AIG 2008 Annual Report Download - page 24

by several commercial banks in favor of certain AIG Property Casualty Group companies and funded trusts totalling
$2.9 billion. Finally, AIG has agreed to contribute capital to the AIG Property Casualty Group companies that hold
shares of Transatlantic if, upon selling their Transatlantic shares they receive less than the shares’ statutory book
value. The amount of the capital contribution would equal the difference between the aggregate statutory book
value of the shares they sold and the aggregate cash proceeds they received in respect to those shares.
In the U.S., the Risk-Based Capital (RBC) formula is designed to measure the adequacy of an insurer’s
statutory surplus in relation to the risks inherent in its business. Thus, inadequately capitalized general and life
insurance companies may be identified. The U.S. RBC formula develops a risk-adjusted target level of statutory
surplus by applying certain factors to various asset, premium and reserve items. Higher factors are applied to more
risky items and lower factors are applied to less risky items. Thus, the target level of statutory surplus varies not only
as a result of the insurer’s size, but also based on the risk profile of the insurer’s operations.
The RBC Model Law provides for four incremental levels of regulatory attention for insurers whose surplus is
below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a
plan for corrective action to placing the insurer under regulatory control.
The statutory surplus of each of AIG’s AIG Property Casualty Group and U.S.-based Life Insurance
subsidiaries exceeded their RBC minimum required levels as of December 31, 2008.
To the extent that any of AIG’s insurance entities would fall below prescribed levels of statutory surplus, it
would be AIG’s intention to provide appropriate capital or other types of support to that entity.
A substantial portion of AIG’s General Insurance business and a majority of its Life Insurance business is
conducted in foreign countries. The degree of regulation and supervision in foreign jurisdictions varies. Generally,
AIG, as well as the underwriting companies operating in such jurisdictions, must satisfy local regulatory
requirements. Licenses issued by foreign authorities to AIG subsidiaries are subject to modification or revocation
by such authorities, and these subsidiaries could be prevented from conducting business in certain of the
jurisdictions where they currently operate. A change in control of AIG, such as that resulting from the issuance
of the Series C Preferred Stock (described in Note 15 to the Consolidated Financial Statements), or changes in the
ownership of a regulated subsidiary that may result from a disposition of the subsidiary or the repayment of
outstanding amounts under the Fed Facility with subsidiary preferred equity, may also trigger change of control
requirements in jurisdictions around the world and result in other regulatory actions.
In addition to licensing requirements, AIG’s foreign operations are also regulated in various jurisdictions with
respect to currency, policy language and terms, advertising, amount and type of security deposits, amount and type
of reserves, amount and type of capital to be held, amount and type of local investment and the share of profits to be
returned to policyholders on participating policies. Some foreign countries regulate rates on various types of
policies. Certain countries have established reinsurance institutions, wholly or partially owned by the local
government, to which admitted insurers are obligated to cede a portion of their business on terms that may not
always allow foreign insurers, including AIG subsidiaries, full compensation. In some countries, regulations
governing constitution of technical reserves and remittance balances may hinder remittance of profits and
repatriation of assets.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital
Resources and Liquidity — Regulation and Supervision and Note 16 to Consolidated Financial Statements.
Competition
AIG’s businesses operate in highly competitive environments, both domestically and overseas. Principal
sources of competition are insurance companies, banks, investment banks and other non-bank financial institutions.
The insurance industry in particular is highly competitive. Within the United States, AIG’s General Insurance
subsidiaries compete with approximately 3,400 other stock companies, specialty insurance organizations, mutual
companies and other underwriting organizations. AIG’s Life Insurance & Retirement Services subsidiaries compete
in the United States with approximately 2,100 life insurance companies and other participants in related financial
services fields. Overseas, AIG’s subsidiaries compete for business with the foreign insurance operations of large
U.S. insurers and with global insurance groups and local companies in particular areas in which they are active.
18 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries