AIG 2008 Annual Report Download - page 55

General Insurance operating cash flow is derived from underwriting and investment activities. Cash flow from
underwriting operations includes collections of periodic premiums and paid loss recoveries, less reinsurance
premiums, losses, and acquisition and operating expenses. Generally, there is a time lag from when premiums are
collected and losses and benefits are paid. Investment cash flow is primarily derived from interest and dividends
received, and includes investment maturities and repayments.
With respect to General Insurance operations, if paid losses accelerated beyond AIG’s ability to fund such
losses from current operating cash flows, AIG might need to liquidate a portion of its General Insurance investment
portfolio and/or attempt to arrange for financing. A liquidity strain could result from the occurrence of one or
several significant catastrophic events in a relatively short period of time. Additional strain on liquidity could occur
if the investments liquidated to fund such paid losses were sold in a depressed market place. Further liquidity strains
could also arise if reinsurance recoverable on such paid losses became uncollectible or collateral supporting such
reinsurance recoverable significantly decreased in value.
At December 31, 2008, General Insurance had liquidity in the form of cash and short-term investments of
$11.7 billion. In the event additional liquidity is required, management believes it can provide such liquidity
through sale of a portion of its substantial holdings in government and corporate bonds as well as equity securities.
Government and corporate bonds represented 97.6 percent of total fixed income investments at December 31, 2008.
Given the size and liquidity profile of AIG’s General Insurance investment portfolios, AIG believes that deviations
from its projected claim experience do not constitute a significant liquidity risk. AIG’s asset/liability management
process takes into account the expected maturity of investments and the specific nature and risk profile of liabilities.
Historically, there has been no significant variation between the expected maturities of AIG’s General Insurance
investments and the payment of claims.
AIG has arranged for letters of credit that totaled $1.6 billion and funded trusts totaling $2.9 billion at
December 31, 2008, to allow certain AIG Property and Casualty Group subsidiaries to obtain admitted surplus
credit for reinsurance provided by non-admitted carriers. Substantially all the letters of credit may be cancelled on
December 31, 2010. The inability of AIG to renew or replace these letters of credit or otherwise obtain equivalent
financial support would result in a reduction of the statutory surplus of these property and casualty companies. AIG
Property Casualty Group maintains liquidity in its investment portfolio through holdings of $6.2 billion of
municipal securities which have been refunded and are escrowed to the call or to maturity. The maturities of these
holdings are all less than ten years, and the bonds are secured by the United States Department of the Treasury or
Government Agency securities held in escrow by trustees. These municipal holdings have substantial unrealized
gains and demonstrated liquidity even during the market dislocations experienced during the fourth quarter of 2008.
Life Insurance & Retirement Services
Life Insurance & Retirement Services operating cash flow is derived from underwriting and investment
activities. Cash flow from underwriting operations includes collections of periodic premiums and policyholders’
contract deposits, and paid loss recoveries, less reinsurance premiums, losses, benefits, surrenders, and acquisition
and operating expenses. Generally, there is a time lag from when premiums are collected and losses and benefits are
paid. Investment cash flow is primarily derived from interest and dividends received, and includes investment
maturities and repayments. Contributions from AIG parent also represent a liquidity source.
If a substantial portion of the Life Insurance & Retirement Services operations bond portfolio diminished
significantly in value and/or defaulted, AIG might need to provide capital or liquidity support to these operations.
For a discussion of AIG’s potential inability to support its subsidiaries, see Item 1A. Risk Factors — Liquidity. A
significant increase in policy surrenders and withdrawals, which could be triggered by a variety of factors, including
AIG-specific concerns, could result in a substantial liquidity strain. Other potential events causing a liquidity strain
could include economic collapse of a nation or region in which Life Insurance & Retirement Services operations
exist, nationalization, catastrophic terrorist acts, or other economic or political upheaval.
At December 31, 2008, Life Insurance & Retirement Services had liquidity in the form of cash and short-term
investments of $32.3 billion. In the event additional liquidity is required, management believes it can provide such
liquidity through sale of a portion of its substantial holdings in government and corporate bonds as well as equity
AIG 2008 Form 10-K 49
American International Group, Inc., and Subsidiaries