methods rely on the application of an
expected loss ratio to the earned premium for the class of
business to determine the loss reserves. For example, an
expected loss ratio of 70 percent applied to an earned
premium base of $10 million for a class of business would
generate an ultimate loss estimate of $7 million.
Subtracting any reported paid losses and loss expense would
result in the indicated loss reserve for this class.
Bornhuetter Ferguson methods are expected loss ratio
methods for which the expected loss ratio is applied only to the
expected unreported portion of the losses. For example, for a
long-tail class of business for which only 10 percent of
the losses are expected to be reported at the end of the
accident year, the expected loss ratio would be applied to the
90 percent of the losses still unreported. The actual
reported losses at the end of the accident year would be added
to determine the total ultimate loss estimate for the accident
year. Subtracting the reported paid losses and loss expenses
would result in the indicated loss reserve. In the example
above, the expected loss ratio of 70 percent would be
multiplied by 90 percent. The result of 63 percent
would be applied to the earned premium of $10 million
resulting in an estimated unreported loss of $6.3 million.
Actual reported losses would be added to arrive at the total
ultimate losses. If the reported losses were $1 million,
the ultimate loss estimate under the Bornhuetter
Ferguson method would be $7.3 million versus the
$7 million amount under the expected loss ratio method
described above. Thus, the Bornhuetter Ferguson
method gives partial credibility to the actual loss experience
to date for the class of business. Loss development methods
generally give full credibility to the reported loss experience
to date. In the example above, loss development methods would
typically indicate an ultimate loss estimate of
$10 million, as the reported losses of $1 million
would be estimated to reflect only 10 percent of the
ultimate losses.
A key advantage of loss development methods is that they respond
quickly to any actual changes in loss costs for the class of
business. Therefore, if loss experience is unexpectedly
deteriorating or improving, the loss development method gives
full credibility to the changing experience. Expected loss ratio
methods would be slower to respond to the change, as they would
continue to give more weight to the expected loss ratio, until
enough evidence emerged for the expected loss ratio to be
modified to reflect the changing loss experience. On the other
hand, loss development methods have the disadvantage of
overreacting to changes in reported losses if in fact the loss
experience is not credible. For example, the presence or absence
of large losses at the early stages of loss development could
cause the loss development method to overreact to the favorable
or unfavorable experience by assuming it will continue at later
stages of development. In these instances, expected loss ratio
methods such as Bornhuetter Ferguson have the
advantage of properly recognizing large losses without
extrapolating unusual large loss activity onto the unreported
portion of the losses for the accident year. AIGs loss
reserve reviews for long-tail classes typically utilize a
combination of both loss development and expected loss ratio
methods. Loss development methods are generally given more
weight for accident years and classes of business where the loss
experience is highly credible. Expected loss ratio methods are
given more weight where the reported loss experience is less
credible, or is driven more by large losses. Expected loss ratio
methods require sufficient information to determine the
appropriate expected loss ratio. This information generally
includes the actual loss ratios for prior accident years, and
rate changes as well as underwriting or other changes which
would affect the loss ratio. Further, an estimate of the loss
cost trend or loss ratio trend is required in order to allow for
the effect of inflation and other factors which may increase or
otherwise change the loss costs from one accident year to the
next.
Frequency/severity methods generally rely on the determination
of an ultimate number of claims and an average severity for each
claim for each accident year. Multiplying the estimated ultimate
number of claims for each accident year by the expected average
severity of each claim produces the estimated ultimate loss for
the accident year. Frequency/severity methods generally require
a sufficient volume of claims in order for the average severity
to be predictable. Average severity for subsequent accident
years is generally determined by applying an estimated annual
loss cost trend to the estimated average claim severity from
prior accident years. Frequency/severity methods have the
advantage that ultimate claim counts can generally be estimated
more quickly and accurately than can ultimate losses. Thus, if
the average claim severity can be accurately estimated, these
methods can more quickly respond to changes in loss experience
than other methods. However, for average severity to be
predictable, the class of business must consist of homogeneous
types of claims for which loss severity trends from one year to
the next are reasonably consistent. Generally these methods work
best for high frequency, low severity classes of business such
as personal auto. AIG also utilizes these methods in pricing
subclasses of professional liability. However, AIG does not
generally utilize
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American International Group, Inc. and Subsidiaries
frequency/severity methods to test loss reserves, due to the
general nature of AIGs reserves being applicable to lower
frequency, higher severity commercial classes of business where
average claim severity is volatile.
Excess Casualty: AIG generally uses a combination of loss
development methods and expected loss ratio methods for excess
casualty classes. Expected loss ratio methods are generally
utilized for at least the three latest accident years, due to
the relatively low credibility of the reported losses. The loss
experience is generally reviewed separately for lead umbrella
classes and for other excess classes, due to the relatively
shorter tail for lead umbrella business. Automobile-related
claims are generally reviewed separately from non-auto claims,
due to the shorter tail nature of the automobile related claims.
The expected loss ratios utilized for recent accident years are
based on the projected ultimate loss ratios of prior years,
adjusted for rate changes, estimated loss cost trends and all
other changes that can be quantified. The estimated loss cost
trend utilized in the year-end 2007 reviews averaged
approximately five percent for excess casualty classes.
Frequency/severity methods are generally not utilized as the
vast majority of reported claims do not result in a claim
payment. In addition, the average severity varies significantly
from accident year to accident year due to large losses which
characterize this class of business, as well as changing
proportions of claims which do not result in a claim payment.
D&O: AIG generally utilizes a combination of loss
development methods and expected loss ratio methods for D&O
and related management liability classes of business. Expected
loss ratio methods are given more weight in the two most recent
accident years, whereas loss development methods are given more
weight in more mature accident years. Beginning with the
year-end 2005 loss reserve review, AIGs actuaries began to
utilize claim projections provided by AIG claims staff as a
benchmark for determining the indicated ultimate losses for
accident years 2004 and prior. For the year end 2007 loss
reserve review, claims projections for accident years 2006 and
prior were utilized. In prior years, AIGs actuaries had
utilized these claims projections as a benchmark for
profitability studies for major classes of D&O and related
management liability business. The track record of these claims
projections has indicated a very low margin of error, thus
providing support for their usage as a benchmark in determining
the estimated loss reserve. These classes of business reflect
claims made coverage, and losses are characterized by low
frequency and high severity. Thus, the claim projections can
produce an accurate overall indicator of the ultimate loss
exposure for these classes by identifying and estimating all
large losses. Frequency/severity methods are generally not
utilized for these classes as the overall losses are driven by
large losses more than by claim frequency. Severity trends have
varied significantly from accident year to accident year.
