10-K/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/ A
(Amendment No. 1)
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number 1-8787
American International Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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13-2592361 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
70 Pine Street, New York, New York
(Address of principal executive offices) |
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10270
(Zip Code) |
Registrants telephone number, including area code
(212) 770-7000
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each exchange |
Title of each class |
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on which registered |
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Common Stock, Par Value $2.50 Per Share
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New York Stock Exchange, Inc. |
Securities registered pursuant to Section 12(g) of the
Act:
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the
registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days. Yes þ No o
Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K.
o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated
Filer þ Accelerated
Filer o Non-Accelerated
Filer o
Indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2 of the
Exchange Act).
Yes o No þ
The aggregate market value of the
voting and nonvoting common equity held by nonaffiliates of the
registrant computed by reference to the price at which the
common equity was last sold as of June 30, 2005 (the last
business day of the registrants most recently completed
second fiscal quarter), was approximately $127,330,500,000.
As of January 31, 2006, there
were outstanding 2,596,987,248 shares of Common Stock,
$2.50 par value per share, of the registrant.
AIG -
Form 10-K/A
1
This amendment to the Annual Report on
Form 10-K for the
year ended December 31, 2005 (2005 Annual Report on
Form 10-K/A) is
being filed for the purpose of amending Item 1 of Part I,
Items 7, 7A and 8 of Part II and Item 15 of
Part IV of the Annual Report on
Form 10-K for the
year ended December 31, 2005 of American International
Group, Inc. (AIG), which was originally filed on March 16,
2006 (2005 Annual Report on
Form 10-K). All
other Items of the 2005 Annual Report on
Form 10-K are
unaffected by the changes described above and have been omitted
from this amendment. Information in this 2005 Annual Report on
Form 10-K/A is
stated as of December 31, 2005 and does not reflect any
subsequent information or events.
2
AIG -
Form 10-K/A
Table of Contents
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Page | |
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PART I |
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Item 1.
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Business |
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4 |
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PART II |
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Item 7.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations |
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16 |
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk |
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68 |
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Item 8.
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Financial Statements and Supplementary Data |
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68 |
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PART IV |
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Item 15.
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Exhibits and Financial Statement Schedules |
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139 |
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SIGNATURES
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140 |
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AIG -
Form 10-K/A
3
Part I
ITEM 1.
Business
American International Group, Inc. (AIG), a Delaware
corporation, is a holding company which, through its
subsidiaries, is engaged in a broad range of insurance and
insurance-related activities in the United States and abroad.
AIGs primary activities include both General Insurance and
Life Insurance & Retirement Services operations. Other
significant activities include Financial Services and Asset
Management. The principal General Insurance company subsidiaries
are American Home Assurance Company (American Home), National
Union Fire Insurance Company of Pittsburgh, Pa. (National
Union), New Hampshire Insurance Company (New Hampshire),
Lexington Insurance Company (Lexington), The Hartford Steam
Boiler Inspection and Insurance Company (HSB), Transatlantic
Reinsurance Company, American International Underwriters
Overseas, Ltd. (AIUO) and United Guaranty Residential
Insurance Company. Significant Life Insurance &
Retirement Services operations include those conducted through
American Life Insurance Company (ALICO), American International
Reinsurance Company, Ltd. (AIRCO), American International
Assurance Company, Limited together with American International
Assurance Company (Bermuda) Limited (AIA), Nan Shan Life
Insurance Company, Ltd. (Nan Shan), The Philippine American Life
and General Insurance Company (Philamlife), AIG Star Life
Insurance Co., Ltd. (AIG Star Life), AIG Edison Life Insurance
Company (AIG Edison Life), AIG Annuity Insurance Company (AIG
Annuity), the AIG American General Life Companies (AIG American
General), American General Life and Accident Insurance Company
(AGLA), The United States Life Insurance Company in the City of
New York (USLIFE), The Variable Annuity Life Insurance Company
(VALIC), SunAmerica Life Insurance Company (SunAmerica Life) and
AIG SunAmerica Life Assurance Company. AIGs Financial
Services operations are conducted primarily through
International Lease Finance Corporation (ILFC), AIG Financial
Products Corp. and AIG Trading Group Inc. (AIGTG) and their
respective subsidiaries (collectively referred to as AIGFP), and
American General Finance, Inc. and its subsidiaries (AGF).
AIGs Asset Management operations include AIG SunAmerica
Asset Management Corp. (SAAMCo) and AIG Global Asset Management
Holdings Corp. (formerly known as AIG Global Investment Group,
Inc.) and its subsidiaries and affiliated companies (AIG Global
Investment Group). For information on AIGs business
segments, see Note 2 of Notes to Consolidated Financial
Statements.
At December 31, 2005, AIG and its subsidiaries had
approximately 97,000 employees.
AIGs Internet address for its corporate website is
www.aigcorporate.com. AIG makes available free of charge,
through the Investor Information section of AIGs corporate
website, Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q and
Current Reports on
Form 8-K and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (the Exchange Act) as soon as reasonably practicable
after such materials are electronically filed with, or furnished
to, the Securities and Exchange Commission (SEC). AIG also makes
available on its corporate website copies of its charters for
its Audit, Nominating and Corporate Governance and Compensation
Committees, as well as its Corporate Governance Guidelines
(which includes Director Independence Standards) and Director,
Executive Officer and Senior Financial Officer Code of Business
Conduct and Ethics.
Throughout this Annual Report on
Form 10-K/A, AIG
presents its operations in the way it believes will be most
meaningful, as well as most transparent. Certain of the
measurements used by AIG management are non-GAAP financial
measures under SEC rules and regulations. Statutory
underwriting profit (loss) and combined ratios are determined in
accordance with accounting principles prescribed by insurance
regulatory authorities. For an explanation of why AIG management
considers these non-GAAP measures useful to
investors, see Managements Discussion and Analysis of
Financial Condition and Results of Operations.
The Restatements
AIG has completed two restatements of its financial statements
(the Restatements). In connection with the first restatement
(the First Restatement), AIG restated its consolidated financial
statements and financial statement schedules for the years ended
December 31, 2003, 2002, 2001 and 2000, the quarters ended
March 31, June 30 and September 30, 2004 and 2003
and the quarter ended December 31, 2003. In the second
restatement (the Second Restatement), AIG restated its
consolidated financial statements and financial statement
schedules for the years ended December 31, 2004, 2003 and
2002, along with 2001 and 2000 for purposes of preparation of
the Consolidated Financial Data for 2001 and 2000, the quarterly
financial information for 2004 and 2003 and the first three
quarters of 2005. AIG, however, did not amend its quarterly
report on
Form 10-Q for the
quarter ended September 30, 2005 because the adjustments to
the financial statements included therein were not material to
those financial statements. All financial information included
in this Annual Report on
Form 10-K/A
reflects the Restatements.
4
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
The following table shows the general development of the
business of AIG on a consolidated basis, the contributions made
to AIGs consolidated revenues and operating income and the
assets held, in the periods indicated, by its General Insurance,
Life Insurance & Retirement Services, Financial
Services and Asset Management operations and other realized
capital gains (losses). For additional information, see Selected
Financial Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and Notes 1 and 2
of Notes to Consolidated Financial Statements.
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Years Ended December 31, | |
(in millions) |
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2005 | |
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2004 | |
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2003 | |
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2002 | |
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2001 | |
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General Insurance operations:
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Gross premiums written
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$ |
52,725 |
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$ |
52,046 |
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$ |
46,938 |
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$ |
36,678 |
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$ |
28,341 |
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Net premiums written
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41,872 |
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40,623 |
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35,031 |
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26,718 |
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19,793 |
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Net premiums earned
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40,809 |
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38,537 |
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31,306 |
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23,595 |
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18,661 |
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Net investment income
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4,031 |
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3,196 |
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2,566 |
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2,350 |
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2,551 |
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Realized capital gains (losses)
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334 |
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228 |
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(39 |
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(345 |
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(189 |
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Operating
income(a)
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2,315 |
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3,177 |
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4,502 |
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923 |
(c) |
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1,585 |
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Identifiable assets
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150,667 |
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131,658 |
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117,511 |
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105,891 |
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88,250 |
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Statutory
measures(b):
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Statutory underwriting profit
(loss)(a)
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(2,165 |
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(564 |
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1,559 |
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(1,843 |
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(947 |
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Loss
ratio(a)
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81.1 |
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78.8 |
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73.1 |
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83.1 |
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79.3 |
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Expense ratio
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23.6 |
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21.5 |
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19.6 |
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21.8 |
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24.3 |
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Combined
ratio(a)
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104.7 |
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100.3 |
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92.7 |
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104.9 |
(c) |
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103.6 |
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Life Insurance & Retirement Services operations:
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GAAP premiums
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29,400 |
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28,088 |
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23,496 |
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20,694 |
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19,600 |
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Net investment income
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18,134 |
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15,269 |
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12,942 |
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11,243 |
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10,451 |
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Realized capital gains
(losses)(d)
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(218 |
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43 |
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240 |
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(372 |
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(400 |
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Operating income
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8,844 |
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7,923 |
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6,807 |
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5,181 |
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4,633 |
(e) |
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Identifiable assets
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480,622 |
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447,841 |
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372,126 |
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289,914 |
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256,767 |
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Insurance in-force at end of
year(f)
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1,852,833 |
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1,858,094 |
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1,583,031 |
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1,298,592 |
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1,228,501 |
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Financial Services operations:
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Interest, lease and finance charges
(g)
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10,525 |
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7,495 |
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6,242 |
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6,822 |
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6,321 |
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Operating
income(g)
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4,276 |
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2,180 |
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1,182 |
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2,125 |
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1,769 |
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Identifiable assets
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166,488 |
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165,995 |
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141,667 |
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128,104 |
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107,719 |
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Asset Management operations:
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Advisory and management fees and net investment income from GICs
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5,325 |
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4,714 |
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3,651 |
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3,467 |
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3,565 |
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Operating income
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2,253 |
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2,125 |
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1,316 |
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1,125 |
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1,019 |
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Identifiable assets
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81,080 |
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80,075 |
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64,047 |
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53,732 |
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42,961 |
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Other realized capital gains (losses)
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225 |
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(227 |
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(643 |
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(936 |
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(321 |
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Revenues(h)
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108,905 |
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97,666 |
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79,421 |
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66,171 |
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59,958 |
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Total operating
income(i)
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15,213 |
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14,845 |
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11,907 |
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7,808 |
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5,917 |
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Total assets
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853,370 |
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801,145 |
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675,602 |
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561,598 |
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490,614 |
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(a) |
Includes catastrophe losses of $2.63 billion,
$1.05 billion, $83 million, $61 million and
$867 million (including World Trade Center and related
losses (WTC losses) of $769 million) in 2005, 2004, 2003,
2002 and 2001, respectively. |
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(b) |
Calculated on the basis under which the U.S.-domiciled
insurance companies are required to report such measurements to
regulatory authorities. |
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(c) |
In the fourth quarter of 2002, after completion of its annual
review of General Insurance loss and loss adjustment expense
reserves, AIG increased its net loss reserves relating to
accident years 1997 through 2001 by $2.1 billion. |
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(d) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133 and the
application of FAS 52. For 2005, 2004, 2003, 2002, and
2001, respectively, the amounts included are
$(437) million, $(140) million, $78 million,
$(91) million and $(219) million. |
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(e) |
Includes $100 million in WTC losses. |
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(f) |
2005 includes the effect of the non-renewal of a single large
group life case of $36 billion. Also, the foreign in-force
is translated to U.S. dollars at the appropriate balance sheet
exchange rate in each period. |
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(g) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133, including the
related foreign exchange gains and losses. For 2005, 2004, 2003,
2002 and 2001, respectively, the amounts included in interest,
lease and finance charges are $2.01 billion,
$(122) million, $(1.01) billion, $220 million and
$56 million, and the amounts included in Financial Services
operating income are $1.98 billion, $(149) million,
$(964) million, $240 million and $75 million. |
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(h) |
Represents the sum of General Insurance net premiums earned,
Life Insurance & Retirement Services GAAP premiums, net
investment income, Financial Services interest, lease and
finance charges, Asset Management advisory and management fees
and net investment income from Guaranteed Investment Contracts
(GICs), and realized capital gains (losses). |
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(i) |
Represents income before income taxes, minority interest and
cumulative effect of accounting changes. Includes segment
operating income and other realized capital gains (losses)
presented above, as well as AIG Parent and other operations of
$(2.70) billion, $(333) million, $(1.26) billion,
$(610) million and $(751) million in 2005, 2004, 2003,
2002 and 2001, respectively, and acquisition, restructuring and
related charges of $(2.02) billion in 2001. |
AIG -
Form 10-K/A
5
General Insurance Operations
AIGs General Insurance subsidiaries are multiple line
companies writing substantially all lines of property and
casualty insurance both domestically and abroad. Domestic
General Insurance operations are comprised of the Domestic
Brokerage Group (DBG), which includes the operations of HSB;
Transatlantic Holdings, Inc. (Transatlantic); Personal Lines,
including 21st Century Insurance Group (21st Century); and
United Guaranty Corporation (UGC).
AIGs primary domestic division is DBG. DBGs business
in the United States and Canada is conducted through its General
Insurance subsidiaries including American Home, National Union,
Lexington and certain other General Insurance company
subsidiaries of AIG.
DBG writes substantially all classes of business insurance,
accepting such business mainly from insurance brokers. This
provides DBG the opportunity to select specialized markets and
retain underwriting control. Any licensed broker is able to
submit business to DBG without the traditional agent-company
contractual relationship, but such broker usually has no
authority to commit DBG to accept a risk.
In addition to writing substantially all classes of business
insurance, including large commercial or industrial property
insurance, excess liability, inland marine, environmental,
workers compensation and excess and umbrella coverages, DBG
offers many specialized forms of insurance such as aviation,
accident and health, equipment breakdown, directors and officers
liability (D&O), difference-in-conditions, kidnap-ransom,
export credit and political risk, and various types of
professional errors and omissions coverages. The AIG Risk
Management operation provides insurance and risk management
programs for large corporate customers. The AIG Risk Finance
operation is a leading provider of customized structured
insurance products. Also included in DBG are the operations of
AIG Environmental, which focuses specifically on providing
specialty products to clients with environmental exposures.
Lexington writes surplus lines, those risks for which
conventional insurance companies do not readily provide
insurance coverage, either because of complexity or because the
coverage does not lend itself to conventional contracts.
Certain of the products of the DBG companies include funding
components or have been structured in a manner such that little
or no insurance risk is actually transferred. Funds received in
connection with these products are recorded as deposits,
included in other liabilities, rather than premiums and incurred
losses.
The AIG Worldsource Division introduces and coordinates
AIGs products and services to
U.S.-based
multinational clients and foreign corporations doing business in
the U.S.
Transatlantic subsidiaries offer reinsurance capacity on both a
treaty and facultative basis both in the U.S. and abroad.
Transatlantic structures programs for a full range of property
and casualty products with an emphasis on specialty risk.
AIGs Personal Lines operations provide automobile
insurance through AIG Direct, the mass marketing operation of
AIG, Agency Auto Division and 21st Century, as well as a broad
range of coverages for high net-worth individuals through the
AIG Private Client Group.
The main business of the UGC subsidiaries is the issuance of
residential mortgage guaranty insurance on conventional first
lien mortgages for the purchase or refinance of 1-4 family
residences. This type of insurance protects lenders in both
domestic and international markets against loss if borrowers
default. Other UGC subsidiaries write second lien and private
student loan guaranty insurance. The second lien coverage
protects lenders against loss from default on home equity and
closed-end second mortgages used to finance home improvements,
repairs or other expenses not directly related to the purchase
of a borrowers home. Private student loan guaranty
insurance protects lenders against loss if the student, or in
many cases the students parent, defaults on their
education loan. UGC had approximately $23 billion of
guaranty risk in force at December 31, 2005.
