AIG 2007 Annual Report Download - page 171

American International Group, Inc. and Subsidiaries
AIG’s Reinsurance Security Department (RSD) conducts peri- For 2008, AIG purchased a U.S. catastrophe coverage of
odic detailed assessments of the financial status and condition of approximately $1.1 billion in excess of a per occurrence deducti-
current and potential reinsurers, both foreign and domestic. The ble of $1.5 billion. For Life Insurance & Retirement Services,
RSD monitors both the nature of the risks ceded to the reinsurers AIG’s 2008 catastrophe program covers losses of $250 million in
and the aggregation of total reinsurance recoverables ceded to excess of $200 million for Japan and Taiwan only.
reinsurers. Such assessments may include, but are not limited to,
identifying if a reinsurer is appropriately licensed and has Reinsurance Recoverable
sufficient financial capacity, and evaluating the local economic General reinsurance recoverable assets are comprised of:
environment in which a foreign reinsurer operates.
(balances due from reinsurers for indemnity losses and loss
The RSD reviews the nature of the risks ceded to reinsurers expenses billed to, but not yet collected from, reinsurers (Paid
and the need for credit risk mitigants. For example, in AIG’s treaty Losses Recoverable);
reinsurance contracts, AIG frequently includes provisions that
(ultimate ceded reserves for indemnity losses and expenses
require a reinsurer to post collateral when a referenced event includes reserves for claims reported but not yet paid and
occurs. Furthermore, AIG limits its unsecured exposure to reinsur- estimates for IBNR (collectively, Ceded Loss Reserves); and
ers through the use of credit triggers, which include, but are not
(Ceded Reserves for Unearned Premiums.
limited to, insurer financial strength rating downgrades, declines in At December 31, 2007, general reinsurance assets of
policyholders surplus below predetermined levels, decreases in $21.5 billion include Paid Losses Recoverable of $1.8 billion and
the NAIC risk-based capital (RBC) ratio or reaching maximum limits Ceded Loss Reserves of $16.2 billion, and $4.0 billion of Ceded
of reinsurance recoverables. In addition, AIG’s CRC reviews all Reserves for Unearned Premiums. The methods used to estimate
reinsurer exposures and credit limits and approves most large IBNR and to establish the resulting ultimate losses involve
reinsurer credit limits that represent actual or potential credit projecting the frequency and severity of losses over multiple years
concentrations. AIG believes that no exposure to a single and are continually reviewed and updated by management. Any
reinsurer represents an inappropriate concentration of risk to AIG, adjustments are reflected in income currently. It is AIG’s belief
nor is AIG’s business substantially dependent upon any single that the ceded reserves for losses and loss expenses at
reinsurance contract. December 31, 2007 were representative of the ultimate losses
AIG enters into intercompany reinsurance transactions for its recoverable. Actual losses may differ from the reserves currently
General Insurance and Life Insurance & Retirement Services ceded.
operations. AIG enters into these transactions as a sound and AIG manages the credit risk in its reinsurance relationships by
prudent business practice in order to maintain underwriting transacting with reinsurers that it considers financially sound, and
control and spread insurance risk among AIG’s various legal when necessary AIG requires reinsurers to post substantial
entities and to leverage economies of scale with external collateral in the form of funds, securities and/or irrevocable
reinsurers. When required for statutory recognition, AIG obtains letters of credit. This collateral can be drawn on for amounts that
letters of credit from third-party financial institutions to collateral- remain unpaid beyond specified time periods on an individual
ize these intercompany transactions. At December 31, 2007, reinsurer basis. At December 31, 2007, approximately 55 percent
approximately $8.8 billion of letters of credit were outstanding to of the general reinsurance assets were from unauthorized reinsur-
cover intercompany reinsurance transactions between ers. The terms authorized and unauthorized pertain to regulatory
subsidiaries. categories, not creditworthiness. More than 50 percent of these
Although reinsurance arrangements do not relieve AIG subsidi- balances were collateralized, permitting statutory recognition.
aries from their direct obligations to insureds, an efficient and Additionally, with the approval of insurance regulators, AIG posted
effective reinsurance program substantially mitigates AIG’s expo- approximately $1.8 billion of letters of credit issued by commer-
sure to potentially significant losses. AIG continually evaluates the cial banks in favor of certain Domestic General Insurance
reinsurance markets and the relative attractiveness of various companies to permit those companies statutory recognition of
arrangements for coverage, including structures such as catastro- balances otherwise uncollateralized at December 31, 2007. The
phe bonds, insurance risk securitizations, ‘‘sidecars’’ and similar remaining 45 percent of the general reinsurance assets were from
vehicles. authorized reinsurers. At December 31, 2007, approximately
Based on this ongoing evaluation and other factors, effective 87 percent of the balances with respect to authorized reinsurers
December 31, 2007, Lexington and Concord Re Limited agreed to are from reinsurers rated A (excellent) or better, as rated by A.M.
commute their quota share reinsurance agreement covering Best, or A (strong) or better, as rated by S&P. These ratings are
U.S. commercial property insurance business written by Lexington measures of financial strength.
on a risk attaching basis. This agreement was effective in July
2006 and was due to expire on January 15, 2008.
AIG 2007 Form 10-K 117