Workers Compensation: AIG generally utilizes loss
development methods for all but the most recent accident year.
Expected loss ratio methods generally are given significant
weight only in the most recent accident year. Workers
compensation claims are generally characterized by high
frequency, low severity, and relatively consistent loss
development from one accident year to the next. AIG is a leading
writer of workers compensation, and thus has sufficient volume
of claims experience to utilize development methods. AIG does
not believe frequency/severity methods are as appropriate, due
to significant growth and changes in AIGs workers
compensation business over the years. AIG generally segregates
California business from other business in evaluating workers
compensation reserves. Certain classes of workers compensation,
such as construction, are also evaluated separately.
Additionally, AIG writes a number of very large accounts which
include workers compensation coverage. These accounts are
generally priced by AIG actuaries, and to the extent
appropriate, the indicated losses based on the pricing analysis
may be utilized to record the initial estimated loss reserves
for these accounts.
Excess Workers Compensation: AIG generally utilizes a
combination of loss development methods and expected loss ratio
methods. Loss development methods are given the greater weight
for mature accident years such as 2001 and prior. Expected loss
ratio methods are given the greater weight for the more recent
accident years. Excess workers compensation is an extremely
long-tail class of business, with loss emergence extending for
decades. Therefore there is limited credibility in the reported
losses for many of the more recent accident years. Beginning
with the year-end 2005 loss reserve review, AIGs actuaries
began to utilize claims projections provided by AIG claims staff
to help determine the loss development factors for this class of
business.
General Liability: AIG generally uses a combination of
loss development methods and expected loss ratio methods for
primary general liability or products liability classes. For
certain classes of business with sufficient loss volume, loss
development methods may be given significant weight for all but
the most recent one or two accident years, whereas for smaller
or more volatile classes of business, loss development methods
may be given limited weight for the five or more most recent
accident years. Expected loss ratio methods would be utilized
for the more recent accident years for these classes. The loss
experience for primary general liability business is generally
reviewed at a level that is believed to provide the most
appropriate data for reserve analysis. For example, primary
claims made business is generally segregated from business
written on an occurrence policy form. Additionally, certain
subclasses, such as construction, are generally reviewed
separately from business in other subclasses. Due to the fairly
long-tail nature of general liability business, and the many
subclasses that are reviewed individually, there is less
credibility in the reported losses and increased reliance on
expected loss ratio methods. AIGs actuaries generally do
not utilize frequency/severity methods to test reserves for this
business, due to significant changes and growth in AIGs
general liability and products liability business over the years.
Commercial Automobile Liability: AIG generally utilizes
loss development methods for all but the most recent accident
year for commercial automobile classes of business. Expected
loss ratio methods are generally given significant weight only
in the most recent accident year. Frequency/severity methods are
generally
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Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
not utilized due to significant changes and growth in this
business over the years.
Healthcare: AIG generally uses a combination of loss
development methods and expected loss ratio methods for
healthcare classes of business. The largest component of the
healthcare business consists of coverage written for hospitals
and other healthcare facilities. Reserves for excess coverage
are tested separately from those for primary coverage. For
primary coverages, loss development methods are generally given
the majority of the weight for all but the latest three accident
years, and are given some weight for all years other than the
latest accident year. For excess coverages, expected loss
methods are generally given all the weight for the latest three
accident years, and are also given considerable weight for
accident years prior to the latest three years. For other
classes of healthcare coverage, an analogous weighting between
loss development and expected loss ratio methods is utilized.
The weights assigned to each method are those which are believed
to result in the best combination of responsiveness and
stability. Frequency/severity methods are sometimes utilized for
pricing certain healthcare accounts or business. However, in
testing loss reserves the business is generally combined into
larger groupings to enhance the credibility of the loss
experience. The frequency/severity methods that are applicable
in pricing may not be appropriate for reserve testing and thus
frequency/severity methods are not generally employed in
AIGs healthcare reserve analyses.
Professional Liability: AIG generally uses a combination
of loss development methods and expected loss ratio methods for
professional liability classes of business. Loss development
methods are used for the more mature accident years. Greater
weight is given to expected loss ratio methods in the more
recent accident years. Reserves are tested separately for claims
made classes and classes written on occurrence policy forms.
Further segmentations are made in a manner believed to provide
an appropriate balance between credibility and homogeneity of
the data. Frequency/severity methods are used in pricing and
profitability analyses for some classes of professional
liability; however, for loss reserve testing, the need to
enhance credibility generally results in classes that are not
sufficiently homogenous to utilize frequency/severity methods.
Catastrophic Casualty: AIG utilizes expected loss ratio
methods for all accident years for catastrophic casualty
business. This class of business consists of casualty or
financial lines coverage which attaches in excess of very high
attachment points; thus the claims experience is marked by very
low frequency and high severity. Because of the limited number
of claims, loss development methods are not utilized. The
expected loss ratios and loss development assumptions utilized
are based upon the results of prior accident years for this
business as well as for similar classes of business written
above lower attachment points. The business is generally written
on a claims made basis. AIG utilizes ground-up claim projections
provided by AIG claims staff to assist in developing the
appropriate reserve.
Aviation: AIG generally uses a combination of loss
development methods and expected loss ratio methods for aviation
exposures. Aviation claims are not very long-tail in nature;
however, they are driven by claim severity. Thus a combination
of both development and expected loss ratio methods are used for
all but the latest accident year to determine the loss reserves.
Expected loss ratio methods are used to determine the loss
reserves for the latest accident year. Frequency/severity
methods are not employed due to the high severity nature of the
claims and different mix of claims from year to year.