AIGs Foreign General Insurance group accepts risks
primarily underwritten through American International
Underwriters (AIU), a marketing unit consisting of wholly owned
agencies and insurance companies. The Foreign General Insurance
group also includes business written by AIGs foreign-based
insurance subsidiaries. The Foreign General group uses various
marketing methods and multiple distribution channels to write
both commercial and consumer lines insurance with certain
refinements for local laws, customs and needs. AIU operates in
Asia, the Pacific Rim, the United Kingdom, Europe, Africa, the
Middle East and Latin America. See also Note 2 of Notes to
Consolidated Financial Statements.
During 2005, DBG and the Foreign General Insurance group
accounted for 55 percent and 24 percent, respectively,
of AIGs General Insurance net premiums written.
AIGs General Insurance company subsidiaries worldwide
operate primarily by underwriting and accepting risks for their
direct account and securing reinsurance on that portion of the
risk in excess of the limit which they wish to retain. This
operating policy differs from that of many insurance companies
that will underwrite only up to their net retention limit,
thereby requiring the broker or agent to secure commitments from
other underwriters for the remainder of the gross risk amount.
Certain of DBGs commercial insurance is reinsured on a
quota share basis by AIRCO. Various AIG profit centers,
including AIU, AIG Reinsurance Advisors, Inc. and AIG Risk
Finance, use AIRCO as a reinsurer for certain of their
businesses, and AIRCO also receives premiums from offshore
fronting arrangements for clients of AIG subsidiaries. In
accordance with permitted accounting practices in Bermuda, AIRCO
discounts reserves attributable to certain classes of business
assumed from other AIG subsidiaries. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Operating Review
Reserve for Losses and Loss Expenses.
6
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
The utilization of reinsurance is closely monitored by senior
management and AIGs Credit Risk Committee. AIG believes
that no exposure to a single reinsurer represents an
inappropriate concentration of risk to AIG, nor is AIGs
business substantially dependent upon any reinsurance contract.
See also Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 5 of Notes to
Consolidated Financial Statements.
AIG is diversified both in terms of classes of business and
geographic locations. In General Insurance, approximately
15 percent of net premiums written for the year ended
December 31, 2005 represented workers compensation
business. During 2005, of the direct General Insurance premiums
written (gross premiums less return premiums and cancellations,
excluding reinsurance assumed and before deducting reinsurance
ceded), 11 percent and 7 percent were written in
California and New York, respectively. No other state accounted
for more than five percent of such premiums.
The majority of AIGs General Insurance business is in the
casualty classes, which tend to involve longer periods of time
for the reporting and settling of claims. This may increase the
risk and uncertainty with respect to AIGs loss reserve
development. See also the Discussion and Analysis of
Consolidated Net Losses and Loss Expense Reserve Development in
this Item 1. Business and Managements Discussion and
Analysis of Financial Condition and Results of Operations.
A significant portion of AIGs General Insurance operating
revenue is derived from AIGs insurance investment
operations. For a table summarizing the investment results of
General Insurance see Insurance Investments
Operations below. See also Managements Discussion
and Analysis of Financial Conditions and Results of Operations
and Notes 1, 2 and 8 of Notes to Consolidated Financial
Statements.
Discussion and Analysis of Consolidated Net Losses and Loss
Expense Reserve Development
The reserve for net losses and loss expenses represents the
accumulation of estimates for reported losses (case basis
reserves) and provisions for losses incurred but not reported
(IBNR), both reduced by applicable reinsurance recoverable and
the discount for future investment income. Losses and loss
expenses are charged to income as incurred.
Loss reserves established with respect to foreign business are
set and monitored in terms of the respective local or functional
currency. Therefore, no assumption is included for changes in
currency rates. See also Note 1(bb) of Notes to
Consolidated Financial Statements.
Management reviews the adequacy of established loss reserves
through the utilization of a number of analytical reserve
development techniques. Through the use of these techniques,
management is able to monitor the adequacy of AIGs
established reserves and determine appropriate assumptions for
inflation. Also, analysis of emerging specific development
patterns, such as case reserve redundancies or deficiencies and
IBNR emergence, allows management to determine any required
adjustments. See also Managements Discussion and Analysis
of Financial Condition and Results of Operations.
The Analysis of Consolidated Net Losses and Loss Expense
Reserve Development table presents the development of net
losses and loss expense reserves for calendar years 1995 through
2005. Immediately following this table is a second table that
presents all data on a basis that excludes asbestos and
environmental net losses and loss expense reserve development.
The opening reserves held are shown at the top of the table for
each year end date. The amount of loss reserve discount included
in the opening reserve at each date is shown immediately below
the reserves held for each year. The undiscounted reserve at
each date is thus the sum of the discount and the reserve held.
The upper half of the table shows the cumulative amounts paid
during successive years related to the undiscounted opening loss
reserves. For example, in the table that excludes asbestos and
environmental losses, with respect to the net losses and loss
expense reserve of $24.55 billion as of December 31,
1998, by the end of 2005 (seven years later) $24.75 billion
had actually been paid in settlement of these net loss reserves.
In addition, as reflected in the lower section of the table, the
original reserve of $25.45 billion was reestimated to be
$30.64 billion at December 31, 2005. This increase
from the original estimate would generally result from a
combination of a number of factors, including reserves being
settled for larger amounts than originally estimated. The
original estimates will also be increased or decreased as more
information becomes known about the individual claims and
overall claim frequency and severity patterns. The redundancy
(deficiency) depicted in the table, for any particular calendar
year, shows the aggregate change in estimates over the period of
years subsequent to the calendar year reflected at the top of
the respective column heading. For example, the deficiency of
$3.75 billion at December 31, 2005 related to
December 31, 2004 net losses and loss expense reserves of
$47.30 billion represents the cumulative amount by which
reserves for 2004 and prior years have developed deficiently
during 2005. The deficiency that has emerged in the last year
can be attributed primarily to the excess casualty, excess
workers compensation, and D&O and related management
liability classes of business. These classes in total produced
approximately $4 billion of adverse development in 2005,
primarily related to claims from accident years 2002 and prior.
For most other classes, accident years 2002 and prior generally
produced adverse development in 2005, whereas accident year 2004
generally produced favorable development. In total, the
favorable development for all classes of business for accident
year 2004 was approximately $3.85 billion. The accident
year emergence can be seen by comparing the respective
development in 2005 for each columns loss reserve in the
table that follows. Loss development patterns utilized to test
the reserves generally rely on the actual historical loss
development patterns of prior accident years for each class of
business. See also Managements Discussion and Analysis of
Financial Condition and Results of Operations for further
discussion of loss development in 2005.
AIG -
Form 10-K/A
7
The bottom of each table below shows the remaining undiscounted
and discounted net loss reserve for each year. For example, in
the table that excludes asbestos and environmental losses, for
the 2000 year-end, the remaining undiscounted reserves held as
of December 31, 2005 are $10.01 billion, with a
corresponding discounted net reserve of $9.32 billion.
The reserves for net losses and loss expenses with respect to
Transatlantic and 21st Century are included only in consolidated
net losses and loss expenses commencing with the year ended
December 31, 1998, the year they were first consolidated in
AIGs financial statements. Reserve development for these
operations is included only for 1998 and subsequent periods.
Thus, the presentation for 1997 and prior year ends is not fully
comparable to that for 1998 and subsequent years in the tables
below.
8
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Analysis of Consolidated Losses and Loss Expense Reserve
Development
The following table presents for each calendar year the
losses and loss expense reserves and the development thereof
including those with respect to asbestos and environmental
claims. See also Managements Discussion and Analysis of
Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1995 | |
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net Reserves Held
|
|
$ |
19,755 |
|
|
$ |
20,496 |
|
|
$ |
20,901 |
|
|
$ |
25,418 |
|
|
$ |
25,636 |
|
|
$ |
25,684 |
|
|
$ |
26,005 |
|
|
$ |
29,347 |
|
|
$ |
36,228 |
|
|
$ |
47,254 |
|
|
$ |
57,476 |
|
Discount (in Reserves Held)
|
|
|
217 |
|
|
|
393 |
|
|
|
619 |
|
|
|
897 |
|
|
|
1,075 |
|
|
|
1,287 |
|
|
|
1,423 |
|
|
|
1,499 |
|
|
|
1,516 |
|
|
|
1,553 |
|
|
|
2,110 |
|
Net Reserves Held (Undiscounted)
|
|
|
19,972 |
|
|
|
20,889 |
|
|
|
21,520 |
|
|
|
26,315 |
|
|
|
26,711 |
|
|
|
26,971 |
|
|
|
27,428 |
|
|
|
30,846 |
|
|
|
37,744 |
|
|
|
48,807 |
|
|
|
59,586 |
|
Paid (Cumulative) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
5,416 |
|
|
|
5,712 |
|
|
|
5,607 |
|
|
|
7,205 |
|
|
|
8,266 |
|
|
|
9,709 |
|
|
|
11,007 |
|
|
|
10,775 |
|
|
|
12,163 |
|
|
|
14,910 |
|
|
|
|
|
|
Two years later
|
|
|
8,982 |
|
|
|
9,244 |
|
|
|
9,754 |
|
|
|
12,382 |
|
|
|
14,640 |
|
|
|
17,149 |
|
|
|
18,091 |
|
|
|
18,589 |
|
|
|
21,773 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
11,363 |
|
|
|
11,943 |
|
|
|
12,939 |
|
|
|
16,599 |
|
|
|
19,901 |
|
|
|
21,930 |
|
|
|
23,881 |
|
|
|
25,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
13,108 |
|
|
|
14,152 |
|
|
|
15,484 |
|
|
|
20,263 |
|
|
|
23,074 |
|
|
|
26,090 |
|
|
|
28,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
14,667 |
|
|
|
16,077 |
|
|
|
17,637 |
|
|
|
22,303 |
|
|
|
25,829 |
|
|
|
29,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
16,120 |
|
|
|
17,551 |
|
|
|
18,806 |
|
|
|
24,114 |
|
|
|
28,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
17,212 |
|
|
|
18,415 |
|
|
|
19,919 |
|
|
|
25,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
17,792 |
|
|
|
19,200 |
|
|
|
21,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
18,379 |
|
|
|
20,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
19,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1995 | |
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net Reserves Held (undiscounted)
|
|
$ |
19,972 |
|
|
$ |
20,889 |
|
|
$ |
21,520 |
|
|
$ |
26,315 |
|
|
$ |
26,711 |
|
|
$ |
26,971 |
|
|
$ |
27,428 |
|
|
$ |
30,846 |
|
|
$ |
37,744 |
|
|
$ |
48,807 |
|
|
$ |
59,586 |
|
Undiscounted Liability as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
19,782 |
|
|
|
20,795 |
|
|
|
21,563 |
|
|
|
25,897 |
|
|
|
26,358 |
|
|
|
26,979 |
|
|
|
31,112 |
|
|
|
32,913 |
|
|
|
40,931 |
|
|
|
53,486 |
|
|
|
|
|
|
Two years later
|
|
|
19,866 |
|
|
|
20,877 |
|
|
|
21,500 |
|
|
|
25,638 |
|
|
|
27,023 |
|
|
|
30,696 |
|
|
|
33,363 |
|
|
|
37,583 |
|
|
|
49,463 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
19,865 |
|
|
|
20,994 |
|
|
|
21,264 |
|
|
|
26,169 |
|
|
|
29,994 |
|
|
|
32,732 |
|
|
|
37,964 |
|
|
|
46,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
20,143 |
|
|
|
20,776 |
|
|
|
21,485 |
|
|
|
28,021 |
|
|
|
31,192 |
|
|
|
36,210 |
|
|
|
45,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
19,991 |
|
|
|
20,917 |
|
|
|
22,405 |
|
|
|
28,607 |
|
|
|
33,910 |
|
|
|
41,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
19,950 |
|
|
|
21,469 |
|
|
|
22,720 |
|
|
|
30,632 |
|
|
|
38,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
20,335 |
|
|
|
21,671 |
|
|
|
24,209 |
|
|
|
33,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
20,558 |
|
|
|
22,986 |
|
|
|
26,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
21,736 |
|
|
|
25,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
23,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Redundancy/(Deficiency)
|
|
|
(3,906 |
) |
|
|
(4,375 |
) |
|
|
(5,227 |
) |
|
|
(7,546 |
) |
|
|
(11,376 |
) |
|
|
(14,728 |
) |
|
|
(17,775 |
) |
|
|
(15,333 |
) |
|
|
(11,719 |
) |
|
|
(4,679 |
) |
|
|
|
|
Remaining Reserves (Undiscounted)
|
|
|
4,724 |
|
|
|
5,158 |
|
|
|
5,658 |
|
|
|
8,091 |
|
|
|
9,922 |
|
|
|
12,226 |
|
|
|
16,486 |
|
|
|
20,666 |
|
|
|
27,690 |
|
|
|
38,576 |
|
|
|
|
|
Remaining Discount
|
|
|
252 |
|
|
|
299 |
|
|
|
358 |
|
|
|
459 |
|
|
|
568 |
|
|
|
690 |
|
|
|
846 |
|
|
|
999 |
|
|
|
1,212 |
|
|
|
1,568 |
|
|
|
|
|
Remaining Reserves
|
|
|
4,472 |
|
|
|
4,859 |
|
|
|
5,300 |
|
|
|
7,632 |
|
|
|
9,354 |
|
|
|
11,536 |
|
|
|
15,640 |
|
|
|
19,667 |
|
|
|
26, 478 |
|
|
|
37,008 |
|
|
|
|
|
|
The table below shows the gross liability (before discount),
reinsurance recoverable and net liability recorded at each
year-end and the reestimation of these amounts as of
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1995 | |
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Gross Liability, End of Year
|
|
$ |
32,298 |
|
|
$ |
32,605 |
|
|
$ |
32,049 |
|
|
$ |
36,973 |
|
|
$ |
37,278 |
|
|
$ |
39,222 |
|
|
$ |
42,629 |
|
|
$ |
48,173 |
|
|
$ |
53,387 |
|
|
$ |
63,431 |
|
|
$ |
79,279 |
|
Reinsurance Recoverable,
End of Year
|
|
|
12,326 |
|
|
|
11,716 |
|
|
|
10,529 |
|
|
