AIG 2006 Annual Report Download - page 63

American International Group, Inc. and Subsidiaries
requires periodic disclosure concerning the corporation that mately $2 billion of letters of credit issued by several commercial
controls the registered insurer and the other companies in the banks in favor of certain Domestic General Insurance companies.
holding company system and prior approval of intercorporate Risk-Based Capital (RBC) is designed to measure the adequacy
services and transfers of assets (including in some instances of an insurer’s statutory surplus in relation to the risks inherent in
payment of dividends by the insurance subsidiary) within the its business. Thus, inadequately capitalized general and life
holding company system. AIG’s subsidiaries are registered under insurance companies may be identified.
such legislation in those states that have such requirements. The RBC formula develops a risk-adjusted target level of
AIG’s insurance subsidiaries, in common with other insurers, statutory surplus by applying certain factors to various asset,
are subject to regulation and supervision by the states and by premium and reserve items. Higher factors are applied to more
other jurisdictions in which they do business. Within the United risky items and lower factors are applied to less risky items. Thus,
States, the method of such regulation varies but generally has its the target level of statutory surplus varies not only as a result of
source in statutes that delegate regulatory and supervisory the insurer’s size, but also based on the risk profile of the
powers to an insurance official. The regulation and supervision insurer’s operations.
relate primarily to approval of policy forms and rates, the The RBC Model Law provides for four incremental levels of
standards of solvency that must be met and maintained, including regulatory attention for insurers whose surplus is below the
risk-based capital measurements, the licensing of insurers and calculated RBC target. These levels of attention range in severity
their agents, the nature of and limitations on investments, from requiring the insurer to submit a plan for corrective action to
restrictions on the size of risks that may be insured under a placing the insurer under regulatory control.
single policy, deposits of securities for the benefit of policyhold- The statutory surplus of each of AIG’s Domestic General and
ers, requirements for acceptability of reinsurers, periodic examina- Life Insurance subsidiaries exceeded their RBC target levels as of
tions of the affairs of insurance companies, the form and content December 31, 2006.
of reports of financial condition required to be filed, and reserves To the extent that any of AIG’s insurance entities would fall
for unearned premiums, losses and other purposes. In general, below prescribed levels of statutory surplus, it would be AIG’s
such regulation is for the protection of policyholders rather than intention to infuse necessary capital to support that entity.
the equity owners of these companies. A substantial portion of AIG’s General Insurance business and
In preparing both its 2004 and 2005 audited statutory a majority of its Life Insurance business is carried on in foreign
financial statements for its Domestic General Insurance compa- countries. The degree of regulation and supervision in foreign
nies, AIG agreed with the relevant regulatory agencies on the jurisdictions varies. Generally, AIG, as well as the underwriting
statutory accounting treatment of the various items requiring companies operating in such jurisdictions, must satisfy local
adjustment or restatement. These adjustments and restatements regulatory requirements. Licenses issued by foreign authorities to
reduced previously reported General Insurance statutory surplus AIG subsidiaries are subject to modification or revocation by such
at December 31, 2004 by approximately $3.5 billion to approxi- authorities, and AIU or other AIG subsidiaries could be prevented
mately $20.6 billion. from conducting business in certain of the jurisdictions where they
With respect to the 2005 audited statutory financial state- currently operate. In the past, AIU has been allowed to modify its
ments, the state regulators permitted the Domestic General operations to conform with new licensing requirements in most
Insurance companies to record a $724 million reduction to jurisdictions.
opening statutory surplus as of January 1, 2005. In addition to licensing requirements, AIG’s foreign operations
AIG has taken various steps to enhance the capital positions are also regulated in various jurisdictions with respect to currency,
of the Domestic General Insurance companies. AIG entered into policy language and terms, amount and type of security deposits,
capital maintenance agreements with the Domestic General amount and type of reserves, amount and type of local invest-
Insurance companies that set forth procedures through which AIG ment and the share of profits to be returned to policyholders on
will provide ongoing capital support. Dividends from the Domestic participating policies. Some foreign countries regulate rates on
General Insurance companies were suspended from fourth quarter various types of policies. Certain countries have established
2005 through 2006, but AIG expects that dividend payments will reinsurance institutions, wholly or partially owned by the local
resume in the first quarter of 2007. AIG contributed an additional government, to which admitted insurers are obligated to cede a
$750 million of capital into American Home effective Septem- portion of their business on terms that may not always allow
ber 30, 2005, and contributed a further $2.25 billion of capital in foreign insurers, including AIG subsidiaries, full compensation. In
February 2006 for a total of approximately $3 billion of capital some countries, regulations governing constitution of technical
into Domestic General Insurance subsidiaries effective Decem- reserves and remittance balances may hinder remittance of profits
ber 31, 2005. Furthermore, in order to allow the Domestic and repatriation of assets.
General Insurance companies to record as an admitted asset at See also Management’s Discussion and Analysis of Financial
December 31, 2006 certain reinsurance ceded to non-U.S. Condition and Results of Operations — Capital Resources and
reinsurers (which has the effect of increasing the statutory Liquidity — Regulation and Supervision and Note 11 of Notes to
surplus of such Domestic General Insurance companies), AIG Consolidated Financial Statements.
obtained and entered into reimbursement agreements for approxi-
Form 10-K 2006 AIG 13