Personal Auto (Domestic): AIG generally utilizes
frequency/severity methods and loss development methods for
domestic personal auto classes. For many classes of business,
greater reliance is placed on frequency/severity methods as
claim counts emerge quickly for personal auto and allow for more
immediate analysis of resulting loss trends and comparisons to
industry and other diagnostic metrics.
Fidelity/ Surety: AIG generally uses loss development
methods for fidelity exposures for all but the latest accident
year. Expected loss ratio methods are also given weight for the
more recent accident years, and for the latest accident year
they may be given 100 percent weight. For surety exposures,
AIG generally uses the same method as for short-tail classes.
Mortgage Guaranty: AIG tests mortgage guaranty reserves
using loss development methods, supplemented by an internal
claim analysis by actuaries and staff who specialize in the
mortgage guaranty business. The claim analysis projects ultimate
losses for claims within each of several categories of
delinquency based on actual historical experience and is
essentially a frequency/severity analysis for each category of
delinquency. Additional reserve tests using Bornhuetter
Ferguson methods are also employed, as well as tests
measuring losses as a percent of risk in force. Reserves are
reviewed separately for each class of business to consider the
loss development characteristics associated with the claims, the
volume of claim data available for the applicable class and the
applicability of various actuarial methods to the class.
Short-Tail Classes: AIG generally uses either loss
development methods or IBNR factor methods to set reserves for
short-tail classes such as property coverages. Where a factor is
used, it generally represents a percent of earned premium or
other exposure measure. The factor is determined based on prior
accident year experience. For example, the IBNR for a class of
property coverage might be expected to approximate
20 percent of the latest years earned premium. The
factor is continually reevaluated in light of emerging claim
experience as well as rate changes or other factors that could
affect the adequacy of the IBNR factor being employed.
International: Business written by AIGs Foreign
General Insurance sub-segment includes both long-tail and
short-tail classes of business. For long-tail classes of
business, the actuarial methods utilized would be analogous to
those described above. However, the majority of business written
by Foreign General Insurance is short-tail, high frequency and
low severity in nature. For this business, loss development
methods are generally employed to
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American International Group, Inc. and Subsidiaries
test the loss reserves. AIG maintains a data base of detailed
historical premium and loss transactions in original currency
for business written by Foreign General Insurance, thereby
allowing AIG actuaries to determine the current reserves without
any distortion from changes in exchange rates over time. In
testing the Foreign General Insurance reserves, AIGs
actuaries segment the data by region, country or class of
business as appropriate to determine an optimal balance between
homogeneity and credibility.
Loss Adjustment Expenses: AIG determines reserves for
legal defense and cost containment loss adjustment expenses for
each class of business by one or more actuarial methods. The
methods generally include development methods analogous to those
described for loss development methods. The developments could
be based on either the paid loss adjustment expenses or the
ratio of paid loss adjustment expenses to paid losses, or both.
Other methods include the utilization of expected ultimate
ratios of paid loss expense to paid losses, based on actual
experience from prior accident years or from similar classes of
business. AIG generally determines reserves for adjuster loss
adjustment expenses based on calendar year ratios of adjuster
expenses paid to losses paid for the particular class of
business. AIG generally determines reserves for other
unallocated loss adjustment expenses based on the ratio of the
calendar year expenses paid to overall losses paid. This
determination is generally done for all classes of business
combined, and reflects costs of home office claim overhead as a
percent of losses paid.
Catastrophes: Special analyses are conducted by AIG in
response to major catastrophes in order to estimate AIGs
gross and net loss and loss expense liability from the events.
These analyses may include a combination of approaches,
including modeling estimates, ground up claim analysis, loss
evaluation reports from on-site field adjusters, and market
share estimates.
AIGs loss reserve analyses do not calculate a range of
loss reserve estimates. Because a large portion of the loss
reserves from AIGs General Insurance business relates to
longer-tail casualty classes of business driven by severity
rather than frequency of claims, such as excess casualty and
D&O, developing a range around loss reserve estimates would
not be meaningful. Using the reserving methodologies described
above, AIGs actuaries determine their best estimate of the
required reserve and advise Management of that amount. AIG then
adjusts its aggregate carried reserves as necessary so that the
actual carried reserves as of December 31 reflect this best
estimate.
Volatility of Reserve Estimates and Sensitivity Analyses
As described above, AIG uses numerous assumptions in determining
its best estimate of reserves for each class of business. The
importance of any specific assumption can vary by both class of
business and accident year. If actual experience differs from
key assumptions used in establishing reserves, there is
potential for significant variation in the development of loss
reserves, particularly for long-tail casualty classes of
business such as excess casualty, D&O or workers
compensation. Set forth below is a sensitivity analysis that
estimates the effect on the loss reserve position of using
alternative loss trend or loss development factor assumptions
rather than those actually used in determining AIGs best
estimates in the year-end loss reserve analyses in 2007. The
analysis addresses each major class of business for which a
material deviation to AIGs overall reserve position is
believed reasonably possible, and uses what AIG believes is a
reasonably likely range of potential deviation for each class.
There can be no assurance, however, that actual reserve
development will be consistent with either the original or the
adjusted loss trend or loss development factor assumptions, or
that other assumptions made in the reserving process will not
materially affect reserve development for a particular class of
business.
Excess Casualty: For the excess casualty class of
business, the assumed loss cost trend was approximately five
percent. After evaluating the historical loss cost trends from
prior accident years since the early 1990s, in AIGs
judgment, it is reasonably likely that actual loss cost trends
applicable to the year-end 2007 loss reserve review for excess
casualty will range from negative five percent to positive
15 percent, or approximately ten percent lower or higher
than the assumption actually utilized in the year-end 2007
reserve review. A ten percent change in the assumed loss cost
trend for excess casualty would cause approximately a
$2.4 billion increase or a $1.6 billion decrease in
the net loss and loss expense reserve for this class of
business. It should be emphasized that the ten percent
deviations are not considered the highest possible deviations
that might be expected, but rather what is considered by AIG to
reflect a reasonably likely range of potential deviation. Actual
loss cost trends in the early 1990s were negative for several
years, including amounts below the negative five percent cited
above, whereas actual loss cost trends in the late 1990s ran
well into the double digits for several years, including amounts
greater than the 15 percent cited above. Thus, there can be
no assurance that loss trends will not deviate by more than ten
percent. The loss cost trend assumption is critical for the
excess casualty class of business due the long-tail nature of
the claims and therefore is applied across many accident years.