|
10,658 |
|
|
|
10,567 |
|
|
|
12,251 |
|
|
|
15,201 |
|
|
|
17,327 |
|
|
|
15,643 |
|
|
|
14,624 |
|
|
|
19,693 |
|
Net Liability, End of Year
|
|
|
19,972 |
|
|
|
20,889 |
|
|
|
21,520 |
|
|
|
26,315 |
|
|
|
26,711 |
|
|
|
26,971 |
|
|
|
27,428 |
|
|
|
30,846 |
|
|
|
37,744 |
|
|
|
48,807 |
|
|
|
59,586 |
|
Reestimated Gross Liability
|
|
|
40,012 |
|
|
|
40,817 |
|
|
|
42,937 |
|
|
|
51,847 |
|
|
|
56,864 |
|
|
|
61,991 |
|
|
|
65,704 |
|
|
|
66,398 |
|
|
|
66,967 |
|
|
|
69,327 |
|
|
|
|
|
Reestimated Reinsurance Recoverable
|
|
|
16,134 |
|
|
|
15,553 |
|
|
|
16,190 |
|
|
|
17,986 |
|
|
|
18,777 |
|
|
|
20,292 |
|
|
|
20,501 |
|
|
|
20,219 |
|
|
|
17,504 |
|
|
|
15,841 |
|
|
|
|
|
Reestimated Net Liability
|
|
|
23,878 |
|
|
|
25,264 |
|
|
|
26,747 |
|
|
|
33,861 |
|
|
|
38,087 |
|
|
|
41,699 |
|
|
|
45,203 |
|
|
|
46,179 |
|
|
|
49, 463 |
|
|
|
53,486 |
|
|
|
|
|
Cumulative Gross Redundancy/(Deficiency)
|
|
|
(7,713 |
) |
|
|
(8,212 |
) |
|
|
(10,888 |
) |
|
|
(14,874 |
) |
|
|
(19,586 |
) |
|
|
(22,769 |
) |
|
|
(23,075 |
) |
|
|
(18,225 |
) |
|
|
(13,580 |
) |
|
|
(5,896 |
) |
|
|
|
|
|
AIG -
Form 10-K/A
9
Analysis of Consolidated Losses and Loss Expense Reserve
Development Excluding Asbestos and Environmental Losses and Loss
Expense Reserve Development
The following table presents for each calendar year the
losses and loss expense reserves and the development thereof
excluding those with respect to asbestos and environmental
claims. See also Managements Discussion and Analysis of
Financial Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1995 | |
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net Reserves Held
|
|
$ |
19,247 |
|
|
$ |
19,753 |
|
|
$ |
20,113 |
|
|
$ |
24,554 |
|
|
$ |
24,745 |
|
|
$ |
24,829 |
|
|
$ |
25,286 |
|
|
$ |
28,650 |
|
|
$ |
35,559 |
|
|
$ |
45,742 |
|
|
$ |
55,227 |
|
Discount (in Reserves Held)
|
|
|
217 |
|
|
|
393 |
|
|
|
619 |
|
|
|
897 |
|
|
|
1,075 |
|
|
|
1,287 |
|
|
|
1,423 |
|
|
|
1,499 |
|
|
|
1,516 |
|
|
|
1,553 |
|
|
|
2,110 |
|
Net Reserves Held (Undiscounted)
|
|
|
19,464 |
|
|
|
20,146 |
|
|
|
20,732 |
|
|
|
25,451 |
|
|
|
25,820 |
|
|
|
26,116 |
|
|
|
26,709 |
|
|
|
30,149 |
|
|
|
37,075 |
|
|
|
47,295 |
|
|
|
57,336 |
|
Paid (Cumulative) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
5,309 |
|
|
|
5,603 |
|
|
|
5,467 |
|
|
|
7,084 |
|
|
|
8,195 |
|
|
|
9,515 |
|
|
|
10,861 |
|
|
|
10,632 |
|
|
|
11,999 |
|
|
|
14,718 |
|
|
|
|
|
|
Two years later
|
|
|
8,771 |
|
|
|
8,996 |
|
|
|
9,500 |
|
|
|
12,190 |
|
|
|
14,376 |
|
|
|
16,808 |
|
|
|
17,801 |
|
|
|
18,283 |
|
|
|
21,419 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
11,013 |
|
|
|
11,582 |
|
|
|
12,618 |
|
|
|
16,214 |
|
|
|
19,490 |
|
|
|
21,447 |
|
|
|
23,430 |
|
|
|
25,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
12,645 |
|
|
|
13,724 |
|
|
|
14,972 |
|
|
|
19,732 |
|
|
|
22,521 |
|
|
|
25,445 |
|
|
|
28,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
14,139 |
|
|
|
15,460 |
|
|
|
16,983 |
|
|
|
21,630 |
|
|
|
25,116 |
|
|
|
28,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
15,404 |
|
|
|
16,792 |
|
|
|
18,014 |
|
|
|
23,282 |
|
|
|
27,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
16,355 |
|
|
|
17,519 |
|
|
|
18,972 |
|
|
|
24,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
16,798 |
|
|
|
18,149 |
|
|
|
19,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
17,230 |
|
|
|
18,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
17,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1995 | |
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Net Reserves Held (undiscounted)
|
|
$ |
19,464 |
|
|
$ |
20,146 |
|
|
$ |
20,732 |
|
|
$ |
25,451 |
|
|
$ |
25,820 |
|
|
$ |
26,116 |
|
|
$ |
26,709 |
|
|
$ |
30,149 |
|
|
$ |
37,075 |
|
|
$ |
47,295 |
|
|
$ |
57,336 |
|
Undiscounted Liability as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
18,937 |
|
|
|
19,904 |
|
|
|
20,576 |
|
|
|
24,890 |
|
|
|
25,437 |
|
|
|
26,071 |
|
|
|
30,274 |
|
|
|
32,129 |
|
|
|
39,261 |
|
|
|
51,048 |
|
|
|
|
|
|
Two years later
|
|
|
18,883 |
|
|
|
19,788 |
|
|
|
20,385 |
|
|
|
24,602 |
|
|
|
26,053 |
|
|
|
29,670 |
|
|
|
32,438 |
|
|
|
35,803 |
|
|
|
46,865 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
18,680 |
|
|
|
19,777 |
|
|
|
20,120 |
|
|
|
25,084 |
|
|
|
28,902 |
|
|
|
31,619 |
|
|
|
36,043 |
|
|
|
43,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
18,830 |
|
|
|
19,530 |
|
|
|
20,301 |
|
|
|
26,813 |
|
|
|
30,014 |
|
|
|
34,102 |
|
|
|
42,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
18,651 |
|
|
|
19,633 |
|
|
|
21,104 |
|
|
|
27,314 |
|
|
|
31,738 |
|
|
|
38,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
18,574 |
|
|
|
20,070 |
|
|
|
21,336 |
|
|
|
28,345 |
|
|
|
34,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
18,844 |
|
|
|
20,188 |
|
|
|
21,836 |
|
|
|
30,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
18,984 |
|
|
|
20,515 |
|
|
|
23,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
19,173 |
|
|
|
21,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
20,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Redundancy/(Deficiency)
|
|
|
(915 |
) |
|
|
(1,712 |
) |
|
|
(2,709 |
) |
|
|
(5,185 |
) |
|
|
(9,158 |
) |
|
|
(12,539 |
) |
|
|
(15,639 |
) |
|
|
(13,318 |
) |
|
|
(9,790 |
) |
|
|
(3,753 |
) |
|
|
|
|
Remaining Reserves (undiscounted)
|
|
|
2,553 |
|
|
|
2,985 |
|
|
|
3,482 |
|
|
|
5,883 |
|
|
|
7,712 |
|
|
|
10,012 |
|
|
|
14,269 |
|
|
|
18,446 |
|
|
|
25,447 |
|
|
|
36,330 |
|
|
|
|
|
Remaining Discount
|
|
|
252 |
|
|
|
299 |
|
|
|
358 |
|
|
|
459 |
|
|
|
568 |
|
|
|
690 |
|
|
|
846 |
|
|
|
999 |
|
|
|
1,212 |
|
|
|
1,568 |
|
|
|
|
|
Remaining Reserves
|
|
|
2,301 |
|
|
|
2,686 |
|
|
|
3,124 |
|
|
|
5,424 |
|
|
|
7,144 |
|
|
|
9,322 |
|
|
|
13,423 |
|
|
|
17,447 |
|
|
|
24,235 |
|
|
|
34,762 |
|
|
|
|
|
|
The table below shows the gross liability (before discount),
reinsurance recoverable and net liability recorded at each
year-end and the reestimation of these amounts as of
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) |
|
1995 | |
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
Gross Liability, End of Year
|
|
$ |
30,356 |
|
|
$ |
30,302 |
|
|
$ |
29,740 |
|
|
$ |
34,474 |
|
|
$ |
34,666 |
|
|
$ |
36,777 |
|
|
$ |
40,400 |
|
|
$ |
46,036 |
|
|
$ |
51,363 |
|
|
$ |
59,897 |
|
|
$ |
73,912 |
|
Reinsurance Recoverable,
End of Year
|
|
|
10,892 |
|
|
|
10,156 |
|
|
|
9,008 |
|
|
|
9,023 |
|
|
|
8,846 |
|
|
|
10,661 |
|
|
|
13,691 |
|
|
|
15,887 |
|
|
|
14,288 |
|
|
|
12,602 |
|
|
|
16,576 |
|
Net Liability, End of Year
|
|
|
19,464 |
|
|
|
20,146 |
|
|
|
20,732 |
|
|
|
25,451 |
|
|
|
25,820 |
|
|
|
26,116 |
|
|
|
26,709 |
|
|
|
30,149 |
|
|
|
37,075 |
|
|
|
47,295 |
|
|
|
57,336 |
|
Reestimated Gross Liability
|
|
|
30,452 |
|
|
|
31,660 |
|
|
|
34,226 |
|
|
|
43,461 |
|
|
|
48,886 |
|
|
|
54,534 |
|
|
|
58,776 |
|
|
|
59,813 |
|
|
|
60,788 |
|
|
|
63,544 |
|
|
|
|
|
Reestimated Reinsurance Recoverable
|
|
|
10,073 |
|
|
|
9,802 |
|
|
|
10,785 |
|
|
|
12,825 |
|
|
|
13,908 |
|
|
|
15,879 |
|
|
|
16,428 |
|
|
|
16,346 |
|
|
|
13,923 |
|
|
|
12,496 |
|
|
|
|
|
Reestimated Net Liability
|
|
|
20,379 |
|
|
|
21,858 |
|
|
|
23,441 |
|
|
|
30,636 |
|
|
|
34,978 |
|
|
|
38,655 |
|
|
|
42,348 |
|
|
|
43,467 |
|
|
|
46,865 |
|
|
|
51,048 |
|
|
|
|
|
Cumulative Gross Redundancy/(Deficiency)
|
|
|
(96 |
) |
|
|
(1,358 |
) |
|
|
(4,486 |
) |
|
|
(8,987 |
) |
|
|
(14,220 |
) |
|
|
(17,757 |
) |
|
|
(18,376 |
) |
|
|
(13,777 |
) |
|
|
(9,425 |
) |
|
|
(3,647 |
) |
|
|
|
|
|
10
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Reconciliation of Net Reserves for Losses and Loss
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) | |
|
2005 | |
|
2004 | |
|
2003 | |
|
Net reserve for losses and loss
expenses at beginning of year
|
|
$ |
47,254 |
|
|
$ |
36,228 |
|
|
$ |
29,347 |
|
Foreign exchange effect
|
|
|
(628 |
) |
|
|
524 |
|
|
|
580 |
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
391 |
(a) |
|
Losses and loss expenses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
28,426 |
|
|
|
26,793 |
|
|
|
20,509 |
|
|
Prior
years(b)
|
|
|
4,665 |
|
|
|
3,564 |
|
|
|
2,363 |
|
|
|
|
|
33,091 |
|
|
|
30,357 |
|
|
|
22,872 |
|
|
Losses and loss expenses paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
7,331 |
|
|
|
7,692 |
|
|
|
6,187 |
|
|
Prior years
|
|
|
14,910 |
|
|
|
12,163 |
|
|
|
10,775 |
|
|
|
|
|
22,241 |
|
|
|
19,855 |
|
|
|
16,962 |
|
|
Net reserve for losses and loss
expenses at end of
year(c)
|
|
$ |
57,476 |
|
|
$ |
47,254 |
|
|
$ |
36,228 |
|
|
|
|
(a) |
Reflects the opening balances with respect to the GE
U.S.-based auto and home insurance business acquired in 2003. |
|
(b) |
Includes accretion of discount of $(15) million in 2005,
including an increase of $375 million in the discount
recorded in 2005; $377 million in 2004 and $296 million in 2003.
Additionally, includes $269 million in 2005,
$317 million in 2004 and $323 million in 2003 for the
general reinsurance operations of Transatlantic, and
$197 million of additional losses incurred in 2005
resulting from increased labor and material costs related to the
2004 Florida hurricanes. |
|
(c) |
See also Note 6(a) of Notes to Consolidated Financial
Statements. |
The reserve for losses and loss expenses as reported in
AIGs Consolidated Balance Sheet at December 31, 2005
differs from the total reserve reported in the Annual Statements
filed with state insurance departments and, where appropriate,
with foreign regulatory authorities. The differences at
December 31, 2005 relate primarily to reserves for certain
foreign operations not required to be reported in the United
States for statutory reporting purposes.
The reserve for gross losses and loss expenses is prior to
reinsurance and represents the accumulation for reported losses
and IBNR. Management reviews the adequacy of established gross
loss reserves in the manner previously described for net loss
reserves.
For further discussion regarding net reserves for losses and
loss expenses, see Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Life Insurance & Retirement Services Operations
AIGs Life Insurance & Retirement Services subsidiaries
offer a wide range of insurance and retirement savings products
both domestically and abroad. Insurance-oriented products
consist of individual and group life, payout annuities,
endowment and accident and health policies. Retirement savings
products consist generally of fixed and variable annuities. See
also Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Life Insurance & Retirement Services operations in foreign
countries comprised 78 percent of Life Insurance &
Retirement Services GAAP premiums and 59 percent of Life
Insurance & Retirement Services operating income in 2005.
AIG operates overseas principally through ALICO, AIA, Nan Shan,
Philamlife, AIG Star Life, and AIG Edison Life. ALICO is
incorporated in Delaware and all of its business is written
outside of the United States. ALICO has operations either
directly or through subsidiaries in Europe, Latin America, the
Caribbean, the Middle East, South Asia and the Far East, with
Japan being the largest territory. AIG added significantly to
its presence in Japan with the acquisition of GE Edison Life
Insurance Company (now AIG Edison Life), which was consolidated
beginning with the fourth quarter of 2003. AIA operates
primarily in China (including Hong Kong), Singapore, Malaysia,
Thailand, Korea, Australia, New Zealand, Vietnam, and India. The
operations in India are conducted through a joint venture, Tata
AIG Life Insurance Company Limited. Nan Shan operates in Taiwan.
Philamlife is the largest life insurer in the Philippines. AIG
Star Life operates in Japan. See also Note 2 of Notes to
Consolidated Financial Statements.
AIRCO acts primarily as an internal reinsurance company for
AIGs foreign life operations. This facilitates insurance
risk management (retention, volatility, concentrations) and
capital planning locally (branch and subsidiary). It also allows
AIG to pool its insurance risks and purchase reinsurance more
efficiently at a consolidated level, manage global counterparty
risk and relationships and manage global life catastrophe risks.
AIGs principal domestic Life Insurance &
Retirement Services operations include AGLA, AIG American
General, AIG Annuity, USLIFE, VALIC and SunAmerica Life. These
companies utilize multiple distribution channels including
independent producers, brokerage, career agents and banks to
offer life insurance, annuity and accident and health products
and services, as well as financial and other investment
products. The domestic Life Insurance & Retirement
Services operations comprised 22 percent of total Life
Insurance & Retirement Services GAAP premiums and
41 percent of Life Insurance & Retirement Services
operating income in 2005.
There was no significant adverse effect on AIGs Life
Insurance & Retirement Services results of operations
from
AIG -
Form 10-K/A
11
economic conditions in any one state, country or geographic
region for the year ended December 31, 2005. See also
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
Life insurance products such as whole life and endowment
continue to be significant in the overseas companies, especially
in Southeast Asia, while a mixture of life insurance, accident
and health and retirement services products are sold in Japan.
In addition to the above, AIG also has subsidiary operations in
Canada, Egypt, Mexico, Poland, Switzerland and Puerto Rico, and
conducts life insurance business through a joint venture in
Brazil and through an AIUO subsidiary company in Russia, and in
certain countries in Central and South America.
The Foreign Life Insurance & Retirement Services
companies have over 270,000 full and part-time agents, as well
as independent producers, and sell their products largely to
indigenous persons in local and foreign currencies. In addition
to the agency outlets, these companies also distribute their
products through direct marketing channels, such as mass
marketing, and through brokers and other distribution outlets,
such as financial institutions.
Insurance Investment Operations
A significant portion of AIGs General Insurance and Life
Insurance & Retirement Services operating revenues are
derived from AIGs insurance investment operations. See
also Managements Discussion and Analysis of Financial
Condition and Results of Operations and Notes 1,
2 and 8 of Notes to Consolidated Financial Statements.
