AIG 2011 Annual Report Download - page 39

by the insurance subsidiary, within the holding company system. AIG’s subsidiaries are registered under such
legislation in those states that have such requirements.
AIG’s 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 the financial condition of the insurers and
their corporate conduct and market conduct activities. This includes approval of policy forms and rates, the
standards of solvency that must be met and maintained, including with respect to 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 Chartis and SunAmerica
companies. AIG entered into capital maintenance agreements with these companies that set forth procedures
through which AIG has provided, and expects to continue to provide, capital support. Also, in order to allow the
domestic Chartis and SunAmerica companies to record as an admitted asset at December 31, 2011 certain
reinsurance ceded to reinsurers, which has the effect of maintaining the level of the statutory surplus of such
companies, AIG obtained and entered into reimbursement agreements for approximately $1.45 billion and
$800 million of letters of credit issued by several commercial banks in favor of certain Chartis and SunAmerica
companies, respectively.
In the U.S., the Risk-Based Capital (RBC) formula is designed to measure the adequacy of an insurer’s
statutory surplus in relation to the risks inherent in its business. The RBC Model Law, which allows states to act
upon the results of RBC calculations, provides for four incremental levels of regulatory action regarding insurers
whose RBC calculations fall below specific thresholds. Those levels of action range from the requirement to
submit a plan describing how an insurer would regain a calculated RBC ratio above the respective threshold
through a mandatory regulatory takeover of the company. The action thresholds are based on RBC levels that are
calculated so that a company, subject to such actions, is solvent but its future solvency is in doubt without some
type of corrective action. The RBC formula computes a risk-adjusted surplus level by applying discrete factors to
various asset, premium and reserve items. These factors are developed to be risk-sensitive so that higher factors
are applied to items exposed to greater risk.
The statutory surplus of each of AIG’s U.S.-based life and property and casualty insurance subsidiaries exceeded
RBC minimum required levels as of December 31, 2011.
To the extent that any of AIG’s insurance entities would fall below prescribed levels of statutory surplus, it
would be AIG’s intention to provide appropriate capital or other types of support to that entity, under formal
support agreements or CMAs or otherwise. For additional details regarding CMAs that AIG has entered into with
its insurance subsidiaries, see Item 7. MD&A — Liquidity of Parent and Subsidiaries — Chartis, and Liquidity of
Parent and Subsidiaries.
There are a number of proposals to amend state insurance laws and regulations in ways that could affect AIG
and its subsidiaries. The National Association of Insurance Commissioners (NAIC) has recently adopted or
amended model laws on holding company regulation that would provide for supervision of insurers at the
corporate group level. Although these changes are only beginning to be adopted by individual state regulators, it
can be expected that most will ultimately adopt them in some form. The various proposals to implement group
supervision include:
• uniform standards for insurer corporate governance;
• group-wide supervision of insurance holding companies;
• adjustments to RBC calculations to account for group-wide risks; and
• additional regulatory and disclosure requirements for insurance holding companies.
AIG 2011 Form 10-K 25