For the excess casualty class of business, the assumed loss
development factors are also a key assumption. After evaluating
the historical loss development factors from prior accident
years since the early 1990s, in AIGs judgment, it is
reasonably likely that actual loss development factors will
range from approximately 3.5 percent below those actually
utilized in the year-end 2007 reserve review to approximately
6.5 percent above those factors actually utilized. If the
loss development factor assumptions were changed by
3.5 percent and 6.5 percent, respectively, the net
loss reserves for the excess casualty class would decrease by
approximately $600 million under the lower assumptions or
increase by approximately $1.0 billion under the higher
assumptions. Generally, actual historical loss development
factors are used to project future loss development. However
there can be no assurance that future loss development patterns
will be the same as in the past, or that they will not deviate
by more than the amounts illustrated above. Moreover, as excess
casualty is a long-tail class of business, any deviation in loss
cost trends or in loss development factors might not be
discernible for an extended
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Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
period of time subsequent to the recording of the initial loss
reserve estimates for any accident year. Thus, there is the
potential for the reserves with respect to a number of accident
years to be significantly affected by changes in the loss cost
trends or loss development factors that were initially relied
upon in setting the reserves. These changes in loss trends or
loss development factors could be attributable to changes in
inflation or in the judicial environment, or in other social or
economic conditions affecting claims. Thus, there is the
potential for variations greater than the amounts cited above,
either positively or negatively.
D&O and Related Management Liability Classes of
Business: For D&O and related management liability
classes of business, the assumed loss cost trend was
approximately four percent. After evaluating the historical loss
cost trends from prior accident years since the early 1990s, in
AIGs judgment, it is reasonably likely that actual loss
cost trends applicable to the year-end 2007 loss reserve review
for these classes will range from negative 11 percent to
positive 19 percent, or approximately 15 percent lower
or higher than the assumption actually utilized in the year-end
2007 reserve review. A 15 percent change in the assumed
loss cost trend for these classes would cause approximately a
$550 million increase or a $500 million decrease in
the net loss and loss expense reserves for these classes of
business. It should be emphasized that the 15 percent
deviations are not considered the highest possible deviations
that might be expected, but rather what is considered by AIG to
reflect a reasonably likely range of potential deviation. Actual
loss cost trends for these classes in the early 1990s were
negative for several years, including amounts below the negative
11 percent cited above, whereas actual loss cost trends in
the late 1990s ran at nearly 50 percent per year for several
years, vastly exceeding the 19 percent figure cited above.
Because the D&O class of business has exhibited highly
volatile loss trends from one accident year to the next, there
is the possibility of an exceptionally high deviation.
For D&O and related management liability classes of
business, the assumed loss development factors are also an
important assumption but less critical than for excess casualty.
Because these classes are written on a claims made basis, the
loss reporting and development tail is much shorter than for
excess casualty. However, the high severity nature of the claims
does create the potential for significant deviations in loss
development patterns from one year to the next. After evaluating
the historical loss development factors for these classes of
business for accident years since the early 1990s, in AIGs
judgment, it is reasonably likely that actual loss development
factors will range approximately 6 percent lower to
3.5 percent higher than those factors actually utilized in
the year-end 2007 loss reserve review for these classes. If the
loss development factor assumptions were changed by
6 percent and 3.5 percent, respectively, the net loss
reserves for these classes would be estimated to decrease or
increase by approximately $250 million and
$125 million, respectively. As noted above for excess
casualty, actual historical loss development factors are
generally used to project future loss development. However,
there can be no assurance that future loss development patterns
will be the same as in the past, or that they will not deviate
by more than the 6 percent or 3.5 percent amounts.
Excess Workers Compensation: For excess workers
compensation business, loss costs were trended at six percent
per annum. After reviewing actual industry loss trends for the
past ten years, in AIGs judgment, it is reasonably likely
that actual loss cost trends applicable to the year-end 2007
loss reserve review for excess workers compensation will range
five percent lower or higher than this estimated loss trend. A
five percent change in the assumed loss cost trend would cause
approximately a $425 million increase or a
$275 million decrease in the net loss reserves for this
business. It should be emphasized that the actual loss cost
trend could vary significantly from this assumption, and there
can be no assurance that actual loss costs will not deviate,
perhaps materially, by greater than five percent.
For excess workers compensation business, the assumed loss
development factors are a critical assumption. Excess workers
compensation is an extremely long-tail class of business, with a
much greater than normal uncertainty as to the appropriate loss
development factors for the tail of the loss development. After
evaluating the historical loss development factors for prior
accident years since the 1980s, in AIGs judgment, it is
reasonably likely that actual loss development factors will
range approximately 15 percent lower or higher than those
factors actually utilized in the year-end 2007 loss reserve
review for excess workers compensation. If the loss development
factor assumptions were changed by 15 percent, the net loss
reserves for excess workers compensation would increase or
decrease by approximately $600 million. Given the
exceptionally long-tail for this class of business, there is the
potential for actual deviations in the loss development tail to
exceed the deviations assumed, perhaps materially.
Primary Workers Compensation: For primary workers
compensation, the loss cost trend assumption is not believed to
be material with respect to AIGs loss reserves. This is
primarily because AIGs actuaries are generally able to use
loss development projections for all but the most recent
accident years reserves, so there is limited need to rely
on loss cost trend assumptions for primary workers compensation
business.