The following table summarizes the investment results of the
General Insurance operations. See also Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Note 8 of Notes to Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Average Cash and Invested Assets | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
Cash | |
|
|
|
|
|
|
|
|
(including | |
|
|
|
Return on | |
|
Return on | |
Years Ended December 31, |
|
short-term | |
|
Invested | |
|
|
|
Average Cash | |
|
Average | |
(in millions) |
|
investments) | |
|
Assets(a) | |
|
Total | |
|
and Assets(b) | |
|
Assets(c) | |
|
2005
|
|
$ |
2,450 |
|
|
$ |
86,211 |
|
|
$ |
88,661 |
|
|
|
4.5 |
% |
|
|
4.7 |
% |
2004
|
|
|
2,012 |
|
|
|
73,338 |
|
|
|
75,350 |
|
|
|
4.2 |
|
|
|
4.4 |
|
2003
|
|
|
1,818 |
|
|
|
59,855 |
|
|
|
61,673 |
|
|
|
4.2 |
|
|
|
4.3 |
|
2002
|
|
|
1,537 |
|
|
|
47,477 |
|
|
|
49,014 |
|
|
|
4.8 |
|
|
|
5.0 |
|
2001
|
|
|
1,338 |
|
|
|
41,481 |
|
|
|
42,819 |
|
|
|
6.0 |
|
|
|
6.2 |
|
|
|
|
(a) |
Including investment income due and accrued, and real
estate. |
|
(b) |
Net investment income divided by the annual average sum of
cash and invested assets. |
|
(c) |
Net investment income divided by the annual average invested
assets. |
The following table summarizes the investment results of the
Life Insurance & Retirement Services operations. See
also Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 8 of Notes to
Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Average Cash and Invested Assets | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
Cash | |
|
|
|
|
|
|
|
|
(including | |
|
|
|
Return on | |
|
Return on | |
Years Ended December 31, |
|
short-term | |
|
Invested | |
|
|
|
Average Cash | |
|
Average | |
(in millions) |
|
investments) | |
|
Assets(a) | |
|
Total | |
|
and Assets(b) | |
|
Assets(c) | |
|
2005
|
|
$ |
6,180 |
|
|
$ |
352,250 |
|
|
$ |
358,430 |
|
|
|
5.1 |
% |
|
|
5.1 |
% |
2004
|
|
|
5,089 |
|
|
|
307,659 |
|
|
|
312,748 |
|
|
|
4.9 |
|
|
|
5.0 |
|
2003
|
|
|
4,680 |
|
|
|
247,608 |
|
|
|
252,288 |
|
|
|
5.1 |
|
|
|
5.2 |
|
2002
|
|
|
3,919 |
|
|
|
199,750 |
|
|
|
203,669 |
|
|
|
5.5 |
|
|
|
5.6 |
|
2001
|
|
|
3,615 |
|
|
|
162,708 |
|
|
|
166,323 |
|
|
|
6.3 |
|
|
|
6.4 |
|
|
|
|
(a) |
Including investment income due and accrued, and real
estate. |
|
(b) |
Net investment income divided by the annual average sum of
cash and invested assets. |
|
(c) |
Net investment income divided by the annual average invested
assets. |
AIGs worldwide insurance investment policy places primary
emphasis on investments in government and other high quality,
fixed income securities in all of its portfolios and, to a
lesser extent, investments in high yield bonds, common stocks,
real estate, hedge funds and partnerships, in order to enhance
returns on policyholders funds and generate net investment
income. The ability to implement this policy is somewhat limited
in certain territories as there may be a lack of adequate
long-term investments or investment restrictions may be imposed
by the local regulatory authorities. See also Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
Financial Services Operations
AIGs Financial Services subsidiaries engage in diversified
activities including aircraft and equipment leasing, capital
markets transactions, consumer finance and insurance premium
financing.
12
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
AIGs Aircraft Finance operations represent the operations
of ILFC, which generates its revenues primarily from leasing new
and used commercial jet aircraft to domestic and foreign
airlines. Revenues also result from the remarketing of
commercial jets for its own account, for airlines and for
financial institutions. See also Note 2 of Notes to
Consolidated Financial Statements.
The Capital Markets operations of AIG are conducted primarily
through AIGFP, which engages as principal in standard and
customized interest rate, currency, equity, commodity, energy
and credit products with top-tier corporations, financial
institutions, governments, agencies, institutional investors,
and high-net-worth individuals throughout the world. AIGFP also
raises funds through municipal reinvestment contracts and other
private and public security offerings, investing the proceeds in
a diversified portfolio of high grade securities and derivative
transactions. See also Note 2 of Notes to Consolidated
Financial Statements.
Consumer Finance operations include AGF as well as AIG Consumer
Finance Group, Inc. (AIGCFG). AGF provides a wide variety of
consumer finance products, including real estate mortgages,
consumer loans, retail sales finance and credit-related
insurance to customers in the United States. AIGCFG, through its
subsidiaries, is engaged in developing a multi-product consumer
finance business with an emphasis on emerging markets. See also
Note 2 of Notes to Consolidated Financial Statements.
Together, the Aircraft Finance, Capital Markets and Consumer
Finance operations generate the vast majority of the revenues
produced by AIGs consolidated Financial Services
operations.
Imperial A.I. Credit Companies also contribute to Financial
Services income. This operation engages principally in insurance
premium financing for both AIGs customers and those of
other insurers. See Note 1 of Notes to Consolidated
Financial Statements.
Asset Management Operations
AIGs Asset Management operations comprise a wide variety
of investment-related services and investment products,
including institutional and retail asset management, broker
dealer services and spread-based investment business from the
sale of guaranteed investment contracts, also known as funding
agreements (GICs). Such products and services are offered to
individuals and institutions both domestically and overseas.
AIGs principal Asset Management operations are conducted
through certain subsidiaries of AIG Retirement Services, Inc.
(AIG SunAmerica), including SAAMCo and the AIG Advisor Group
broker dealers and AIG Global Investment Group. AIG SunAmerica
sells and manages mutual funds and provides financial advisory
services through independent-contractor registered
representatives. AIG Global Investment Group manages invested
assets on a global basis for third-party institutional, retail,
private equity and real estate investment funds, provides
securities lending and custodial services and organizes and
manages the invested assets of institutional private equity
investment funds. Each of these subsidiary operations receives
fees for investment products and services provided. See also
Managements Discussion and Analysis of Financial Condition
and Results of Operations and Note 2 of Notes to Consolidated
Financial Statements.
Other Operations
Certain other AIG subsidiaries provide insurance-related
services such as adjusting claims and marketing specialized
products. Several wholly owned foreign subsidiaries of AIG
operating in countries or jurisdictions such as Ireland,
Bermuda, Barbados and Gibraltar provide insurance and related
administrative and back office services to a variety of
insurance and reinsurance companies. These companies include
captive insurance companies unaffiliated with AIG, subsidiaries
of AIG and the subsidiaries of holding companies in which AIG
holds an interest, such as IPC Holdings, Ltd (IPC) and Allied
World Assurance Holdings, Ltd. (AWAC). AIG also has several
other subsidiaries which engage in various businesses. Mt.
Mansfield Company, Inc. owns and operates the ski slopes, lifts,
school and an inn located at Stowe, Vermont. Also included in
other operations are unallocated corporate expenses, including
the settlement costs more fully described in
Item 3. Legal Proceedings and Note 12(i) of Notes
to Consolidated Financial Statements.
Additional Investments
AIG holds a 24.3 percent interest in IPC, a reinsurance
holding company, a 23.4 percent interest in AWAC, a
property-casualty insurance holding company, and a
24.5 percent interest in The Fuji Fire and Marine Insurance
Co., Ltd., a general insurance company. See also Note 1(s)
of Notes to Consolidated Financial Statements.
Locations of Certain Assets
As of December 31, 2005, approximately 34 percent of
the consolidated assets of AIG were located in foreign countries
(other than Canada), including $4.4 billion of cash and
securities on deposit with foreign regulatory authorities.
Foreign operations and assets held abroad may be adversely
affected by political developments in foreign countries,
including such possibilities as tax changes, nationalization,
and changes in regulatory policy, as well as by consequence of
hostilities and unrest. The risks of such occurrences and their
overall effect upon AIG vary from country to country and cannot
easily be predicted. If expropriation or nationalization does
occur, AIGs policy is to take all appropriate measures to
seek recovery of such assets. Certain of the countries in which
AIGs business is conducted have currency restrictions
which generally cause a delay in a companys ability to
repatriate assets and profits. See also Notes 1 and 2 of Notes
to Consolidated Financial Statements and Risk
Factors Foreign Operations in Item 1A.
Risk Factors.
AIG -
Form 10-K/A
13
Regulation
AIGs operations around the world are subject to regulation
by many different types of regulatory authorities, including
insurance, securities, investment advisory, banking and thrift
regulators in the United States and abroad. The regulatory
environment can have a significant effect on AIG and its
business. AIGs operations have become more diverse and
consumer-oriented, increasing the scope of regulatory
supervision and the possibility of intervention. In addition,
the investigations into financial accounting practices that led
to the Restatements of AIGs financial statements have
heightened regulatory scrutiny of AIG worldwide.
Certain states require registration and periodic reporting by
insurance companies that are licensed in such states and are
controlled by other corporations. Applicable legislation
typically requires periodic disclosure concerning the
corporation that controls the registered insurer and the other
companies in the holding company system and prior approval of
intercorporate services and transfers of assets (including in
some instances payment of dividends by the insurance subsidiary)
within the holding company system. AIGs subsidiaries are
registered under such legislation in those states that have such
requirements. See also Note 11 of Notes to Consolidated
Financial Statements.
AIGs insurance subsidiaries, in common with other
insurers, are subject to regulation and supervision by the
states and by other jurisdictions in which they do business.
Within the United States, the method of such regulation varies
but generally has its source in statutes that delegate
regulatory and supervisory powers to an insurance official. The
regulation and supervision relate primarily to approval of
policy forms and rates, the standards of solvency that must be
met and maintained, including risk-based capital measurements,
the licensing of insurers and their agents, the nature of and
limitations on investments, restrictions on the size of risks
that may be insured under a single policy, deposits of
securities for the benefit of policyholders, requirements for
acceptability of reinsurers, periodic examinations of the
affairs of insurance companies, the form and content of reports
of financial condition required to be filed, and reserves for
unearned premiums, losses and other purposes. In general, such
regulation is for the protection of policyholders rather than
the equity owners of these companies. See also Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
In connection with the Restatements, AIG undertook to examine
and evaluate each of the items that have been restated or
adjusted in its consolidated GAAP financial statements to
determine whether restatement of the previously filed statutory
financial statements of its insurance company subsidiaries would
be required. AIG completed its 2004 audited statutory financial
statements for all of the Domestic General Insurance companies
in late 2005. The statutory accounting treatment of the various
items requiring adjustment or restatement were reviewed and
agreed to with the relevant state insurance regulators in
advance of the filings. Adjustments necessary to reflect the
cumulative effect on statutory surplus of adjustments relating
to years prior to 2004 were made to 2004 opening surplus, and
2004 statutory net income was restated accordingly. Previously
reported General Insurance statutory surplus at
December 31, 2004 was reduced by approximately
$3.5 billion to approximately $20.6 billion.
AIG also recently completed its 2005 unaudited statutory
financial statements for all of the Domestic General Insurance
companies, again after reviewing and agreeing with the relevant
state insurance regulators the statutory accounting treatment of
various items. The state regulators have permitted the Domestic
General Insurance companies to record a $724 million
reduction to opening statutory surplus as of January 1,
2005, to reflect the effects of the Second Restatement. See also
Managements Discussion and Analysis of Financial Condition
and Results of Operations Capital
Resources Regulation and Supervision herein.
AIG has taken various steps to enhance the capital positions of
the Domestic General Insurance companies. AIG entered into
capital maintenance agreements with the Domestic General
Insurance companies that set forth procedures through which AIG
will provide ongoing capital support. Dividends from the
Domestic General Insurance companies were suspended in the
fourth quarter of 2005. AIG contributed an additional
$750 million of capital into American Home effective
September 30, 2005, and contributed a further
$2.25 billion of capital in February 2006 for a total of
approximately $3 billion of capital into Domestic General
Insurance subsidiaries effective December 31, 2005.
Furthermore, in order to allow the Domestic General Insurance
companies to record as an admitted asset at December 31,
2005 certain reinsurance ceded to non-U.S. reinsurers (which has
the effect of increasing the statutory surplus of such Domestic
General Insurance companies), AIG has obtained, and entered into
reimbursement agreements for $1.5 billion of letters of
credit issued by several commercial banks in favor of certain
Domestic General Insurance companies.
AIGs insurance operations are currently under review by
various state regulatory agencies. See Item 3. Legal
Proceedings for a further description of these investigations
and see Risk Factors Regulatory
Investigations in Item 1A. Risk Factors for more
information on their application to AIGs insurance
businesses.
Risk-Based Capital (RBC) is designed to measure the adequacy of
an insurers statutory surplus in relation to the risks
inherent in its business. Thus, inadequately capitalized general
and life insurance companies may be identified.
The 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 insurers size, but also on the risk profile
of the insurers 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
14
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
corrective action to placing the insurer under regulatory
control.
The statutory surplus of each of AIGs domestic general and
life insurance subsidiaries exceeded their RBC standards as of
December 31, 2005.
To the extent that any of AIGs insurance entities would
fall below prescribed levels of surplus, it would be AIGs
intention to infuse necessary capital to support that entity.
A substantial portion of AIGs General Insurance business
and a majority of its Life Insurance business is carried on 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 AIU or other
AIG subsidiaries could be prevented from conducting business in
certain of the jurisdictions where they currently operate. In
the past, AIU has been allowed to modify its operations to
conform with new licensing requirements in most jurisdictions.
In addition to licensing requirements, AIGs foreign
operations are also regulated in various jurisdictions with
respect to currency, policy language and terms, amount and type
of security deposits, amount and type of reserves, 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 state, to which admitted insurers are
obligated to cede a portion of their business on terms which may
not always allow foreign insurers, including AIG, full
compensation. In some countries, regulations governing
constitution of technical reserves and remittance balances may
hinder remittance of profits and repatriation of assets.
In 1999, AIG became a unitary thrift holding company when the
Office of Thrift Supervision (OTS) granted AIG approval to
organize AIG Federal Savings Bank. Annually, the OTS conducts an
examination of AIG. The OTS examination involves assessing the
organizations overall risk profile.
Competition
AIGs Insurance, Financial Services and Asset Management
businesses operate in a highly competitive environment, 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, AIGs General Insurance
subsidiaries compete with approximately 3,100 other stock
companies, specialty insurance organizations, mutual companies
and other underwriting organizations. AIGs subsidiaries
offering Life Insurance and Retirement Services compete in the
United States with approximately 2,000 life insurance companies
and other participants in related financial services fields.
Overseas, AIG subsidiaries compete for business with foreign
insurance operations of the larger U.S. insurers, global
insurance groups, and local companies in particular areas in
which they are active.
AIGs strong ratings have historically provided a
competitive advantage. The effect on the business of AIG of
recent regulatory investigations, the Restatements, and
subsequent ratings actions is currently unknown, but these
developments may adversely affect the competitive position of
AIG and its subsidiaries. See Risk Factors AIG
Credit Ratings in Item 1A. Risk Factors.
AIG -
Form 10-K/A
15
Managements Discussion and Analysis of
Financial Condition and Results of Operations
ITEM 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Throughout this Managements Discussion and Analysis of
Financial Condition and Results of Operations, AIG presents its
operations in the way it believes will be most meaningful.
Statutory underwriting profit (loss) and combined ratios
are presented in accordance with accounting principles
prescribed by insurance regulatory authorities because these are
standard measures of performance used in the insurance industry
and thus allow more meaningful comparisons with AIGs
insurance competitors. AIG has also incorporated into this
discussion a number of cross-references to additional
information included throughout the 2005 Annual Report on Form
10-K to assist readers
seeking related information on a particular subject.
