AIG 2006 Annual Report Download - page 127

American International Group, Inc. and Subsidiaries
permitted by domestic and foreign insurance regulatory authori- these assessments upon notice. Additionally, certain states
ties. The principal differences between statutory financial state- permit at least a portion of the assessed amount to be used as a
ments and financial statements prepared in accordance with credit against a company’s future premium tax liabilities. There-
U.S. GAAP for domestic companies are that statutory financial fore, the ultimate net assessment cannot reasonably be esti-
statements do not reflect DAC, some bond portfolios may be mated. The guarantee fund assessments net of credits for 2006,
carried at amortized cost, assets and liabilities are presented net 2005 and 2004, respectively, were $97 million, $124 million and
of reinsurance, policyholder liabilities are valued using more $118 million.
conservative assumptions and certain assets are non-admitted. AIG is also required to participate in various involuntary pools
In connection with the filing of the 2005 statutory financial (principally workers compensation business) which provide insur-
statements for AIG’s Domestic General Insurance companies, AIG ance coverage for those not able to obtain such coverage in the
agreed with the relevant state insurance regulators on the voluntary markets. This par ticipation is also recorded upon
statutory accounting treatment of various items. The regulatory notification, as these amounts cannot reasonably be estimated.
authorities have also permitted certain of the domestic and A substantial portion of AIG’s General Insurance business and
foreign insurance subsidiaries to support the carrying value of a majority of its Life Insurance & Retirement Services business
their investments in certain non-insurance and foreign insurance are conducted in foreign countries. The degree of regulation and
subsidiaries by utilizing the AIG audited consolidated financial supervision in foreign jurisdictions varies. Generally, AIG, as well
statements to satisfy the requirement that the U.S. GAAP-basis as the underwriting companies operating in such jurisdictions,
equity of such entities be audited. In addition, the regulatory must satisfy local regulatory requirements. Licenses issued by
authorities have permitted the Domestic General Insurance com- foreign authorities to AIG subsidiaries are subject to modification
panies to utilize audited financial statements prepared on a basis and revocation. Thus, AIG’s insurance subsidiaries could be
of accounting other than U.S. GAAP to value investments in joint prevented from conducting future business in certain of the
ventures, limited partnerships and hedge funds. AIG has received jurisdictions where they currently operate. AIG’s international
similar permitted practices authorizations from insurance regula- operations include operations in various developing nations. Both
tory authorities in connection with the 2006 statutory financial current and future foreign operations could be adversely affected
statements. These permitted practices did not affect the Domes- by unfavorable political developments up to and including national-
tic General Insurance companies’ compliance with minimum ization of AIG’s operations without compensation. Adverse effects
regulatory capital requirements. resulting from any one country may affect AIG’s results of
Statutory capital of each company continued to exceed operations, liquidity and financial condition depending on the
minimum company action level requirements following the adjust- magnitude of the event and AIG’s net financial exposure at that
ments, but AIG nonetheless contributed an additional $750 million time in that country.
of capital into American Home effective September 30, 2005 and Foreign insurance operations are individually subject to local
contributed a further $2.25 billion of capital in February 2006 for solvency margin requirements that require maintenance of ade-
a total of approximately $3 billion of capital into Domestic General quate capitalization, which AIG complies with by country. In
Insurance subsidiaries effective December 31, 2005. To enhance addition, certain foreign locations, notably Japan, have estab-
their current capital positions, AIG suspended dividends from the lished regulations that can result in guarantee fund assessments.
DBG companies from the fourth quarter 2005 through 2006, but These have not had a material effect on AIG’s financial condition
AIG expects dividend payments will resume in the first quarter of or results of operations.
2007. AIG believes it has the capital resources and liquidity to
fund any necessary statutory capital contributions. Liquidity
As discussed above, various regulators have commenced AIG manages liquidity at both the subsidiary and parent company
investigations into certain insurance business practices. In addi- levels. At December 31, 2006, AIG’s consolidated invested
tion, the OTS and other regulators routinely conduct examinations assets, primarily held by its subsidiaries, included $26.8 billion in
of AIG and its subsidiaries, including AIG’s consumer finance cash and short-term investments. Consolidated net cash provided
operations. AIG cannot predict the ultimate effect that these from operating activities in 2006 amounted to $6.8 billion. At the
investigations and examinations, or any additional regulation parent company level, liquidity management activities are con-
arising therefrom, might have on its business. Federal, state or ducted in a manner to preserve and enhance funding stability,
local legislation may affect AIG’s ability to operate and expand its flexibility, and diversity through the full range of potential operating
various financial services businesses, and changes in the current environments and market conditions. AIG’s primary sources of
laws, regulations or interpretations thereof may have a material cash flow are dividends and other payments from its regulated
adverse effect on these businesses. and unregulated subsidiaries, as well as issuances of debt
AIG’s U.S. operations are negatively affected under guarantee securities. Primary uses of cash flow are for debt service,
fund assessment laws which exist in most states. As a result of subsidiary funding and shareholder dividend payments. Manage-
operating in a state which has guarantee fund assessment laws, ment believes that AIG’s liquid assets, cash provided by opera-
a solvent insurance company may be assessed for certain tions and access to the capital markets will enable it to meet its
obligations arising from the insolvencies of other insurance anticipated cash requirements, including the funding of increased
companies which operated in that state. AIG generally records
Form 10-K 2006 AIG 77