However, for primary workers compensation business the loss
development factor assumptions are important. Generally,
AIGs actual historical workers compensation loss
development factors would be expected to provide a reasonably
accurate predictor of future loss development. However, workers
compensation is a long-tail class of business, and AIGs
business reflects a very significant volume of losses
particularly in recent accident years due to growth of the
business. After evaluating the actual historical loss
developments since the 1980s for this business, in AIGs
judgment, it is reasonably likely that actual loss development
factors will fall within the range of approximately 3.5 percent
below to 8.25 percent above those actually utilized in the
year-end 2007 loss reserve review. If the loss development
factor assumptions were changed by 3.5 percent and
8.25 percent, respectively, the net loss reserves for
workers compensation
58 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
would decrease or increase by approximately $800 million
and $1.9 billion, respectively. It should be noted that
loss emergence in 2006 and 2007 for this class was higher than
historical averages, resulting in an increase in loss reserves
for prior accident years. During 2007, reserves from prior
accident years developed adversely by approximately
$300 million for AIGs primary workers compensation
business. AIG relies on longer term averages of historical loss
development patterns in setting loss reserves; thus if loss
emergence in subsequent years continues at the levels observed
in 2006 and 2007 there could be additional adverse development
for this class of business that could be more significant than
the amount observed in 2007. However, AIG believes it is too
soon to ascertain if this increased emergence represents a new
trend in the pattern of loss development. For this class of
business, there can be no assurance that actual deviations from
the expected loss development factors will not exceed the
deviations assumed, perhaps materially.
Other Casualty Classes of Business: For casualty business
other than the classes discussed above, there is generally some
potential for deviation in both the loss cost trend and loss
development factor assumptions. However, the effect of such
deviations is expected to be less material when compared to the
effect on the classes cited above.
Asbestos and Environmental
Reserves
The estimation of loss reserves relating to asbestos and
environmental claims on insurance policies written many years
ago is subject to greater uncertainty than other types of claims
due to inconsistent court decisions as well as judicial
interpretations and legislative actions that in some cases have
tended to broaden coverage beyond the original intent of such
policies and in others have expanded theories of liability. The
insurance industry as a whole is engaged in extensive litigation
over these coverage and liability issues and is thus confronted
with a continuing uncertainty in its efforts to quantify these
exposures.
AIG continues to receive claims asserting injuries and damages
from toxic waste, hazardous substances, and other environmental
pollutants and alleged claims to cover the cleanup costs of
hazardous waste dump sites, referred to collectively as
environmental claims, and indemnity claims asserting injuries
from asbestos.
The vast majority of these asbestos and environmental claims
emanate from policies written in 1984 and prior years.
Commencing in 1985, standard policies contained an absolute
exclusion for pollution-related damage and an absolute asbestos
exclusion was also implemented. The current environmental
policies that AIG underwrites on a claims-made basis have been
excluded from the analysis herein.
The majority of AIGs exposures for asbestos and
environmental claims are excess casualty coverages, not primary
coverages. Thus, the litigation costs are treated in the same
manner as indemnity amounts. That is, litigation expenses are
included within the limits of the liability AIG incurs.
Individual significant claim liabilities, where future
litigation costs are reasonably determinable, are established on
a case-by-case basis.
Estimation of asbestos and environmental claims loss reserves is
a subjective process and reserves for asbestos and environmental
claims cannot be estimated using conventional reserving
techniques such as those that rely on historical accident year
loss development factors. The methods used to determine asbestos
and environmental loss estimates and to establish the resulting
reserves are continually reviewed and updated by management.
Significant factors which affect the trends that influence the
asbestos and environmental claims estimation process are the
court resolutions and judicial interpretations which broaden the
intent of the policies and scope of coverage. The current case
law can be characterized as still evolving, and there is little
likelihood that any firm direction will develop in the near
future. Additionally, the exposures for cleanup costs of
hazardous waste dump sites involve issues such as allocation of
responsibility among potentially responsible parties and the
governments refusal to release parties from liability.
Due to this uncertainty, it is not possible to determine the
future development of asbestos and environmental claims with the
same degree of reliability as with other types of claims. Such
future development will be affected by the extent to which
courts continue to expand the intent of the policies and the
scope of the coverage, as they have in the past, as well as by
the changes in Superfund and waste dump site coverage and
liability issues. If the asbestos and environmental reserves
develop deficiently, such deficiency would have an adverse
effect on AIGs future results of operations.
With respect to known asbestos and environmental claims, AIG
established over a decade ago specialized toxic tort and
environmental claims units, which investigate and adjust all
such asbestos and environmental claims. These units evaluate
these asbestos and environmental claims utilizing a
claim-by-claim approach that involves a detailed review of
individual policy terms and exposures. Because each policyholder
presents different liability and coverage issues, AIG generally
evaluates exposure on a policy-by-policy basis, considering a
variety of factors such as known facts, current law,
jurisdiction, policy language and other factors that are unique
to each policy. Quantitative techniques have to be supplemented
by subjective considerations, including management judgment.
Each claim is reviewed at least semi-annually utilizing the
aforementioned approach and adjusted as necessary to reflect the
current information.
In both the specialized and dedicated asbestos and environmental
claims units, AIG actively manages and pursues early resolution
with respect to these claims in an attempt to mitigate its
exposure to the unpredictable development of these claims. AIG
attempts to mitigate its known long-tail environmental exposures
by utilizing a combination of proactive claim-resolution
techniques, including policy buybacks, complete environmental
releases, compromise settlements, and, where indicated,
litigation.
With respect to asbestos claims handling, AIGs specialized
claims staff operates to mitigate losses through proactive
handling, supervision and resolution of asbestos cases. Thus,
while AIG has resolved all claims with respect to miners and
major manufacturers (Tier One), its claims staff continues
to operate under the same proactive philosophy to resolve claims
involving accounts with products containing asbestos
(Tier Two), products
AIG 2007
Form 10-K
59
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
containing small amounts of asbestos, companies in the
distribution process, and parties with remote, ill-defined
involvement in asbestos (Tiers Three and Four). Through its
commitment to appropriate staffing, training, and management
oversight of asbestos cases, AIG seeks to mitigate its exposure
to these claims.