Managements Discussion and Analysis of Financial Condition
and Results of Operations
Managements Discussion and Analysis of Financial
Condition and Results of Operations is designed to provide the
reader a narrative with respect to AIGs operations,
financial condition and liquidity and certain other significant
matters.
|
|
|
|
|
|
Index |
|
Page | |
|
Cautionary Statement Regarding
Projections and Other Information About Future Events
|
|
|
16 |
|
Overview of Operations and Business Results
|
|
|
17 |
|
Consolidated Results
|
|
|
17 |
|
Critical Accounting Estimates
|
|
|
21 |
|
Operating Review
|
|
|
22 |
|
General Insurance Operations
|
|
|
22 |
|
|
General Insurance Results
|
|
|
24 |
|
|
Reinsurance
|
|
|
25 |
|
|
Reserve for Losses and Loss Expenses
|
|
|
26 |
|
|
Asbestos and Environmental Reserves
|
|
|
35 |
|
Life Insurance & Retirement Services Operations
|
|
|
39 |
|
|
Life Insurance & Retirement Services Results
|
|
|
41 |
|
|
Underwriting and Investment Risk
|
|
|
43 |
|
Insurance and Asset Management Invested Assets
|
|
|
45 |
|
|
Credit Quality
|
|
|
47 |
|
|
Valuation of Invested Assets
|
|
|
48 |
|
Financial Services Operations
|
|
|
49 |
|
|
Financial Services Results
|
|
|
52 |
|
|
Financial Services Invested Assets
|
|
|
53 |
|
Asset Management Operations
|
|
|
55 |
|
|
Asset Management Results
|
|
|
55 |
|
Other Operations
|
|
|
56 |
|
Capital Resources
|
|
|
56 |
|
Borrowings
|
|
|
56 |
|
Contractual Obligations and Other Commercial Commitments
|
|
|
59 |
|
Shareholders Equity
|
|
|
60 |
|
Stock Purchase
|
|
|
61 |
|
Dividends from Insurance Subsidiaries
|
|
|
61 |
|
Regulation and Supervision
|
|
|
61 |
|
Liquidity
|
|
|
62 |
|
Special Purpose Vehicles and Off Balance Sheet
Arrangements
|
|
|
63 |
|
Derivatives
|
|
|
63 |
|
Managing Market Risk
|
|
|
64 |
|
Insurance
|
|
|
64 |
|
Financial Services
|
|
|
65 |
|
Recent Accounting Standards
|
|
|
66 |
|
Cautionary Statement Regarding Projections and Other
Information About Future Events
This Annual Report on
Form 10-K/A and
other publicly available documents may include, and AIGs
officers and representatives may from time to time make,
projections concerning financial information and statements
concerning future economic performance and events, plans and
objectives relating to management, operations, products and
services, and assumptions underlying these projections and
statements. These projections and statements are not historical
facts but instead represent only AIGs belief regarding
future events, many of which, by their nature, are inherently
uncertain and outside AIGs control. These projections and
statements may address, among other things, the status and
potential future outcome of the current regulatory and civil
proceedings against AIG and their potential effect on AIGs
businesses, financial position, results of operations, cash
flows and liquidity, the effect of the credit rating downgrades
on AIGs businesses and competitive position, the unwinding
and resolving of various relationships between AIG and Starr and
SICO and AIGs strategy for growth, product development,
market position, financial results and reserves. It is possible
that AIGs actual results and financial condition may
differ, possibly materially, from the anticipated results and
financial condition indicated in these projections and
statements. Factors that could cause AIGs actual results
to differ, possibly materially, from those in the specific
projections and statements are discussed throughout this
Managements Discussion and Analysis of Financial Condition
and Results of Operations and in Risk Factors in
Item 1A, Part I of the 2005 Annual Report on
Form 10-K. AIG is
not under any obligation (and expressly disclaims any such
obligations) to update or alter any projection or other
statement, whether written or oral, that may be made from time
to time, whether as a result of new information, future events
or otherwise.
16
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Overview of Operations and Business Results
In 2003 and prior years, AIGs operations were conducted by
its subsidiaries principally through four operating
segments: General Insurance, Life Insurance, Financial Services
and Retirement Services & Asset Management. Beginning
with the first quarter of 2004, AIG reports Retirement Services
results in the same segment as Life Insurance, reflecting the
convergence of protective financial and retirement products and
AIGs current management of these operations. All financial
information herein gives effect to the Restatements described in
The Restatements under Item 1. Business.
Information for years prior to 2005 included herein has been
reclassified to show AIGs results of operations and
financial position on a comparable basis with the 2005
presentation.
Through these segments, AIG provides insurance and investment
products and services to both businesses and individuals in more
than 130 countries and jurisdictions. This geographic,
product and service diversification is one of AIGs major
strengths and sets it apart from its competitors. The importance
of this diversification was especially evident in 2005, when
record catastrophe losses, settlements of legal proceedings and
charges for increases in reserves for loss and loss expenses,
were more than offset by profitability in other segments and
product lines. Although regional economic downturns or political
upheaval could negatively affect parts of AIGs operations,
AIG believes that its diversification makes it unlikely that
regional difficulties would have a material effect on its
operating results, financial condition or liquidity.
AIGs subsidiaries serve commercial, institutional and
individual customers through an extensive
property-casualty and
life insurance and retirement services network. In the United
States, AIG companies are the largest underwriters of commercial
and industrial insurance and one of the largest life insurance
and retirement services operations as well. AIGs Financial
Services businesses include commercial aircraft and equipment
leasing, capital markets operations and consumer finance, both
in the United States and abroad. AIG also provides asset
management services and offers guaranteed investment contracts
(GICs) to institutions and individuals.
A primary goal of AIG in managing its General Insurance
operations is to achieve an underwriting profit. To achieve this
goal, AIG must be disciplined in its risk selection and premiums
must be adequate and terms and conditions appropriate to cover
the risk accepted. AIG believes in strict control of expenses.
AIGs 2005 operating performance reflects continuing
implementation of various long-term strategies in its various
operating segments.
A central focus of AIG operations in recent years is the
development and expansion of new distribution channels. In 2005,
AIG continued to expand its distribution channels in many Asian
countries, which now include banks, credit card companies and
television-media home shopping. In late 2003, AIG entered into
an agreement with PICC Property and Casualty Company, Limited
(PICC), which will enable the marketing of accident and health
products throughout China through PICCs branch networks
and agency system. AIG participates in the underwriting results
through a reinsurance agreement and also holds a
9.9 percent ownership interest in PICC. Other examples of
new distribution channels used both domestically and overseas
include banks, affinity groups, direct response and e-commerce.
AIG patiently builds relationships in markets around the world
where it sees long-term growth opportunities. For example, the
fact that AIG has the only wholly-owned foreign life insurance
operations in eight cities in China is the result of
relationships developed over nearly 30 years. AIGs more
recent expansion of operations into India, Vietnam, Russia and
other emerging markets reflect the same growth strategy.
Moreover, AIG believes in investing in the economies and
infrastructures of these countries and growing with them. When
AIG companies enter a new jurisdiction, they typically offer
both basic protection and savings products. As the economies
evolve, AIGs products evolve with them, to more complex
and investment-oriented models.
Growth for AIG may be generated both internally and through
acquisitions which both fulfill strategic goals and offer
adequate return on investment. In recent years, the acquisitions
of AIG Star Life and AIG Edison Life have broadened AIGs
penetration of the Japanese market through new distribution
channels and will result in operating efficiencies as they are
integrated into AIGs previously existing companies
operating in Japan.
AIG provides leadership on issues of concern to the global and
local economies as well as the insurance and financial services
industries. In recent years, efforts to reform the tort system
and class action litigation procedures, legislation to deal with
the asbestos problem and the renewal of the Terrorism Risk
Insurance Act have been key issues, while in prior years trade
legislation and Superfund had been issues of concern.
The following table summarizes AIGs revenues, income
before income taxes, minority interest and cumulative effect of
accounting changes and net income for the twelve months ended
December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
(in millions) |
|
2005 | |
|
2004 | |
|
2003 | |
|
Total revenues
|
|
$ |
108,905 |
|
|
$ |
97,666 |
|
|
$ |
79,421 |
|
|
Income before income taxes, minority interest and cumulative
effect of accounting changes
|
|
|
15,213 |
|
|
|
14,845 |
|
|
|
11,907 |
|
|
Net income
|
|
$ |
10,477 |
|
|
$ |
9,839 |
|
|
$ |
8,108 |
|
|
Consolidated Results
The 12 percent growth in revenues in 2005 and
23 percent growth in revenues in 2004 were primarily
attributable to the growth in net premiums earned from global
General Insurance operations as well as growth in both General
Insurance and Life Insurance & Retirement Services net
investment income and Life Insurance & Retirement
Services GAAP premiums. An additional factor was the capital
gains realized in 2004 rather than the capital losses realized
in 2003.
AIG -
Form 10-K/A
17
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
AIGs income before income taxes, minority interest and
cumulative effect of accounting changes increased 2 percent
in 2005 when compared to 2004 and 25 percent in 2004 when
compared to 2003. Life Insurance & Retirement Services,
Financial Services and Asset Management operating income gains
accounted for the increase over 2004 and 2003 in both pretax
income and net income. Somewhat offsetting these gains in 2005
was the effect of the charges related to regulatory settlements,
as described in Item 3. Legal Proceedings.
The following table summarizes the net effect of catastrophe
losses for December 31, 2005, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 | |
|
2004 | |
|
2003 | |
|
Pretax(*)
|
|
$ |
3,280 |
|
|
$ |
1,155 |
|
|
$ |
83 |
|
|
Net of tax and minority interest
|
|
|
2,109 |
|
|
|
729 |
|
|
|
53 |
|
|
|
|
(*) |
Includes $312 million and $96 million in
catastrophe losses from partially owned companies in 2005 and
2004, respectively. |
The following table summarizes the operations of each
principal segment for the twelve months ended December 31,
2005, 2004 and 2003. See also Note 2 of Notes to
Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) | |
|
2005 | |
|
2004 | |
|
2003 | |
|
Revenues(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Insurance(b)
|
|
$ |
45,174 |
|
|
$ |
41,961 |
|
|
$ |
33,833 |
|
|
Life Insurance & Retirement
Services(c)
|
|
|
47,316 |
|
|
|
43,400 |
|
|
|
36,678 |
|
|
Financial
Services(d)
|
|
|
10,525 |
|
|
|
7,495 |
|
|
|
6,242 |
|
|
Asset
Management(e)
|
|
|
5,325 |
|
|
|
4,714 |
|
|
|
3,651 |
|
|
Other
|
|
|
565 |
|
|
|
96 |
|
|
|
(983 |
) |
|
Total
|
|
$ |
108,905 |
|
|
$ |
97,666 |
|
|
$ |
79,421 |
|
|
Operating
Income(a)(f)(g):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Insurance
|
|
$ |
2,315 |
|
|
$ |
3,177 |
|
|
$ |
4,502 |
|
|
Life Insurance & Retirement Services
|
|
|
8,844 |
|
|
|
7,923 |
|
|
|
6,807 |
|
|
Financial Services
|
|
|
4,276 |
|
|
|
2,180 |
|
|
|
1,182 |
|
|
Asset Management
|
|
|
2,253 |
|
|
|
2,125 |
|
|
|
1,316 |
|
|
Other(h)(i)
|
|
|
(2,475 |
) |
|
|
(560 |
) |
|
|
(1,900 |
) |
|
Total
|
|
$ |
15,213 |
|
|
$ |
14,845 |
|
|
$ |
11,907 |
|
|
|
|
(a) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133, including the
related foreign exchange gains and losses. For 2005, 2004 and
2003, the effect was $(34) million, $(27) million and
$49 million, respectively, in operating income for Aircraft
Finance and $2.01 billion, $(122) million and
$(1.01) billion in revenues and operating income,
respectively, for Capital Markets (AIGFP). |
|
(b) |
Represents the sum of General Insurance net premiums earned,
net investment income and realized capital gains (losses). |
|
|
(c) |
Represents the sum of Life Insurance & Retirement
Services GAAP premiums, net investment income and realized
capital gains (losses). Included in realized capital gains
(losses) is the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133 and the
application of FAS 52 of $(437) million,
$(140) million and $78 million. |
|
|
(d) |
Represents interest, lease and finance charges. |
|
|
(e) |
Represents management and advisory fees, and net investment
income with respect to GICs. |
|
(f) |
Represents income before income taxes, minority interest, and
cumulative effect of accounting changes. |
|
|
(g) |
Catastrophe losses were $3.28 billion,
$1.16 billion and $83 million in 2005, 2004 and 2003,
respectively. |
|
(h) |
Represents unallocated corporate expenses and other realized
capital gains (losses) and includes the NYAG, DOI, SEC and DOJ
settlement costs in 2005. |
|
|
(i) |
Includes $312 million and $96 million in
catastrophe related losses from partially owned companies in
2005 and 2004, respectively, and approximately $1.6 billion
of regulatory settlement charges in 2005. |
General Insurance
AIGs General Insurance operations provide property and
casualty products and services throughout the world. The
decrease in General Insurance operating income in 2005 compared
to 2004 was primarily attributable to catastrophe related
losses, increases in the reserve for losses and loss expenses
and changes in estimates related to the remediation of
AIGs material weakness in control over certain balance
sheet reconciliations, partially offset by profitable growth in
Foreign Generals underwriting results and DBGs and
Foreign Generals net investment income. In addition,
realized capital gains increased in 2005 compared to 2004.
General Insurance operating income includes $2.89 billion,
$1.05 billion and $83 million in catastrophe related
losses in 2005, 2004 and 2003, respectively. DBGs
operating income included $197 million of additional losses
in 2005 resulting from increased labor and material costs
related to the 2004 Florida hurricanes. DBGs 2005
operating income also included $291 million of expenses
related to changes in estimates for uncollectible reinsurance
and other premium balances related to the remediation of
AIGs material weakness in internal control over certain
balance sheet reconciliations.
Life Insurance & Retirement Services
AIGs Life Insurance & Retirement Services
operations provide insurance, financial and investment products
throughout the world. Foreign operations provided approximately
59 percent and 61 percent of AIGs Life
Insurance & Retirement Services operating income in
2005 and 2004, respectively.
Life Insurance & Retirement Services operating income
increased 12 percent in 2005 and 16 percent in 2004
when compared to 2003. Foreign Life Insurance &
Retirement Services operating income grew 8 percent in
2005. Realized capital gains included in operating income was
$84 million in 2005 compared to $372 million in 2004
and $486 million in 2003. The decline in realized capital
gains in 2005 includes the effect of hedging activities that do
not qualify for hedge accounting under FAS 133, including
the related foreign exchange gains and losses under FAS 52.
For 2005, the foreign Life Insurance & Retirement
Service segment also incurred higher policy benefit costs for
contributions to the participating policyholder fund in
Singapore, totaling $137 million related to the settlement
of a long disputed local tax issue. The domestic Life
Insurance & Retirement Services segment operating
income grew by 17 percent in 2005. Realized capital
18
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
losses included in operating income was $(302) million in
2005 compared to $(329) million in 2004 and
$(246) million in 2003. The 2004 results include increased
policy benefits of $178 million associated with the workers
compensation arbitration with Superior National. The domestic
Life Insurance & Retirement Services segment also
includes $12 million and $5 million in catastrophe
related losses in 2005 and 2004, respectively.
Financial Services
AIGs Financial Services subsidiaries engage in diversified
activities including aircraft and equipment leasing, capital
markets transactions, consumer finance and insurance premium
financing.
Financial Services operating income increased significantly in
2005 compared to 2004 and in 2004 compared to 2003, primarily
due to the fluctuation in earnings resulting from not qualifying
for hedge accounting treatment under FAS 133. Offsetting
this increase in 2004 when compared to 2003 is the effect of
ILFCs disposition of approximately $2 billion in
aircraft through securitizations in the third quarter of 2003
and the first quarter of 2004. Fluctuations in revenues and
operating income from quarter to quarter are not unusual because
of the transaction-oriented nature of Capital Markets operations
and the effect of not qualifying for hedge accounting treatment
under FAS 133 for hedges on securities available for sale
and borrowings. The increase in 2005 when compared to 2004 was
partially offset by $62 million in catastrophe related
losses in the Consumer Finance operations in 2005. The charge
relating to the PNC settlement, see Item 3. Legal
Proceedings, had a significant negative effect on results in
2004. Consumer Finance operations increased revenues and
operating income, both domestically and internationally.
