AIG 2005 Annual Report Download - page 114

Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
AIG believes that any of its or its subsidiaries’ contractual Dividends from Insurance Subsidiaries
obligations that are subject to ‘‘ratings triggers’’ or financial Payments of dividends to AIG by its insurance subsidiaries are
covenants relating to ‘‘ratings triggers’’ would not have a subject to certain restrictions imposed by regulatory authorities.
material adverse effect on its financial condition or liquidity. With respect to AIG’s domestic insurance subsidiaries, the
As a result of the downgrades of AIG’s long-term senior payment of any dividend requires formal notice to the
debt ratings, AIG was required to post approximately $1.16 bil- insurance department in which the particular insurance subsidi-
lion of collateral with counterparties to municipal guaranteed ary is domiciled. Under the laws of many states, an insurer may
investment contracts and financial derivatives transactions. In pay a dividend without prior approval of the insurance
the event of a further downgrade, AIG will be required to post regulator when the amount of the dividend is below certain
additional collateral. It is estimated that, as of the close of regulatory thresholds. Largely as a result of the restrictions,
business on February 28, 2006, based on AIG’s outstanding approximately 89 percent of consolidated shareholders’ equity
municipal guaranteed investment agreements and financial was restricted from immediate transfer to AIG parent at
derivatives transactions as of such date, a further downgrade of December 31, 2005. To enhance their current capital positions,
AIG’s long-term senior debt ratings to ‘Aa3’ by Moody’s or dividends from the DBG companies were suspended in the
‘AA–’ by S&P would permit counterparties to call for fourth quarter of 2005, and AIG has taken various other
approximately $962 million of additional collateral. Further, actions. See ‘‘Regulation and Supervision’’ below. Furthermore,
additional downgrades could result in requirements for substan- AIG cannot predict how recent regulatory investigations may
tial additional collateral, which could have a material effect on affect the ability of its regulated subsidiaries to pay dividends.
how AIG manages its liquidity. The actual amount of See ‘‘Risk Factors — Regulatory Investigations’’ in Item 1A.
additional collateral that AIG would be required to post to Risk Factors.
counterparties in the event of such downgrades depends on With respect to AIG’s foreign insurance subsidiaries, the
market conditions, the market value of the outstanding most significant insurance regulatory jurisdictions include Ber-
affected transactions and other factors prevailing at the time of muda, Japan, Hong Kong, Taiwan, the United Kingdom,
the downgrade. Additional obligations to post collateral will Thailand and Singapore.
increase the demand on AIG’s liquidity. AIG cannot predict whether the regulatory investigations
currently underway or future regulatory issues will impair AIG’s
Shareholders’ Equity financial condition, results of operations or liquidity. To AIG’s
AIG’s consolidated shareholders’ equity increased $6.64 billion knowledge, no AIG company is currently on any regulatory or
during 2005. During 2005, retained earnings increased similar ‘‘watch list’’ with regard to solvency. See also the
$8.86 billion, resulting from net income less dividends. discussion under ‘‘Liquidity’’ herein and Note 11 of Notes to
Unrealized appreciation of investments, net of taxes, decreased Consolidated Financial Statements, as well as ‘‘Risk Factors’’ in
$1.98 billion and the cumulative translation adjustment loss, Item 1A. Risk Factors.
net of taxes, increased $540 million. During 2005, there was a
gain of $28 million, net of taxes, relating to derivative Regulation and Supervision
contracts designated as cash flow hedging instruments. See also AIG’s insurance subsidiaries, in common with other insurers,
the discussion under ‘‘Operating Review’’ and ‘‘Liquidity’’ are subject to regulation and supervision by the states and
herein, Notes 1(ee), 8(d) and 20 of Notes to Consolidated jurisdictions in which they do business. In the U.S. the
Financial Statements and the Consolidated Statement of National Association of Insurance Commissioners (NAIC) has
Comprehensive Income. developed Risk-Based Capital (RBC) requirements. RBC re-
AIG has in the past reinvested most of its unrestricted lates an individual insurance company’s statutory surplus to the
earnings in its operations and believes such continued reinvest- risk inherent in its overall operations.
ment in the future will be adequate to meet any foreseeable In connection with its Restatements, AIG examined and
capital needs. However, AIG may choose from time to time to evaluated each of the items that have been restated or adjusted
raise additional funds through the issuance of additional in its consolidated GAAP financial statements to determine
securities. whether restatement of the previously filed statutory financial
statements of its insurance company subsidiaries would be
Stock Purchase required. In October and early November 2005, AIG com-
During 2005, AIG purchased in the open market 2,477,100 pleted its audited statutory financial statements for 2004 for all
shares of its common stock. AIG from time to time may buy of the Domestic General Insurance companies. The statutory
shares of its common stock in the open market for general accounting treatment of the various items requiring adjustment
corporate purposes, including to satisfy its obligations under or restatement was reviewed and agreed to with the relevant
various employee benefit plans. At December 31, 2005, an state insurance regulators in advance of the filings. Adjust-
additional 36,542,700 shares could be purchased under the ments necessary to reflect the cumulative effect on statutory
then current authorization by AIG’s Board of Directors. surplus of adjustments relating to years prior to 2004 were
made to 2004 opening surplus, and 2004 statutory net income
was restated accordingly. Previously reported General Insurance
62 AIG m Form 10-K