To determine the appropriate loss reserve as of
December 31, 2007 for its asbestos and environmental
exposures, AIG performed a series of top-down and ground-up
reserve analyses. In order to ensure it had the most
comprehensive analysis possible, AIG engaged a third-party
actuary to assist in a review of these exposures, including
ground-up estimates for asbestos reserves consistent with the
2005 and 2006 reviews as well as a top-down report year
projection for environmental reserves. Prior to 2005, AIGs
reserve analyses for asbestos and environmental exposures was
focused around a report year projection of aggregate losses for
both asbestos and environmental reserves. Additional tests such
as market share analyses were also performed. Ground-up analyses
take into account policyholder-specific and claim-specific
information that has been gathered over many years from a
variety of sources. Ground-up studies can thus more accurately
assess the exposure to AIGs layers of coverage for each
policyholder, and hence for all policyholders in the aggregate,
provided a sufficient sample of the policyholders can be modeled
in this manner.
In order to ensure its ground-up analysis was comprehensive, AIG
staff produced the information required at policy and claim
level detail for nearly 1,000 asbestos defendants. This
represented over 95 percent of all accounts for which AIG
had received any claim notice of any amount pertaining to
asbestos exposure. AIG did not set any minimum thresholds, such
as amount of case reserve outstanding, or paid losses to date,
that would have served to reduce the sample size and hence the
comprehensiveness of the ground-up analysis. The results of the
ground-up analysis for each significant account were examined by
AIGs claims staff for reasonableness, for consistency with
policy coverage terms, and any claim settlement terms
applicable. Adjustments were incorporated accordingly. The
results from the universe of modeled accounts, which as noted
above reflects the vast majority of AIGs known exposures,
were then utilized to estimate the ultimate losses from accounts
or exposures that could not be modeled and to determine an
appropriate provision for unreported claims.
AIG conducted a comprehensive analysis of reinsurance
recoverability to establish the appropriate asbestos and
environmental reserve net of reinsurance. AIG determined the
amount of reinsurance that would be ceded to insolvent
reinsurers or to commuted reinsurance contracts for both
reported claims and for IBNR. These amounts were then deducted
from the indicated amount of reinsurance recoverable. The
year-end 2007 analysis reflected an update to the comprehensive
analysis of reinsurance recoverability that was first completed
in 2005 and updated in 2006. All asbestos accounts for which
there was a significant change in estimated losses in the 2007
review were analyzed to determine the appropriate reserve net of
reinsurance.
AIG also completed a top-down report year projection of its
indicated asbestos and environmental loss reserves. These
projections consist of a series of tests performed separately
for asbestos and for environmental exposures.
For asbestos, these tests project the losses expected to be
reported over the next nineteen years, i.e., from 2008 through
2026, based on the actual losses reported through 2007 and the
expected future loss emergence for these claims. Three scenarios
were tested, with a series of assumptions ranging from more
optimistic to more conservative. In the first scenario, all
carried asbestos case reserves are assumed to be within ten
percent of their ultimate settlement value. The second scenario
relies on an actuarial projection of report year development for
asbestos claims reported from 1993 to the present to estimate
case reserve adequacy as of year-end 2007. The third scenario
relies on an actuarial projection of report year claims for
asbestos but reflects claims reported from 1989 to the present
to estimate case reserve adequacy as of year-end 2007. Based on
the results of the prior report years for each of the three
scenarios described above, the report year approach then
projects forward to the year 2026 the expected future report
year losses, based on AIGs estimate of reasonable loss
trend assumptions. These calculations are performed on losses
gross of reinsurance. The IBNR (including a provision for
development of reported claims) on a net basis is based on
applying a factor reflecting the expected ratio of net losses to
gross losses for future loss emergence.
For environmental claims, an analogous series of
frequency/severity tests are produced. Environmental claims from
future report years, (i.e., IBNR) are projected out nine years,
i.e., through the year 2016.
At year-end 2007, AIG considered a number of factors and recent
experience in addition to the results of the respective top-down
and ground-up analyses performed for asbestos and environmental
reserves. AIG considered the significant uncertainty that
remains as to AIGs ultimate liability relating to asbestos
and environmental claims. This uncertainty is due to several
factors including:
|
|
|
The long latency period between asbestos exposure and disease
manifestation and the resulting potential for involvement of
multiple policy periods for individual claims; |
|
The increase in the volume of claims by currently unimpaired
plaintiffs; |
|
Claims filed under the non-aggregate premises or operations
section of general liability policies; |
|
The number of insureds seeking bankruptcy protection and the
effect of prepackaged bankruptcies; |
|
Diverging legal interpretations; and |
|
With respect to environmental claims, the difficulty in
estimating the allocation of remediation cost among various
parties. |
After carefully considering the results of the ground-up
analysis, which AIG updates on an annual basis, as well as all
of the above factors, including the recent report year
experience, AIG increased its gross asbestos reserves by
$75 million, all of which was reinsured, resulting in no
increase to net reserves. Additionally, during 2007 a reduction
in estimated reinsurance recoverable, partially offset by
several large favorable asbestos settlements, resulted in a
minor amount of adverse incurred loss development.
Based on the environmental top-down report year analysis
performed in the fourth quarter of 2007, a minor increase in
both gross and net reserves was recognized, resulting in the
relatively minor amount of development shown in the table below.