Asset Management
AIGs Asset Management operations include institutional and
retail asset management and broker dealer services and
spread-based investment business from the sale of GICs. These
products and services are offered to individuals and
institutions, both domestically and overseas.
Asset Management operating income increased 6 percent in
2005 when compared to 2004 as a result of the upturn in
worldwide financial markets and a strong global product
portfolio; operating income also increased 61 percent in
2004 when compared to 2003 as a result of the same factors.
Capital Resources
At December 31, 2005, AIG had total consolidated
shareholders equity of $86.32 billion and total
consolidated borrowings of $109.85 billion. At that date,
$99.42 billion of such borrowings were either not
guaranteed by AIG or were matched borrowings under obligations
of guaranteed investment agreements (GIAs), liabilities
connected to trust preferred stock, or matched notes and bonds
payable.
During 2005, AIG repurchased in the open market
2,477,100 shares of its common stock.
Liquidity
At December 31, 2005, AIGs consolidated invested
assets included $17.24 billion in cash and short-term
investments. Consolidated net cash provided from operating
activities in 2005 amounted to $25.14 billion. AIG believes
that its liquid assets, cash provided by operations and access
to short term funding through commercial paper and bank credit
facilities will enable it to meet any anticipated cash
requirements.
Outlook
From March through June of 2005, the major rating agencies
downgraded AIGs ratings in a series of actions.
Standard & Poors, a division of the McGraw-Hill
Companies, Inc. (S&P), lowered the long-term
senior debt and counterparty ratings of AIG from AAA
to AA (second highest of eight rating categories)
and changed the rating outlook to negative. S&Ps
outlook indicates the potential direction of a rating over the
intermediate term (typically six months to two years). A
negative outlook means that a rating may be lowered; however, an
outlook is not necessarily a precursor to a rating change.
Moodys Investors Service (Moodys)
lowered AIGs long-term senior debt rating from
Aaa to Aa2 (second highest of nine
rating categories) with a stable outlook. Moodys appends
numerical modifiers 1, 2, and 3 to the generic rating
categories to show relative position within rating categories.
Fitch Ratings (Fitch) downgraded the long-term
senior debt ratings of AIG from AAA to
AA (second highest of nine rating categories) and
placed the ratings on Rating Watch Negative. A Fitch Rating
Watch notifies investors that there is a reasonable probability
of a rating change and the likely direction of such change. A
Rating Watch Negative indicates a potential downgrade. Rating
Watch is typically resolved over a relatively short period. In
April 2006, Fitch removed AIG from Rating Watch Negative and
affirmed its rating with a stable outlook.
The agencies also took rating actions on AIGs insurance
subsidiaries. S&P lowered the financial strength ratings of
AIGs insurance subsidiaries to AA+ (second
highest rating of eight rating categories) and assigned a
negative rating outlook. Fitch also lowered the financial
strength ratings of AIGs insurance companies to
AA+ (second highest of nine rating categories) and
placed them on Rating Watch Negative. In April 2006, Fitch
removed the financial strength ratings from Rating Watch
Negative and affirmed them with a stable outlook. S&P and
Fitch ratings may be modified by the addition of a plus or minus
sign to show relative standing within the major rating
categories. Moodys lowered the insurance financial
strength ratings generally to either Aa1 or
Aa2 (both within the second highest of nine rating
categories) with a stable outlook. A.M. Best downgraded the
financial strength ratings of most of AIGs insurance
subsidiaries from A++ to A+ (second
highest of fourteen rating levels) and the issuer credit ratings
from aa+ to aa- (remaining within the
second highest of nine rating levels) and placed the ratings
under review with negative implications. An under review
modifier by A.M. Best is assigned to a company whose rating
opinion is under review and may be subject to change in the
near-term, generally defined as six months. Negative implica-
AIG -
Form 10-K/A
19
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
tions indicates a potential downgrade. In June 2006, A.M. Best
upgraded the financial strength ratings from A+ to
A++ (highest of fourteen rating levels) and the
issuer credit ratings from aa- to aa+
(remaining within the second highest of nine rating levels) for
the domestic life & retirement services subsidiaries of AIG.
A.M. Best also affirmed the financial strength ratings of
A+ (second highest of fourteen rating levels) and
the issuer credit ratings of aa- (within the second
highest of nine rating levels) of most of AIGs domestic
property and casualty subsidiaries. In addition, A.M. Best
removed from review all of the ratings of AIGs insurance
subsidiaries and assigned an issuer credit rating of
aa (within the second highest of nine rating levels)
to AIG.
In addition, S&P changed the outlook on the AA-
long-term senior debt rating (second highest out of eight rating
categories) of International Lease Finance Corporation (a wholly
owned subsidiary of AIG) (ILFC) to negative.
Moodys affirmed ILFCs long-term and short-term
senior debt ratings (A1/P-1) (third
highest of nine, and highest of three, rating categories,
respectively). Fitch downgraded ILFCs long-term senior
debt rating from AA- to A+ (third
highest of nine rating categories), placed it on Rating Watch
Negative and downgraded ILFCs short-term debt rating from
F1+ to F1 (remaining within the highest
of five rating categories). In April 2006, Fitch removed
ILFCs long-term senior debt rating from Rating Watch
Negative and affirmed it with a stable outlook.
Fitch also placed the A+ long-term senior debt
ratings (third highest of nine rating categories) of American
General Finance Corporation and American General Finance, Inc.
(wholly owned subsidiaries of AIG) on Rating Watch Negative. In
April 2006, these ratings were also removed from Rating Watch
Negative and affirmed with a stable outlook. S&P and
Moodys affirmed the long-term and short-term senior debt
ratings of American General Finance Corporation of
A+/A-1 (third highest of eight rating
categories/ highest of eight rating categories) and
A1/P-1 (third highest of nine rating
categories/ highest of three rating categories), respectively.
These debt and financial strength ratings are current opinions
of the rating agencies. As such, they may be changed, suspended
or withdrawn at any time by the rating agencies as a result of
changes in, or unavailability of, information or based on other
circumstances. Ratings may also be withdrawn at AIG
managements request. This discussion of ratings is not a
complete list of ratings of AIG and its subsidiaries. For a
discussion of the effect of these ratings downgrades on
AIGs businesses, see Risk Factors
AIGs Credit Ratings in Item 1A. Risk Factors.
Despite industry price erosion in some classes of general
insurance, AIG expects to continue to identify profitable
opportunities and build attractive new General Insurance
businesses as a result of AIGs broad product line and
extensive distribution networks. In December 2005, AIUO received
a license from the government of Vietnam to operate a wholly
owned general insurance company in Vietnam. This license, the
first general insurance license granted by Vietnam to a
U.S.-based insurance organization, permits AIG to operate a
general insurance company throughout Vietnam. In early 2006, AIG
announced plans to acquire a leading general insurance company
in Taiwan.
In China, AIG has wholly-owned life insurance operations in
eight cities. These operations should benefit from Chinas
rapid rate of economic growth and growing middle class, a
segment that is a prime market for life insurance. AIG believes
that it may also have opportunities in the future to grow by
entering the group insurance business. However, in March 2005 it
withdrew its application to serve the group insurance market
until certain regulatory issues are resolved. Among the
regulatory issues to be addressed is the response to AIGs
acknowledgment that certain of its Hong Kong based agents sold
life insurance to customers on the Chinese mainland in
contravention of applicable regulations.
AIG Edison Life, acquired in August 2003, adds to the current
agency force in Japan, and provides alternative distribution
channels including banks, financial advisers, and corporate and
government employee relationships. In January 2005, AIG Star
Life entered into an agreement with the Bank of Tokyo
Mitsubishi, one of Japans largest banks, to market a
multi-currency fixed annuity. Through ALICO, AIG Star Life and
AIG Edison, AIG has developed a leadership position in the
distribution of annuities through banks. AIG is also a leader in
the direct marketing of insurance products through sponsors and
in the broad market. AIG also expects continued growth in India,
Korea and Vietnam.
Domestically, AIG anticipates continued operating growth in 2006
as distribution channels are expanded and new products are
introduced. The home service operation has not met business
objectives, although its cash flow has been strong, and domestic
group life/health continues to be weak. The home service
operation is expected to be a slow growth business. AIG American
Generals current ratings remain equal to or higher than
many of its principal competitors. AIG American General competes
with a variety of companies based on services and products, in
addition to ratings. The recent rating actions appear to be
having no negative long term effect on independent producer
relationships or customer surrender activity.
In the airline industry, changes in market conditions are not
immediately apparent in operating results. Lease rates have
firmed considerably, as a result of strong demand spurred by the
recovering global commercial aviation market, especially in
Asia. Sales have begun to increase, and AIG expects an
increasing level of interest from a variety of purchasers. AIG
also expects increased contributions to Financial Services
revenues and income from its consumer finance operations
overseas. However, the downgrades of AIGs credit ratings
may adversely affect funding costs for AIG and its subsidiaries
and AIGFPs ability to engage in derivative transactions
and certain structured products. See Risk
Factors AIGs Credit Ratings in
Item 1A. Risk Factors.
GICs, which are sold domestically and abroad to both
institutions and individuals, are written on an opportunistic
basis when market conditions are favorable. In September 2005,
AIG launched a $10 billion matched investment program in
the Euromarkets under which AIG debt securities
20
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
will be issued. AIG also expects to launch a matched investment
program in the domestic market which, along with the Euro
program, will become AIGs principal spread-based
investment activity. However, the timing of the launch of the
domestic program is uncertain. Because AIGs credit spreads
in the capital markets have widened following the ratings
declines, there may be a reduction in the earnings on new
business in AIGs spread based funding businesses.
AIG has many promising growth initiatives underway around the
world. Cooperative agreements such as those with PICC and
various banks in the U.S., Japan and Korea are expected to
expand distribution networks for AIGs products and provide
models for future growth.
For a description of the risk factors that may affect these
operations and initiatives, see Item 1A. Risk Factors.
Critical Accounting Estimates
AIG considers its most critical accounting estimates those with
respect to reserves for losses and loss expenses, future policy
benefits for life and accident and health contracts, deferred
policy acquisition costs, estimated gross profits for
investment-oriented products, fair value determinations for
certain Capital Markets assets and liabilities,
other-than-temporary declines in the value of investments and
flight equipment recoverability. These accounting estimates
require the use of assumptions about matters, some of which are
highly uncertain at the time of estimation. To the extent actual
experience differs from the assumptions used, AIGs results
of operations would be directly affected.
Throughout this Managements Discussion and Analysis of
Financial Condition and Results of Operations, AIGs
critical accounting estimates are discussed in detail. The major
categories for which assumptions are developed and used to
establish each critical accounting estimate are highlighted
below.
RESERVES FOR LOSSES AND LOSS EXPENSES (GENERAL INSURANCE):
|
|
- |
Loss trend
factors: used to
establish expected loss ratios for subsequent accident years
based on premium rate adequacy and the projected loss ratio with
respect to prior accident years.
|
- |
Expected loss ratios for the
latest accident
year: in this
case, accident year 2005 for the year end 2005 loss reserve
analysis. For low-frequency, high-severity classes such as
excess casualty, expected loss ratios generally are utilized for
at least the three most recent accident years.
|
- |
Loss development
factors: used to
project the reported losses for each accident year to an
ultimate amount.
|
FUTURE POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH
CONTRACTS (LIFE INSURANCE & RETIREMENT SERVICES):
|
|
- |
Interest
rates: which vary
by geographical region, year of issuance and products.
|
- |
Mortality, morbidity and
surrender
rates: based upon
actual experience by geographical region modified to allow for
variation in policy form.
|
ESTIMATED GROSS PROFITS (LIFE INSURANCE & RETIREMENT
SERVICES):
Estimated gross profits to be realized over the estimated
duration of the contracts (investment-oriented products) affect
the carrying value of deferred policy acquisition costs under
FAS 97. Estimated gross profits include investment income
and gains and losses on investments less required interest,
actual mortality and other expenses.
DEFERRED POLICY ACQUISITION COSTS (LIFE INSURANCE &
RETIREMENT SERVICES):
|
|
- |
Recoverability based on current
and future expected profitability, which is affected by interest
rates, foreign exchange rates, mortality experience, and policy
persistency.
|
DEFERRED POLICY ACQUISITION COSTS (GENERAL INSURANCE):
|
|
- |
Recoverability and eligibility
based upon the current terms and profitability of the underlying
insurance contracts.
|
FAIR VALUE DETERMINATIONS OF CERTAIN ASSETS AND LIABILITIES
(FINANCIAL SERVICES):
|
|
- |
Valuation
models: utilizing
factors, such as market liquidity and current interest, foreign
exchange and volatility rates.
|
- |
Pricing
data: AIG
attempts to secure reliable and independent current market price
data, such as published exchange rates from external
subscription services such as Bloomberg or Reuters or
third-party broker quotes for use in its models. When such
prices are not available, AIG uses an internal methodology,
which includes interpolation and extrapolation from verifiable
prices from trades occurring on dates nearest to the dates of
the transactions.
|
OTHER-THAN-TEMPORARY DECLINES IN THE VALUE OF INVESTMENTS:
Securities are considered a candidate for other-than-temporary
impairment based upon the following criteria:
|
|
- |
Trading at a significant
(25 percent or more) discount to par or amortized cost (if
lower) for an extended period of time (nine months or longer).
|
- |
The occurrence of a discrete
credit event resulting in the debtor defaulting or seeking
bankruptcy or insolvency protection or voluntary reorganization.
|
- |
The probability of
non-realization of a full recovery on its investment,
irrespective of the occurrence of one of the foregoing events.
|
FLIGHT EQUIPMENT RECOVERABILITY (FINANCIAL SERVICES)
|
|
- |
Expected undiscounted future
net cash flows: based
upon current lease rates, projected future lease rates and
estimated terminal values of each aircraft based on third party
information.
|
AIG -
Form 10-K/A
21
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
Operating Review
General Insurance Operations
AIGs General Insurance subsidiaries are multiple line
companies writing substantially all lines of property and
casualty insurance both domestically and abroad. See
General Insurance Operations in Item 1.
Business for more information relating to General Insurance
subsidiaries.
As previously noted, AIG believes it should present and discuss
its financial information in a manner most meaningful to its
investors. Accordingly, in its General Insurance business, AIG
uses certain non-GAAP measures, where AIG has determined these
measurements to be useful and meaningful.
A critical discipline of a successful general insurance business
is the objective to produce operating income from underwriting
exclusive of investment-related income. When underwriting is not
profitable, premiums are inadequate to pay for insured losses
and underwriting related expenses. In these situations, the
addition of general insurance related investment income and
realized capital gains may, however, enable a general insurance
business to produce operating income. For these reasons, AIG
views underwriting profit to be critical in the overall
evaluation of performance. See also the discussion under
Liquidity herein.
Statutory underwriting profit is derived by reducing net
premiums earned by net losses and loss expenses incurred and net
expenses incurred. Statutory accounting generally requires
immediate expense recognition and ignores the matching of
revenues and expenses as required by GAAP. That is, for
statutory purposes, expenses are recognized immediately, not
over the same period that the revenues are earned. Thus,
statutory expenses exclude changes in deferred acquisition costs
(DAC).
GAAP provides for the recognition of expenses at the same time
revenues are earned, the accounting principle of matching.
Therefore, acquisition expenses are deferred and amortized over
the period the related net premiums written are earned. DAC is
reviewed for recoverability, and such review requires management
judgment. The most comparable GAAP measure to statutory
underwriting profit is income before income taxes, minority
interest and cumulative effect of an accounting change. A table
reconciling statutory underwriting profit to income before
income taxes, minority interest and cumulative effect of an
accounting change is contained in the footnotes to the key
information table below. See also Critical Accounting
Estimates herein and Notes 1 and 4 of Notes to
Consolidated Financial Statements.
