AIG 2006 Annual Report Download - page 178

American International Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Continued
5. Reinsurance 6. Reserve for Losses and Loss Expenses and
Continued Future Life Policy Benefits and Policyholders’
Contract Deposits
manage insurance risks and to facilitate capital management
strategies. Pools of highly-rated third-party reinsurers are utilized The following analysis provides a reconciliation of the
to manage net amounts at risk in excess of retention limits. AIG’s activity in the reserve for losses and loss expenses:
Domestic Life Insurance companies also cede excess, non-
Years Ended December 31,
economic reserves carried on a statutory-basis only on certain (in millions) 2006 2005 2004
term and universal life insurance policies and certain fixed
At beginning of year:
annuities to an offshore affiliate. Reserve for losses and
AIG generally obtains letters of credit in order to obtain loss expenses $ 77,169 $ 61,878 $ 51,871
statutory recognition of its intercompany reinsurance transactions. Reinsurance recoverable (19,693) (14,624) (15,643)
For this purpose, AIG has a $2.5 billion syndicated letter of credit
Total 57,476 47,254 36,228
facility outstanding as of December 31, 2006, all of which relates
to life intercompany reinsurance transactions. Foreign exchange effect 741 (628) 524
AIG is also a party to a 364-day bilateral revolving credit facility Acquisition(a) 55 ——
for an aggregate amount of $3.2 billion. The facility can be drawn Losses and loss expenses
in the form of letters of credit with terms of up to eight years. As incurred:
of December 31, 2006, approximately $2.69 billion principal Current year 27,805 28,426 26,793
amount of letters of credit are outstanding under this facility, of Prior years, other than
which approximately $1.3 billion relates to life intercompany accretion of discount (53) 4,680(b) 3,187(c)
reinsurance transactions. AIG has also obtained approximately Prior years, accretion of
$201 million of letters of credit on a bilateral basis. discount 300 (15) 377
Total 28,052 33,091 30,357
Reinsurance Security: AIG’s third party reinsurance arrangements
do not relieve AIG from its direct obligation to its insureds. Thus, Losses and loss expenses
a credit exposure exists with respect to both general and life paid:
reinsurance ceded to the extent that any reinsurer fails to meet Current year 8,368 7,331 7,692
the obligations assumed under any reinsurance agreement. AIG Prior years 15,326 14,910 12,163
holds substantial collateral as security under related reinsurance Total 23,694 22,241 19,855
agreements in the form of funds, securities, and/or letters of At end of year:
credit. A provision has been recorded for estimated unrecoverable Net reserve for losses and
reinsurance. AIG has been largely successful in prior recovery loss expenses 62,630 57,476 47,254
efforts. Reinsurance recoverable 17,369 19,693 14,624
AIG evaluates the financial condition of its reinsurers and
Total $ 79,999 $ 77,169 $ 61,878
establishes limits per reinsurer through AIG’s Credit Risk Commit-
tee. AIG believes that no exposure to a single reinsurer repre- (a) Reflects the opening balance with respect to the acquisition of the
Central Insurance Co., Ltd. in the third quarter of 2006.
sents an inappropriate concentration of risk to AIG, nor is AIG’s
business substantially dependent upon any single reinsurer. (b) Includes fourth quarter charge of $1.8 billion resulting from the annual
review of General Insurance loss and loss adjustment reserves.
(c) Includes fourth quarter charge of $850 million attributable to the
change in estimate for asbestos and environmental exposures.
The analysis of the future policy benefits and policyholders’
contract deposits liabilities follows:
Years Ended December 31,
(in millions) 2006 2005*
Future policy benefits:
Long duration contracts $121,364 $107,877
Short duration contracts 866 930
Total $122,230 $108,807
* 2005 amounts have been reclassified to conform to 2006 presentation.
128 AIG 2006 Form 10-K