AIG 2007 Annual Report Download - page 153

American International Group, Inc. and Subsidiaries
in 2007, 2006 and 2005, respectively, were $87 million, meet its anticipated cash requirements, including the funding of
$97 million and $124 million. increased dividends under AIG’s current dividend policy. See also
AIG is also required to participate in various involuntary pools Item 1A. Risk Factors — Liquidity and Risk Management herein.
(principally workers compensation business) which provide insur-
ance coverage for those not able to obtain such coverage in the Insurance Operations
voluntary markets. This participation is also recorded upon Insurance operating cash flow is derived from two sources,
notification, as these amounts cannot reasonably be estimated. underwriting operations and investment operations. Cash flow
A substantial portion of AIG’s General Insurance business and from underwriting operations includes collections of periodic
a majority of its Life Insurance & Retirement Services business premiums and policyholders’ contract deposits, and paid loss
are conducted in foreign countries. The degree of regulation and recoveries, less reinsurance premiums, losses, benefits, and
supervision in foreign jurisdictions varies. Generally, AIG, as well acquisition and operating expenses. Generally, there is a time lag
as the underwriting companies operating in such jurisdictions, from when premiums are collected and losses and benefits are
must satisfy local regulatory requirements. Licenses issued by paid. Investment cash flow is primarily derived from interest and
foreign authorities to AIG subsidiaries are subject to modification dividends received and includes realized capital gains net of
and revocation. Thus, AIG’s insurance subsidiaries could be realized capital losses.
prevented from conducting future business in certain of the Liquid assets include cash and short-term investments, fixed
jurisdictions where they currently operate. AIG’s international maturities that are not designated as held to maturity, and publicly
operations include operations in various developing nations. Both traded equity securities. At December 31, 2007 and 2006, AIG’s
current and future foreign operations could be adversely affected insurance operations had liquid assets of $476.1 billion and
by unfavorable political developments up to and including national- $428.4 billion, respectively. The portion of liquid assets comprised
ization of AIG’s operations without compensation. Adverse effects of cash and short-term investments was $45.5 billion and
resulting from any one country may affect AIG’s results of $19.9 billion at December 31, 2007 and 2006, respectively. At
operations, liquidity and financial condition depending on the December 31, 2007, $380.9 billion, or 95 percent of the fixed
magnitude of the event and AIG’s net financial exposure at that maturity investments that were not designated as held to maturity
time in that country. in AIG’s insurance company general account portfolios were rated
Foreign insurance operations are individually subject to local investment grade. Given the size and liquidity profile of AIG’s
solvency margin requirements that require maintenance of ade- investment portfolios, AIG believes that deviations from its pro-
quate capitalization, which AIG complies with by country. In jected claim experience do not constitute a significant liquidity risk.
addition, certain foreign locations, notably Japan, have estab- AIG’s asset/liability management process takes into account the
lished regulations that can result in guarantee fund assessments. expected maturity of investments and expected benefit payments
These have not had a material effect on AIG’s financial condition and policy surrenders as well as the specific nature and risk profile
or results of operations. of these liabilities. Historically, there has been no significant
variation between the expected maturities of AIG’s investments and
Liquidity the payment of claims.
AIG manages liquidity at both the subsidiary and parent company See also Operating Review — General Insurance Operations —
levels. At December 31, 2007, AIG’s consolidated invested General Insurance Net Investment Income and Life Insurance &
assets included $65.6 billion in cash and short-term investments. Retirement Services Operations — Life Insurance & Retirement
Consolidated net cash provided from operating activities in 2007 Services Net Investment Income and Realized Capital Gains
amounted to $35.2 billion. At both the subsidiary and parent (Losses) herein.
company level, liquidity management activities are intended to
preserve and enhance funding stability, flexibility, and diversity General Insurance
through a wide range of potential operating environments and General Insurance operating cash flow is derived from underwriting
market conditions. and investment activities. With respect to General Insurance
As a result of market disruption in the credit markets, AIG took operations, if paid losses accelerated beyond AIG’s ability to fund
steps to enhance the liquidity of its portfolios. Cash and short- such paid losses from current operating cash flows, AIG might
term investments increased in all of AIG’s major operating need to liquidate a portion of its General Insurance investment
segments. In addition, AIG created an interdisciplinary Liquidity portfolio and/or arrange for financing. A liquidity strain could
Risk Committee to measure, monitor, control and aggregate result from the occurrence of several significant catastrophic
liquidity risks across AIG. While this Committee’s responsibilities events in a relatively short period of time. Additional strain on
are broad, the Committee’s initial focus is on portfolios with liquidity could occur if the investments liquidated to fund such
shorter-term contractual liabilities, such as securities lending in paid losses were sold into a depressed market place and/or
the United States and retail deposit-like products in the United reinsurance recoverable on such paid losses became uncollectible
Kingdom. or collateral supporting such reinsurance recoverable significantly
Management believes that AIG’s liquid assets, cash provided decreased in value.
by operations and access to the capital markets will enable it to
AIG 2007 Form 10-K 99