AIG, along with most General Insurance companies, uses the loss
ratio, the expense ratio and the combined ratio as measures of
underwriting performance. The loss ratio is the sum of losses
and loss expenses incurred divided by net premiums earned. The
expense ratio is statutory underwriting expenses divided by net
premiums written. The combined ratio is the sum of the loss
ratio and the expense ratio. These ratios are relative
measurements that describe, for every $100 of net premiums
earned or written, the cost of losses and statutory expenses,
respectively. The combined ratio presents the total cost per
$100 of premium production. A combined ratio below 100
demonstrates underwriting profit; a combined ratio above 100
demonstrates underwriting loss.
Net premiums written are initially deferred and earned based
upon the terms of the underlying policies. The net unearned
premium reserve constitutes deferred revenues which are
generally earned ratably over the policy period. Thus, the net
unearned premium reserve is not fully recognized in income as
net premiums earned until the end of the policy period.
The underwriting environment varies from country to country, as
does the degree of litigation activity. Regulation, product type
and competition have a direct effect on pricing and consequently
on profitability as reflected in underwriting profit and
statutory general insurance ratios.
Key information with respect to General Insurance Operations
for 2005, 2004 and 2003 is set forth in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2005 | |
|
2004 | |
|
2003 | |
|
Net premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
23,128 |
|
|
$ |
22,506 |
|
|
$ |
19,563 |
|
|
|
Transatlantic
|
|
|
3,466 |
|
|
|
3,749 |
|
|
|
3,341 |
|
|
|
Personal Lines
|
|
|
4,653 |
|
|
|
4,354 |
|
|
|
3,732 |
|
|
|
Mortgage Guaranty
|
|
|
628 |
|
|
|
607 |
|
|
|
531 |
|
|
Foreign General
|
|
|
9,997 |
|
|
|
9,407 |
|
|
|
7,864 |
|
|
Total
|
|
$ |
41,872 |
|
|
$ |
40,623 |
|
|
$ |
35,031 |
|
|
Net premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
22,602 |
|
|
$ |
21,215 |
|
|
$ |
16,704 |
|
|
|
Transatlantic
|
|
|
3,385 |
|
|
|
3,661 |
|
|
|
3,171 |
|
|
|
Personal Lines
|
|
|
4,634 |
|
|
|
4,291 |
|
|
|
3,678 |
|
|
|
Mortgage Guaranty
|
|
|
533 |
|
|
|
539 |
|
|
|
496 |
|
|
Foreign
General(f)
|
|
|
9,655 |
|
|
|
8,831 |
|
|
|
7,257 |
|
|
Total
|
|
$ |
40,809 |
|
|
$ |
38,537 |
|
|
$ |
31,306 |
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
2,403 |
|
|
$ |
1,965 |
|
|
$ |
1,433 |
|
|
|
Transatlantic
|
|
|
343 |
|
|
|
307 |
|
|
|
271 |
|
|
|
Personal Lines
|
|
|
217 |
|
|
|
186 |
|
|
|
152 |
|
|
|
Mortgage Guaranty
|
|
|
123 |
|
|
|
120 |
|
|
|
142 |
|
|
|
Intercompany adjustments and eliminations net
|
|
|
1 |
|
|
|
|
|
|
|
7 |
|
|
Foreign General
|
|
|
944 |
|
|
|
618 |
|
|
|
561 |
|
|
Total
|
|
$ |
4,031 |
|
|
$ |
3,196 |
|
|
$ |
2,566 |
|
|
Realized capital gains (losses)
|
|
|
334 |
|
|
|
228 |
|
|
|
(39 |
) |
|
Operating
income(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
(646 |
) |
|
$ |
777 |
|
|
$ |
1,774 |
|
|
|
Transatlantic
|
|
|
(39 |
) |
|
|
282 |
|
|
|
390 |
|
|
|
Personal Lines
|
|
|
195 |
|
|
|
357 |
|
|
|
355 |
|
|
|
Mortgage Guaranty
|
|
|
363 |
|
|
|
399 |
|
|
|
451 |
|
|
Foreign General
|
|
|
2,427 |
|
|
|
1,344 |
|
|
|
1,562 |
|
Reclassifications and Eliminations
|
|
|
15 |
|
|
|
18 |
|
|
|
(30 |
) |
|
Total
|
|
$ |
2,315 |
(b)(c)(d) |
|
$ |
3,177 |
|
|
$ |
4,502 |
|
|
Statutory underwriting profit
(loss)(a)(g):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
(3,227 |
) (b)(c) |
|
$ |
(1,500 |
) |
|
$ |
36 |
|
|
|
Transatlantic
|
|
|
(434 |
) |
|
|
(77 |
) |
|
|
68 |
|
|
|
Personal Lines
|
|
|
(38 |
) |
|
|
136 |
|
|
|
170 |
|
|
|
Mortgage Guaranty
|
|
|
249 |
|
|
|
234 |
|
|
|
245 |
|
|
Foreign
General(e)(f)
|
|
|
1,285 |
|
|
|
643 |
|
|
|
1,040 |
|
|
Total
|
|
$ |
(2,165 |
) (d) |
|
$ |
(564 |
) |
|
$ |
1,559 |
|
|
22
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except ratios) |
|
2005 | |
|
2004 | |
|
2003 | |
|
Domestic General:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
89.59 |
|
|
|
83.88 |
|
|
|
78.35 |
|
|
Expense ratio
|
|
|
21.00 |
|
|
|
19.21 |
|
|
|
17.25 |
|
|
Combined ratio
|
|
|
110.59 |
|
|
|
103.09 |
|
|
|
95.60 |
|
|
Foreign General:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
53.66 |
|
|
|
61.61 |
|
|
|
55.52 |
|
|
Expense
ratio(e)
|
|
|
31.90 |
|
|
|
29.20 |
|
|
|
27.82 |
|
|
Combined
ratio(f)
|
|
|
85.56 |
|
|
|
90.81 |
|
|
|
83.34 |
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
81.09 |
|
|
|
78.78 |
|
|
|
73.06 |
|
|
Expense ratio
|
|
|
23.60 |
|
|
|
21.52 |
|
|
|
19.62 |
|
|
Combined
ratio(a)
|
|
|
104.69 |
|
|
|
100.30 |
|
|
|
92.68 |
|
|
|
|
(a) |
The effect of catastrophe related losses on the consolidated
General Insurance combined ratio for 2005, 2004 and 2003 was
7.06, 2.74 and 0.27, respectively. Catastrophe related losses
for 2005, 2004 and 2003 by reporting unit were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 |
|
2004 |
|
2003 |
|
|
|
Insurance |
|
Net |
|
Insurance |
|
Insurance |
|
|
Related |
|
Reinstatement |
|
Related |
|
Related |
Reporting Unit |
|
Losses |
|
Premium Cost |
|
Losses |
|
Losses |
|
DBG
|
|
$ |
1,747 |
|
|
$ |
122 |
|
|
$ |
582 |
|
|
$ |
48 |
|
Transatlantic
|
|
|
463 |
|
|
|
45 |
|
|
|
215 |
|
|
|
4 |
|
Personal Lines
|
|
|
112 |
|
|
|
2 |
|
|
|
25 |
|
|
|
5 |
|
Mortgage Guaranty
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign General
|
|
|
293 |
|
|
|
94 |
|
|
|
232 |
|
|
|
26 |
|
|
Total
|
|
$ |
2,625 |
|
|
$ |
263 |
|
|
$ |
1,054 |
|
|
$ |
83 |
|
|
|
|
(b) |
Includes $197 million of additional losses incurred
resulting from increased labor and material costs related to the
2004 Florida hurricanes. |
|
(c) |
The 2005 statutory underwriting loss for DBG includes
$291 million of expenses from changes in estimates for
uncollectible reinsurance and other premium balances related to
the remediation of the material weakness in internal control
over certain balance sheet reconciliations and $100 million
of accrued expenses in connection with certain workers
compensation insurance policies written between 1985 and 1996.
See Note 12(i) of Notes to Consolidated Financial
Statements. |
|
(d) |
Includes the fourth quarter 2005 increase in net reserves of
approximately $1.8 billion. |
(e) Includes the results of wholly owned AIU
agencies.
|
|
(f) |
Income statement accounts expressed in non-functional
currencies are translated into U.S. dollars using average
exchange rates. |
|
|
(g) |
Statutory underwriting profit (loss) is a measure that U.S.
domiciled insurance companies are required to report to their
regulatory authorities. The following table reconciles statutory
underwriting profit (loss) to income before income taxes,
minority interest and cumulative effect of accounting changes
for the General Insurance segment for the twelve months ended
December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Domestic | |
|
|
|
|
Brokerage | |
|
|
|
Personal | |
|
|
|
Reclassifications | |
|
|
|
|
Group | |
|
Transatlantic | |
|
Lines | |
|
Mortgage Guaranty | |
|
Foreign General | |
|
and Eliminations | |
|
Total | |
| |
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory underwriting profit (loss)
|
|
$ |
(3,227 |
) |
|
$ |
(434 |
) |
|
$ |
(38 |
) |
|
$ |
249 |
|
|
$ |
1,285 |
|
|
$ |
|
|
|
$ |
(2,165 |
) |
Increase (decrease) in deferred acquisition costs
|
|
|
(23 |
) |
|
|
14 |
|
|
|
19 |
|
|
|
(8 |
) |
|
|
113 |
|
|
|
|
|
|
|
115 |
|
Net investment income
|
|
|
2,403 |
|
|
|
343 |
|
|
|
217 |
|
|
|
123 |
|
|
|
944 |
|
|
|
1 |
|
|
|
4,031 |
|
Realized capital gains (losses)
|
|
|
201 |
|
|
|
38 |
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
85 |
|
|
|
14 |
|
|
|
334 |
|
|
|
|
Income before income taxes, minority interest and cumulative
effect of accounting changes
|
|
$ |
(646 |
) |
|
$ |
(39 |
) |
|
$ |
195 |
|
|
$ |
363 |
|
|
$ |
2,427 |
|
|
$ |
15 |
|
|
$ |
2,315 |
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory underwriting profit (loss)
|
|
$ |
(1,500 |
) |
|
$ |
(77 |
) |
|
$ |
136 |
|
|
$ |
234 |
|
|
$ |
643 |
|
|
$ |
|
|
|
$ |
(564 |
) |
Increase (decrease) in deferred acquisition costs
|
|
|
160 |
|
|
|
30 |
|
|
|
24 |
|
|
|
44 |
|
|
|
59 |
|
|
|
|
|
|
|
317 |
|
Net investment income
|
|
|
1,965 |
|
|
|
307 |
|
|
|
186 |
|
|
|
120 |
|
|
|
618 |
|
|
|
|
|
|
|
3,196 |
|
Realized capital gains (losses)
|
|
|
152 |
|
|
|
22 |
|
|
|
11 |
|
|
|
1 |
|
|
|
24 |
|
|
|
18 |
|
|
|
228 |
|
|
|
|
Income before income taxes, minority interest and cumulative
effect of accounting changes
|
|
$ |
777 |
|
|
$ |
282 |
|
|
$ |
357 |
|
|
$ |
399 |
|
|
$ |
1,344 |
|
|
$ |
18 |
|
|
$ |
3,177 |
|
|
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory underwriting profit (loss)
|
|
$ |
36 |
|
|
$ |
68 |
|
|
$ |
170 |
|
|
$ |
245 |
|
|
$ |
1,040 |
|
|
$ |
|
|
|
$ |
1,559 |
|
Increase (decrease) in deferred acquisition costs
|
|
|
351 |
|
|
|
41 |
|
|
|
13 |
|
|
|
19 |
|
|
|
(8 |
) |
|
|
|
|
|
|
416 |
|
Net investment income
|
|
|
1,433 |
|
|
|
271 |
|
|
|
152 |
|
|
|
142 |
|
|
|
561 |
|
|
|
7 |
|
|
|
2,566 |
|
Realized capital gains (losses)
|
|
|
(46 |
) |
|
|
10 |
|
|
|
20 |
|
|
|
45 |
|
|
|
(31 |
) |
|
|
(37 |
) |
|
|
(39 |
) |
|
|
|
Income before income taxes, minority interest and cumulative
effect of accounting changes
|
|
$ |
1,774 |
|
|
$ |
390 |
|
|
$ |
355 |
|
|
$ |
451 |
|
|
$ |
1,562 |
|
|
$ |
(30 |
) |
|
$ |
4,502 |
|
|
AIG -
Form 10-K/A
23
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
General Insurance Results
General Insurance operating income in 2005 decreased after
accounting for catastrophe related losses, the fourth quarter
increase in reserves and changes in estimates related to
remediation of the material weakness in reconciliation of
balance sheet accounts. This decrease was partially offset by
strong profitable growth in Foreign Generals statutory
underwriting profit and DBGs and Foreign Generals
net investment income. DBGs statutory underwriting loss
also included additional losses incurred resulting from
increased labor and material costs related to the 2004 Florida
hurricanes. General Insurance operating income in 2004 showed
positive results, even after accounting for catastrophe losses,
the charge for asbestos and environmental exposures and the
$232 million charge reflecting a change in estimate for
salvage and subrogation recoveries. Net investment income and
the capital gains realized in 2004 rather than the capital
losses realized in 2003 also benefited General Insurance results.
DBGs net premiums written increased modestly in 2005 when
compared to 2004, reflecting generally improving renewal
retention rates and a modest change in the mix of business
towards smaller accounts for which DBG purchases less
reinsurance. DBG also continued to expand its relationships with
a larger number and broader range of brokers. Recently, DBG has
seen improvement in domestic property rates as well as increases
in submission activity in the aftermath of the 2005 hurricanes.
DBG attributes the increase in submissions to its overall
financial strength in comparison to many insurers that
experienced significant losses and reductions of surplus as a
result of the hurricanes.
The DBG loss ratio increased in 2005 from 2004 principally as a
result of adverse loss development, the third and fourth quarter
2005 catastrophe related losses and the $197 million of
additional losses resulting from increased labor and material
costs related to the 2004 hurricanes.
The DBG expense ratio increased in 2005 from 2004 principally
due to an increase in net commissions resulting from the
replacement of certain ceded quota share reinsurance, for which
DBG earns a ceding commission, with
excess-of-loss
reinsurance, which generally does not include a ceding
commission. Increases in other underwriting expenses at DBG
relate to the changes in estimates noted above, as well as
unusually high expenses for Personal Lines. The Foreign General
expense ratio increased in 2005 from 2004 principally because
consumer lines of business, which have higher acquisition costs,
have become more significant.
Transatlantics net premiums written and net premiums
earned for 2005 decreased compared to 2004, principally due to
competitive market conditions and increased ceding company
retentions in certain classes of business. The great majority of
the premium decrease relates to Transatlantics domestic
operations. Operating income decreased principally as a result
of the increased level of catastrophe losses.
Personal Lines net premiums written and net premiums earned for
2005 increased when compared to 2004 as a result of strong
growth in the Private Client Group and Agency Auto divisions due
to increased agent/broker appointments, greater penetration and
enhanced product offerings. AIG direct premiums are down
slightly from 2004 due to aggressive re-underwriting of the
previously acquired GE business and the discontinuation of
underwriting homeowners business. Involuntary auto premiums were
down in 2005 due to the decline in the assigned risk
marketplace. Statutory underwriting profit declined in 2005 as a
result of hurricane losses and related expenses, reserve
strengthening, an increase in Agency Autos current
accident year physical damage loss ratio, and expenses incurred
related to terminating AIGs relationship with The Robert
Plan effective December 31, 2005.
Mortgage Guaranty net premiums written were up slightly for 2005
when compared to 2004, reflecting growth in the second liens and
international businesses offset by higher ceded premiums. Higher
acquisition costs and lower earned premiums from certain single
premium product lines resulted in lower statutory underwriting
profit in 2005 compared to 2004. UGC continued to achieve
expansion of its international business in 2005.
Foreign General Insurance had strong results in 2005. Growth in
net premiums written for 2005 was achieved from new business as
well as new distribution channels. In Japan, the purchase in
February 2005 of the insurance portfolio of the Royal &
SunAlliance branch operations opened new distribution channels.
