AIG 2005 Annual Report Download - page 115

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
statutory surplus at December 31, 2004 was reduced by recorded upon notification, as these amounts cannot reasonably
approximately $3.5 billion to approximately $20.6 billion. be estimated.
AIG also recently completed its 2005 unaudited statutory A substantial portion of AIG’s General Insurance business
financial statements for all of its Domestic General Insurance and a majority of its Life Insurance & Retirement Services
subsidiaries, again after reviewing and agreeing with the business are conducted in foreign countries. The degree of
relevant state insurance regulators the statutory accounting regulation and supervision in foreign jurisdictions varies.
treatment of various items. The state regulators have permitted Generally, AIG, as well as the underwriting companies
the Domestic General Insurance companies to record a operating in such jurisdictions, must satisfy local regulatory
$724 million reduction to opening statutory surplus as of requirements. Licenses issued by foreign authorities to AIG
January 1, 2005 to reflect the effects of the Second subsidiaries are subject to modification and revocation. Thus,
Restatement. AIG’s insurance subsidiaries could be prevented from con-
Statutory capital of each company continued to exceed ducting future business in certain of the jurisdictions where
minimum company action level requirements following the they currently operate. AIG’s international operations include
adjustments, but AIG nonetheless contributed an additional operations in various developing nations. Both current and
$750 million of capital into American Home effective Septem- future foreign operations could be adversely affected by
ber 30, 2005 and contributed a further $2.25 billion of capital unfavorable political developments up to and including nation-
in February 2006 for a total of approximately $3 billion of alization of AIG’s operations without compensation. Adverse
capital into Domestic General Insurance subsidiaries effective effects resulting from any one country may affect AIG’s results
December 31, 2005. To enhance their current capital positions, of operations, liquidity and financial condition depending on
dividends from the DBG companies were suspended in the the magnitude of the event and AIG’s net financial exposure
fourth quarter of 2005. AIG believes it has the capital at that time in that country.
resources and liquidity to fund any necessary statutory capital Foreign insurance operations are individually subject to
contributions. AIG will review the capital position of its local solvency margin requirements that require maintenance
insurance company subsidiaries with various rating agencies of adequate capitalization, which AIG complies with by
and regulators to determine if additional capital contributions country. In addition, certain foreign locations, notably Japan,
or other actions are warranted. have established regulations that can result in guarantee fund
As discussed above, various regulators have commenced assessments. These have not had a material effect on AIG’s
investigations into certain insurance business practices. In results of operations.
addition, the OTS and other regulators routinely conduct
examinations of AIG and its subsidiaries, including AIG’s Liquidity
consumer finance operations. AIG cannot predict the ultimate AIG’s liquidity is primarily derived from the operating cash
effect that these investigations and examinations, or any flows of its General and Life Insurance & Retirement Services
additional regulation arising therefrom, might have on its operations. Management believes that AIG’s liquid assets, its
business. Federal, state or local legislation may affect AIG’s net cash provided by operations, and access to short term
ability to operate and expand its various financial services funding through commercial paper and bank credit facilities
businesses, and changes in the current laws, regulations or will enable it to meet any anticipated cash requirements. See
interpretations thereof may have a material adverse effect on ‘‘Risk Factors — Access to Capital Markets’’ in Item 1A. Risk
these businesses. See ‘‘Risk Factors — Regulatory Investiga- Factors.
tions’’ in Item 1A. Risk Factors for a further discussion of the At December 31, 2005, AIG’s consolidated invested assets
effect these investigations may have on AIG’s businesses. included $17.24 billion of cash and short-term investments.
AIG’s U.S. operations are negatively affected under guaran- Consolidated net cash provided from operating activities in
tee fund assessment laws which exist in most states. As a result 2005 amounted to $25.14 billion.
of operating in a state which has guarantee fund assessment The liquidity of the combined insurance operations is
laws, a solvent insurance company may be assessed for certain derived both domestically and abroad. The combined insurance
obligations arising from the insolvencies of other insurance operating cash flow is derived from two sources, underwriting
companies which operated in that state. AIG generally records operations and investment operations. Cash flow includes
these assessments upon notice. Additionally, certain states periodic premium collections, including policyholders’ contract
permit at least a portion of the assessed amount to be used as a deposits, cash flows from investment operations and paid loss
credit against a company’s future premium tax liabilities. recoveries less reinsurance premiums, losses, benefits, and
Therefore, the ultimate net assessment cannot reasonably be acquisition and operating expenses. Generally, there is a time
estimated. The guarantee fund assessments net of credits for lag from when premiums are collected and, when as a result of
2005, 2004, and 2003 were $124 million, $118 million and the occurrence of events specified in the policy, the losses and
$77 million, respectively. benefits are paid. Investment income cash flow is primarily
AIG is also required to participate in various involuntary derived from interest and dividends received and includes
pools (principally workers compensation business) which pro- realized capital gains net of realized capital losses. See also the
vide insurance coverage for those not able to obtain such discussions under ‘‘Operating Review — General Insurance
coverage in the voluntary markets. This participation is also
AIG m Form 10-K 63