AIG 2005 Annual Report Download - page 65

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
adjustments relating to years prior to 2004 were made to 2004
Regulation
opening surplus, and 2004 statutory net income was restated
AIG’s operations around the world are subject to regulation by accordingly. Previously reported General Insurance statutory
many different types of regulatory authorities, including insur- surplus at December 31, 2004 was reduced by approximately
ance, securities, investment advisory, banking and thrift regula- $3.5 billion to approximately $20.6 billion.
tors in the United States and abroad. The regulatory AIG also recently completed its 2005 unaudited statutory
environment can have a significant effect on AIG and its financial statements for all of the Domestic General Insurance
business. AIG’s operations have become more diverse and companies, again after reviewing and agreeing with the
consumer-oriented, increasing the scope of regulatory supervi- relevant state insurance regulators the statutory accounting
sion and the possibility of intervention. In addition, the treatment of various items. The state regulators have permitted
investigations into financial accounting practices that led to the Domestic General Insurance companies to record a
the Restatements of AIG’s financial statements have height- $724 million reduction to opening statutory surplus as of
ened regulatory scrutiny of AIG worldwide. January 1, 2005, to reflect the effects of the Second Restate-
Certain states require registration and periodic reporting by ment. See also Management’s Discussion and Analysis of
insurance companies that are licensed in such states and are Financial Condition and Results of Operations — ‘‘Capital
controlled by other corporations. Applicable legislation typi- Resources — Regulation and Supervision’’ herein.
cally requires periodic disclosure concerning the corporation AIG has taken various steps to enhance the capital
that controls the registered insurer and the other companies in positions of the Domestic General Insurance companies. AIG
the holding company system and prior approval of intercorpo- entered into capital maintenance agreements with the Domes-
rate services and transfers of assets (including in some tic General Insurance companies that set forth procedures
instances payment of dividends by the insurance subsidiary) through which AIG will provide ongoing capital support.
within the holding company system. AIG’s subsidiaries are Dividends from the Domestic General Insurance companies
registered under such legislation in those states that have such were suspended in the fourth quarter of 2005. AIG contributed
requirements. See also Note 11 of Notes to Consolidated an additional $750 million of capital into American Home
Financial Statements. effective September 30, 2005, and contributed a further
AIG’s insurance subsidiaries, in common with other insur- $2.25 billion of capital in February 2006 for a total of
ers, are subject to regulation and supervision by the states and approximately $3 billion of capital into Domestic General
by other jurisdictions in which they do business. Within the Insurance subsidiaries effective December 31, 2005. Further-
United States, the method of such regulation varies but more, in order to allow the Domestic General Insurance
generally has its source in statutes that delegate regulatory and companies to record as an admitted asset at December 31,
supervisory powers to an insurance official. The regulation and 2005 certain reinsurance ceded to non-U.S. reinsurers (which
supervision relate primarily to approval of policy forms and has the effect of increasing the statutory surplus of such
rates, the standards of solvency that must be met and Domestic General Insurance companies), AIG has obtained,
maintained, including risk-based capital measurements, the and entered into reimbursement agreements for $1.5 billion of
licensing of insurers and their agents, the nature of and letters of credit issued by several commercial banks in favor of
limitations on investments, restrictions on the size of risks that certain Domestic General Insurance companies.
may be insured under a single policy, deposits of securities for AIG’s insurance operations are currently under review by
the benefit of policyholders, requirements for acceptability of various state regulatory agencies. See Item 3. Legal Proceedings
reinsurers, periodic examinations of the affairs of insurance for a further description of these investigations and see ‘‘Risk
companies, the form and content of reports of financial Factors – Regulatory Investigations’’ in Item 1A. Risk Factors
condition required to be filed, and reserves for unearned for more information on their application to AIG’s insurance
premiums, losses and other purposes. In general, such regula- businesses.
tion is for the protection of policyholders rather than the Risk-Based Capital (RBC) is designed to measure the
equity owners of these companies. See also Management’s adequacy of an insurer’s statutory surplus in relation to the
Discussion and Analysis of Financial Condition and Results of risks inherent in its business. Thus, inadequately capitalized
Operations. general and life insurance companies may be identified.
In connection with the Restatements, AIG undertook to The RBC formula develops a risk adjusted target level of
examine and evaluate each of the items that have been statutory surplus by applying certain factors to various asset,
restated or adjusted in its consolidated GAAP financial premium and reserve items. Higher factors are applied to more
statements to determine whether restatement of the previously risky items and lower factors are applied to less risky items.
filed statutory financial statements of its insurance company Thus, the target level of statutory surplus varies not only as a
subsidiaries would be required. AIG completed its 2004 audited result of the insurer’s size, but also on the risk profile of the
statutory financial statements for all of the Domestic General insurer’s operations.
Insurance companies in late 2005. The statutory accounting The RBC Model Law provides for four incremental levels of
treatment of the various items requiring adjustment or restate- regulatory attention for insurers whose surplus is below the
ment were reviewed and agreed to with the relevant state calculated RBC target. These levels of attention range in
insurance regulators in advance of the filings. Adjustments severity from requiring the insurer to submit a plan for
necessary to reflect the cumulative effect on statutory surplus of
AIG m Form 10-K 13