60 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
A summary of reserve activity,
including estimates for applicable IBNR, relating to asbestos
and environmental claims separately and combined at
December 31, 2007, 2006 and 2005 appears in the table
below. The vast majority of such claims arise from policies
written in 1984 and prior years. The current environmental
policies that AIG underwrites on a claims-made basis have been
excluded from the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2007 |
|
2006 |
|
2005 |
|
|
| |
|
| |
|
| |
(in millions) |
|
Gross | |
|
Net | |
|
Gross(e) | |
|
Net | |
|
Gross(e) | |
|
Net | |
| |
Asbestos:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses at beginning of year
|
|
$ |
4,523 |
|
|
$ |
1,889 |
|
|
$ |
4,501 |
|
|
$ |
1,840 |
|
|
$ |
2,622 |
|
|
$ |
1,060 |
|
|
Losses and loss expenses
incurred(a)
|
|
|
96 |
|
|
|
5 |
|
|
|
572 |
|
|
|
267 |
|
|
|
2,206 |
(b) |
|
|
903 |
(b) |
|
Losses and loss expenses
paid(a)
|
|
|
(755 |
) |
|
|
(440 |
) |
|
|
(550 |
) |
|
|
(218 |
) |
|
|
(327 |
) |
|
|
(123 |
) |
|
Reserve for losses and loss expenses at end of year
|
|
$ |
3,864 |
|
|
$ |
1,454 |
|
|
$ |
4,523 |
|
|
$ |
1,889 |
|
|
$ |
4,501 |
|
|
$ |
1,840 |
|
|
Environmental:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses at beginning of year
|
|
$ |
629 |
|
|
$ |
290 |
|
|
$ |
969 |
|
|
$ |
410 |
|
|
$ |
1,018 |
|
|
$ |
451 |
|
|
Losses and loss expenses
incurred(a)
|
|
|
10 |
|
|
|
13 |
|
|
|
(231 |
) |
|
|
(59 |
) |
|
|
47 |
(c) |
|
|
27 |
(c) |
|
Losses and loss expenses
paid(a)
|
|
|
(124 |
) |
|
|
(66 |
) |
|
|
(109 |
) |
|
|
(61 |
) |
|
|
(96 |
) |
|
|
(68 |
) |
|
Reserve for losses and loss expenses at end of year
|
|
$ |
515 |
|
|
$ |
237 |
|
|
$ |
629 |
|
|
$ |
290 |
|
|
$ |
969 |
|
|
$ |
410 |
|
|
Combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses at beginning of year
|
|
$ |
5,152 |
|
|
$ |
2,179 |
|
|
$ |
5,470 |
|
|
$ |
2,250 |
|
|
$ |
3,640 |
|
|
$ |
1,511 |
|
|
Losses and loss expenses
incurred(a)
|
|
|
106 |
|
|
|
18 |
|
|
|
341 |
|
|
|
208 |
|
|
|
2,253 |
(d) |
|
|
930 |
(d) |
|
Losses and loss expenses
paid(a)
|
|
|
(879 |
) |
|
|
(506 |
) |
|
|
(659 |
) |
|
|
(279 |
) |
|
|
(423 |
) |
|
|
(191 |
) |
|
Reserve for losses and loss expenses at end of year
|
|
$ |
4,379 |
|
|
$ |
1,691 |
|
|
$ |
5,152 |
|
|
$ |
2,179 |
|
|
$ |
5,470 |
|
|
$ |
2,250 |
|
|
|
|
(a) |
All amounts pertain to policies underwritten in prior years,
primarily to policies issued in 1984 and prior. |
|
(b) |
Includes increases to gross losses and loss expense reserves
of $2.0 billion and increases to net losses and loss
expense reserves of $843 million for the fourth quarter of
2005. |
|
(c) |
Includes increases to gross losses and loss expense reserves
of $56 million and increases to net losses and loss expense
reserves of $30 million for the fourth quarter of 2005. |
|
(d) |
Includes increases to gross losses and loss expense reserves
of $2.0 billion and increases to net losses and loss
expense reserves of $873 million for the fourth quarter of
2005. |
(e) |
Gross amounts were revised from the previous presentation to
reflect the inclusion of certain reserves not previously
identified as asbestos and environmental related. This revision
had no effect on net reserves. |
The gross and net IBNR included in the
reserve for losses and loss expenses, relating to asbestos and
environmental claims separately and combined, at
December 31, 2007, 2006 and 2005 were estimated as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2007 |
|
2006 |
|
2005 |
|
|
| |
|
| |
|
| |
(in millions) |
|
Gross | |
|
Net | |
|
Gross* | |
|
Net | |
|
Gross* | |
|
Net | |
| |
Asbestos
|
|
$ |
2,701 |
|
|
$ |
1,145 |
|
|
$ |
3,270 |
|
|
$ |
1,469 |
|
|
$ |
3,458 |
|
|
$ |
1,465 |
|
Environmental
|
|
|
325 |
|
|
|
131 |
|
|
|
378 |
|
|
|
173 |
|
|
|
625 |
|
|
|
266 |
|
|
Combined
|
|
$ |
3,026 |
|
|
$ |
1,276 |
|
|
$ |
3,648 |
|
|
$ |
1,642 |
|
|
$ |
4,083 |
|
|
$ |
1,731 |
|
|
|
|
* |
Gross amounts were revised from the previous presentation to
reflect the inclusion of certain reserves not previously
identified as asbestos and environmental related. This revision
had no effect on net reserves. |
A summary of asbestos and environmental
claims count activity for the years ended December 31,
2007, 2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2007 |
|
2006 |
|
2005 |
|
|
| |
|
| |
|
| |
|
|
Asbestos | |
|
Environmental | |
|
Combined | |
|
Asbestos | |
|
Environmental | |
|
Combined | |
|
Asbestos | |
|
Environmental | |
|
Combined | |
| |
Claims at beginning of year
|
|
|
6,878 |
|
|
|
9,442 |
|
|
|
16,320 |
|
|
|
7,293 |
|
|
|
9,873 |
|
|
|
17,166 |
|
|
|
7,575 |
|
|
|
8,216 |
|
|
|
15,791 |
|
Claims during year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opened
|
|
|
656 |
|
|
|
937 |
|
|
|
1,593 |
|
|
|
643 |
|
|
|
1,383 |
|
|
|
2,026 |
|
|
|
854 |
|
|
|
5,253 |
|
|
|
6,107 |
|
|
Settled
|
|
|
(150 |
) |
|
|
(179 |
) |
|
|
(329 |
) |
|
|
(150 |
) |
|
|
(155 |
) |
|
|
(305 |
) |
|
|
(67 |
) |
|
|
(219 |
) |
|
|
(286 |
) |
|
Dismissed or otherwise resolved
|
|
|
(821 |
) |
|
|
(2,548 |
) |
|
|
(3,369 |
) |
|
|
(908 |
) |
|
|
(1,659 |
) |
|
|
(2,567 |
) |
|
|
(1,069 |
) |
|
|
(3,377 |
) |
|
|
(4,446 |
) |
|
Claims at end of year
|
|
|
6,563 |
|
|
|
7,652 |
|
|
|
14,215 |
|
|
|
6,878 |
|
|
|
9,442 |
|
|
|
16,320 |
|
|
|
7,293 |
|
|
|
9,873 |
|
|
|
17,166 |
|
|
AIG 2007
Form 10-K
61
American International Group, Inc. and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
Survival Ratios Asbestos and Environmental
The table below presents AIGs survival ratios for asbestos
and environmental claims at December 31, 2007, 2006 and
2005. The survival ratio is derived by dividing the current
carried loss reserve by the average payments for the three most
recent calendar years for these claims. Therefore, the survival
ratio is a simplistic measure estimating the number of years it
would be before the current ending loss reserves for these
claims would be paid off using recent year average payments. The
December 31, 2007 survival ratio is lower than the ratio at
December 31, 2006 because the more recent periods included
in the rolling average reflect higher claims payments. In
addition, AIGs survival ratio for asbestos claims was
negatively affected by the favorable settlements described
above, which reduced gross and net asbestos survival ratios at
December 31, 2007 by approximately 1.3 years and
2.6 years, respectively. Many factors, such as aggressive
settlement procedures, mix of business and level of coverage
provided, have a significant effect on the amount of asbestos
and environmental reserves and payments and the resultant
survival ratio. Moreover, as discussed above, the primary basis
for AIGs determination of its reserves is not survival
ratios, but instead the ground-up and top-down analysis. Thus,
caution should be exercised in attempting to determine reserve
adequacy for these claims based simply on this survival ratio.
AIGs survival ratios for asbestos
and environmental claims, separately and combined were based
upon a three-year average payment. These ratios for the years
ended December 31, 2007, 2006 and 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
| |
|
|
Gross* | |
|
Net | |
| |
2007
|
|
|
|
|
|
|
|
|
Survival ratios:
|
|
|
|
|
|
|
|
|
|
Asbestos
|
|
|
7.1 |
|
|
|
5.6 |
|
|
Environmental
|
|
|
4.7 |
|
|
|
3.7 |
|
|
Combined
|
|
|
6.7 |
|
|
|
5.2 |
|
|
2006
|
|
|
|
|
|
|
|
|
Survival ratios:
|
|
|
|
|
|
|
|
|
|
Asbestos
|
|
|
11.8 |
|
|
|
12.9 |
|
|
Environmental
|
|
|
5.6 |
|
|
|
4.5 |
|
|
Combined
|
|
|
10.4 |
|
|
|
10.3 |
|
|
2005
|
|
|
|
|
|
|
|
|
Survival ratios:
|
|
|
|
|
|
|
|
|
|
Asbestos
|
|
|
16.0 |
|
|
|
19.8 |
|
|
Environmental
|
|
|
7.2 |
|
|
|
6.2 |
|
|
Combined
|
|
|
13.1 |
|
|
|
14.2 |
|
|
|
|
* |
Gross amounts for 2006 and 2005 were revised from the
previous presentation to reflect the inclusion of certain
reserves not previously identified as asbestos and environmental
related. This revision had no effect on net reserves. |
Life Insurance & Retirement
Services Operations
AIGs Life Insurance & Retirement Services
operations offer a wide range of insurance and retirement
savings products both domestically and abroad.
AIGs Foreign Life Insurance & Retirement Services
operations include insurance and investment-oriented products
such as whole and term life, investment linked, universal life
and endowments, personal accident and health products, group
products including pension, life and health, and fixed and
variable annuities. The Foreign Life Insurance &
Retirement Services products are sold through independent
producers, career agents, financial institutions and direct
marketing channels.
AIGs Domestic Life Insurance operations offer a broad
range of protection products, such as individual life insurance
and group life and health products, including disability income
products and payout annuities, which include single premium
immediate annuities, structured settlements and terminal funding
annuities. The Domestic Life Insurance products are sold through
independent producers, career agents and financial institutions
and direct marketing channels. Home service operations include
an array of life insurance, accident and health and annuity
products sold primarily through career agents.
AIGs Domestic Retirement Services operations include group
retirement products, individual fixed and variable annuities
sold through banks, broker-dealers and exclusive sales
representatives, and annuity runoff operations, which include
previously acquired closed blocks and other fixed
and variable annuities largely sold through distribution
relationships that have been discontinued.
In order to better align financial reporting with the manner in
which AIGs chief operating decision makers manage their
businesses, commencing in 2007, revenues and operating income
related to foreign investment-type contracts, which were
historically reported as a component of the Asset Management
segment, are now reported as part of Foreign Life
Insurance & Retirement Services. Prior period amounts
have been revised to conform to the current presentation.
AIGs Life Insurance & Retirement Services reports
its operations through the following major internal reporting
units and legal entities:
Foreign Life Insurance &
Retirement Services
Japan and Other
|
|
|
|
|
American Life Insurance Company (ALICO) |
|
|
AIG Star Life Insurance Co., Ltd. (AIG Star Life) |
|
|
AIG Edison Life Insurance Company (AIG Edison Life) |
Asia
|
|
|
|
|
American International Assurance Company, Limited, together with
American International Assurance Company (Bermuda) Limited (AIA) |
|
|
Nan Shan Life Insurance Company, Ltd. (Nan Shan) |
|
|
American International Reinsurance Company Limited (AIRCO) |
|
|
The Philippine American Life and General Insurance Company
(Philamlife) |
Domestic Life Insurance
|
|
|
American General Life Insurance Company (AIG American General) |
|
The United States Life Insurance Company in the City of New York
(USLIFE) |
62 AIG
2007 Form 10-K
American International Group, Inc. and Subsidiaries
|
|
|
American General Life and Accident Insurance Company (AGLA) |
Domestic Retirement Services
|
|
|
The Variable Annuity Life Insurance Company (VALIC) |
|
AIG Annuity Insurance Company (AIG Annuity) |
|
AIG SunAmerica Life Assurance Company (AIG SunAmerica) |
Life Insurance & Retirement Services Results
Life Insurance & Retirement
Services results for 2007, 2006 and 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Premiums | |
|
Net | |
|
Net Realized | |
|
|
|
|
and Other | |
|
Investment | <