In the Far East, personal accident business exhibited strong
growth and had excellent results for 2005. Commercial lines in
Europe exhibited healthy growth and had positive results for
2005, partially offset by rate decreases in Australia and the
United Kingdom. Personal lines operations in Brazil and Latin
America continue to exhibit strong growth, which translated into
improved underwriting results for 2005. The Lloyds Ascot
syndicate continues to grow; however, insurance losses and
reinstatement premium costs relating to the hurricanes caused a
significant reduction in 2005 underwriting results. Foreign
General Insurance also benefited from a decrease in the fourth
quarter of 2005 in net reserves for loss and loss expense for
non-asbestos and environmental reserves. Approximately half of
the Foreign General Insurance net premiums written is derived
from commercial insurance and the remainder from consumer lines.
AIG transacts business in most major foreign currencies. The
following table summarizes the effect of changes in foreign
currency exchange rates on the growth of General Insurance net
premiums written.
|
|
|
|
|
|
|
2005 | |
|
Growth in original currency
|
|
|
2.6 |
% |
Foreign exchange effect
|
|
|
0.5 |
|
Growth as reported in U.S. dollars
|
|
|
3.1 |
% |
|
AIGs General Insurance results reflect the effects of
catastrophe related losses of $2.89 billion,
$1.05 billion and $83 million in 2005, 2004 and 2003,
respectively. Losses caused by catastrophes can fluctuate widely
from year to year, making comparisons of recurring type business
more difficult. With respect to catastrophe losses, AIG believes
that it has taken appropriate steps, such as careful exposure
selection and
24
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
obtaining reinsurance coverage, to reduce the effect of the
magnitude of possible future losses. The occurrence of one or
more catastrophic events of unanticipated frequency or severity,
such as a terrorist attack, earthquake or hurricane, that causes
insured losses, however, could have a material adverse effect on
AIGs results of operations, liquidity or financial
condition.
General Insurance net investment income grew in 2005 when
compared to 2004. AIG is benefiting from strong cash flow,
higher interest rates and increased partnership income. Cash
flow for Foreign General was lower in 2005 when compared to 2004
due to payments for catastrophe related losses incurred in 2005
and 2004 and for the purchase of the Royal &
SunAlliance branch operations. Partnership income was
particularly strong for Foreign General due to increases in
market valuations of infrastructure fund investments in Africa,
Asia, China, Eastern Europe and India. Additionally, net
investment income was positively affected by the compounding of
previously earned and reinvested net investment income. In 2004,
net investment income increased when compared to 2003. See also
the discussion under Liquidity herein and
Note 8 of Notes to Consolidated Financial Statements.
Realized capital gains and losses resulted from the ongoing
investment management of the General Insurance portfolios within
the overall objectives of the General Insurance operations. See
the discussion on Valuation of Invested Assets
herein.
The contribution of General Insurance operating income to
AIGs consolidated income before income taxes, minority
interest and cumulative effect of accounting changes was
15 percent in 2005, compared to 21 percent in 2004 and
38 percent in 2003. The decrease in contribution
percentages in both 2005 and 2004 was largely the result of
reserve increases and the effects of catastrophe losses.
Reinsurance
AIG is a major purchaser of reinsurance for its General
Insurance operations. AIG insures risks globally, and its
reinsurance programs must be coordinated in order to provide AIG
the level of reinsurance protection that AIG desires.
Reinsurance is an important risk management tool to manage
transaction and insurance line risk retention at prudent levels
set by management. AIG also purchases reinsurance to mitigate
its catastrophic exposure. AIG is cognizant of the need to
exercise good judgment in the selection and approval of both
domestic and foreign companies participating in its reinsurance
programs because one or more catastrophe losses could negatively
affect AIGs reinsurers and result in an inability of AIG
to collect reinsurance recoverables. AIGs reinsurance
department evaluates catastrophic events and assesses the
probability of occurrence and magnitude of catastrophic events
through the use of state-of-the-art industry recognized program
models among other techniques. AIG supplements these models
through continually monitoring the risk exposure of AIGs
worldwide General Insurance operations and adjusting such models
accordingly. Although reinsurance arrangements do not relieve
AIG from its direct obligations to its insureds, an efficient
and effective reinsurance program substantially limits
AIGs exposure to potentially significant losses. With
respect to its property business, AIG has either renewed
existing coverage or purchased new coverage that, in the opinion
of management, is adequate to limit AIGs exposures.
AIGs consolidated general reinsurance assets amounted to
$23.59 billion at December 31, 2005 and resulted from
AIGs reinsurance arrangements. Thus, a credit exposure
existed at December 31, 2005 with respect to reinsurance
recoverable to the extent that any reinsurer may not be able to
reimburse AIG under the terms of these reinsurance arrangements.
AIG manages its credit risk in its reinsurance relationships by
transacting with reinsurers that it considers financially sound,
and when necessary AIG holds substantial collateral in the form
of funds, securities and/or irrevocable letters of credit. This
collateral can be drawn on for amounts that remain unpaid beyond
specified time periods on an individual reinsurer basis. At
December 31, 2005, approximately 48 percent of the
general reinsurance assets were from unauthorized reinsurers.
Many of these balances were collateralized, permitting statutory
recognition. Additionally, with the approval of its domiciliary
insurance regulators, AIG posted approximately $1.5 billion
of letters of credit issued by several commercial banks in favor
of certain Domestic General Insurance companies to permit
statutory recognition of balances otherwise uncollateralized at
December 31, 2005. The remaining 52 percent of the
general reinsurance assets were from authorized reinsurers. The
terms authorized and unauthorized pertain to regulatory
categories, not creditworthiness. At December 31, 2005,
approximately 88 percent of the balances with respect to
authorized reinsurers are from reinsurers rated
A (excellent) or better, as rated by A.M. Best, or A
(strong) or better, as rated by S&P. These ratings are
measures of financial strength.
The following table presents each reinsurer representing in
excess of five percent of AIGs reinsurance assets at
December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A.M. | |
|
Gross | |
|
Percent of | |
|
|
|
Uncollateralized |
(dollars in millions) |
|
Best | |
|
Reinsurance | |
|
Reinsurance | |
|
Collateral |
|
Reinsurance |
Reinsurer |
|
Rating | |
|
Assets | |
|
Assets, Net | |
|
Held |
|
Assets |
|
Swiss Reinsurance Group
|
|
|
A+ |
|
|
$ |
2,397 |
|
|
|
9.6% |
|
|
$ 537 |
|
$ 1,860 |
|
Lloyds Syndicates
|
|
|
A |
|
|
$ |
1,648 |
|
|
|
6.6% |
|
|
$ 174 |
|
$ 1,474 |
Lloyds of London
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Munich Reinsurance
|
|
|
A+/A |
|
|
$ |
1,627 |
|
|
|
6.5% |
|
|
$ 221 |
|
$ 1,406 |
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Berkshire Hathaway
|
|
|
A++ |
|
|
$ |
1,390 |
|
|
|
5.6% |
|
|
$ 106 |
|
$ 1,284 |
Insurance Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIG maintains a reserve for estimated unrecoverable reinsurance.
While AIG has been largely successful in its previous recovery
efforts, at December 31, 2005, AIG had a reserve for
unrecoverable reinsurance approximating $992 million. At
that date, AIG had no significant reinsurance recoverables due
from any individual reinsurer that was financially troubled
(e.g., liquidated, insolvent, in receivership or otherwise
subject to formal or informal regulatory restriction).
AIGs Reinsurance Security Department conducts ongoing
detailed assessments of the reinsurance markets and current
AIG -
Form 10-K/A
25
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
and potential reinsurers, both foreign and domestic. Such
assessments include, but are not limited to, identifying if a
reinsurer is appropriately licensed and has sufficient financial
capacity, and evaluating the local economic environment in which
a foreign reinsurer operates. This department also reviews the
nature of the risks ceded and the requirements for credit risk
mitigants. For example, in AIGs treaty reinsurance
contracts, AIG includes provisions that frequently require a
reinsurer to post collateral when a referenced event occurs.
Furthermore, AIG limits its unsecured exposure to reinsurers
through the use of credit triggers, which include, but are not
limited to, insurer financial strength rating downgrades,
policyholder surplus declines at or below a certain
predetermined level or a certain predetermined level of a
reinsurance recoverable being reached. In addition, AIGs
Credit Risk Committee reviews the credit limits for and
concentrations with any one reinsurer.
AIG enters into intercompany reinsurance transactions, primarily
through AIRCO, for its General Insurance and Life Insurance
operations. AIG enters into these transactions as a sound and
prudent business practice in order to maintain underwriting
control and spread insurance risk among AIGs various legal
entities. These reinsurance agreements have been approved by the
appropriate regulatory authorities. All material intercompany
transactions have been eliminated in consolidation. AIG
generally obtains letters of credit in order to obtain statutory
recognition of these intercompany reinsurance transactions. At
December 31, 2005, approximately $3.6 billion of
letters of credit were outstanding to cover intercompany
reinsurance transactions with AIRCO or other General Insurance
subsidiaries.
At December 31, 2005, the consolidated general reinsurance
assets of $23.59 billion include reinsurance recoverables
for paid losses and loss expenses of $829 million and
$19.69 billion with respect to the ceded reserve for losses
and loss expenses, including ceded losses incurred but not
reported (IBNR) (ceded reserves) and $3.07 billion of ceded
reserve for unearned premiums. The ceded reserve for losses and
loss expenses represent the accumulation of estimates of
ultimate ceded losses including provisions for ceded IBNR and
loss expenses. The methods used to determine such estimates and
to establish the resulting ceded reserves are continually
reviewed and updated by management. Any adjustments thereto are
reflected in income currently. It is AIGs belief that the
ceded reserve for losses and loss expenses at December 31,
2005 were representative of the ultimate losses recoverable. In
the future, as the ceded reserves continue to develop to
ultimate amounts, the ultimate loss recoverable may be greater
or less than the reserves currently ceded.
Reserve for Losses and Loss Expenses
The table below classifies as of December 31, 2005 the
components of the General Insurance gross reserve for losses and
loss expenses (loss reserves) by major lines of business on a
statutory Annual Statement basis*:
|
|
|
|
|
| |
(in millions) |
|
|
| |
Other liability occurrence
|
|
$ |
18,116 |
|
Other liability claims made
|
|
|
12,447 |
|
Workers compensation
|
|
|
11,630 |
|
Auto liability
|
|
|
6,569 |
|
Property
|
|
|
7,217 |
|
International
|
|
|
4,939 |
|
Reinsurance
|
|
|
2,886 |
|
Medical malpractice
|
|
|
2,363 |
|
Aircraft
|
|
|
1,844 |
|
Products liability
|
|
|
1,937 |
|
Commercial multiple peril
|
|
|
1,359 |
|
Accident and health
|
|
|
1,678 |
|
Fidelity/ surety
|
|
|
1,072 |
|
Other
|
|
|
3,112 |
|
|
Total
|
|
$ |
77,169 |
|
|
|
|
* |
Presented by lines of business pursuant to statutory
reporting requirements as prescribed by the National Association
of Insurance Commissioners. |
AIGs reserve for losses and loss expenses represents the
accumulation of estimates of ultimate losses, including IBNR and
loss expenses. The methods used to determine loss reserve
estimates and to establish the resulting reserves are
continually reviewed and updated by management. Any adjustments
resulting therefrom are reflected in operating income currently.
Because loss reserve estimates are subject to the outcome of
future events, changes in estimates are unavoidable given that
loss trends vary and time is often required for changes in
trends to be recognized and confirmed. Reserve changes that
increase previous estimates of ultimate cost are referred to as
unfavorable or adverse development or reserve strengthening.
Reserve changes that decrease previous estimates of ultimate
cost are referred to as favorable development.
At December 31, 2005, General Insurance net loss reserves
were $57.5 billion, an increase of $10.22 billion from
the prior year-end. The net loss reserve increase includes the
fourth quarter 2005 increase in net reserves of approximately
$1.8 billion, comprised of $960 million for
non-asbestos and environmental exposures, and $873 million
for asbestos and environmental exposures. The increase in
non-asbestos and environmental reserves includes an increase of
$1.44 billion for DBG and decreases of $455 million
for Foreign General Insurance and $29 million for Mortgage
Guaranty. The DBG increase of $1.44 billion is
$140 million greater than the amount previously announced
in AIGs press release of February 9, 2006 as a result
of an additional change in estimate related to a commuted
reinsurance agreement. The aggregate increase in asbestos and
environmental reserves includes increases of $706 million
and $167 million, respectively, for DBG and Foreign General
Insurance.
As discussed in more detail below, the fourth quarter 2005
reserve increase was attributable to adverse development
26
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
primarily related to 2002 and prior accident years, partially
offset by favorable development for accident years 2003 through
2005. This reserve action reflects the completion of AIGs
actuarial studies in the fourth quarter of 2005.
The net loss reserves represent loss reserves reduced by
reinsurance recoverables, net of an allowance for unrecoverable
reinsurance and applicable discount for future investment
income. The table below classifies the components of the General
Insurance net loss reserves by business unit as of
December 31, 2005.
|
|
|
|
|
|
(in millions) |
|
|
|
DBG(a)
|
|
$ |
40,782 |
|
Personal
Lines(b)
|
|
|
2,578 |
|
Transatlantic
|
|
|
5,690 |
|
Mortgage Guaranty
|
|
|
340 |
|
Foreign
General(c)
|
|
|
8,086 |
|
|
Total Net Loss Reserve
|
|
$ |
57,476 |
|
|
|
|
(a) |
DBG loss reserves include approximately $3.77 billion
($4.26 billion before discount) related to business written
by DBG but ceded to AIRCO and reported in AIRCOs statutory
filings. DBG loss reserves also include approximately
$407 million related to business included in AIUOs
statutory filings. |
|
(b) |
Personal Lines loss reserves include $878 million
related to business ceded to DBG and reported in DBGs
statutory filings. |
|
|
(c) |
Foreign General loss reserves include approximately
$2.15 billion related to business reported in DBGs
statutory filings. |
The DBG net loss reserve of $40.78 billion is comprised
principally of the business of AIG subsidiaries participating in
the American Home/ National Union pool (11 companies) and the
surplus lines pool (Lexington, Starr Excess Liability Insurance
Company and Landmark Insurance Company).
Beginning in 1998, DBG ceded a quota share percentage of its
other liability occurrence and products liability occurrence
business to AIRCO. The quota share percentage ceded was
40 percent in 1998, 65 percent in 1999,
75 percent in 2000 and 2001, 50 percent in 2002 and
2003, 40 percent in 2004 and 35 percent in 2005 and
covered all business written in these years for these lines by
participants in the American Home/National Union pool. In 1998
the cession reflected only the other liability occurrence
business, but in 1999 and subsequent years included products
liability occurrence. AIRCOs loss reserves relating to
these quota share cessions from DBG are recorded on a discounted
basis. As of year-end 2005, AIRCO carried a discount of
approximately $490 million applicable to the
$4.26 billion in undiscounted reserves it assumed from the
American Home/National Union pool via this quota share cession.
AIRCO also carries approximately $440 million in net loss
reserves relating to Foreign General insurance business. These
reserves are carried on an undiscounted basis.
Beginning in 1997, the Personal Lines division ceded a
percentage of all business written by the companies
participating in the personal lines pool to the American
Home/National Union pool. As noted above, the total reserves
carried by participants in the American Home/National Union pool
relating to this cession amounted to $878 million as of
year-end 2005.
The companies participating in the American Home/National Union
pool have maintained a participation in the business written by
AIU for decades. As of year-end 2005, these AIU reserves carried
by participants in the American Home/National Union pool
amounted to approximately $2.15 billion. The remaining
Foreign General reserves are carried by AIUO, AIRCO, and other
smaller AIG subsidiaries domiciled outside the United States.
Statutory filings in the U.S. by AIG companies reflect all the
business written by U.S. domiciled entities only, and therefore
exclude business written by AIUO, AIRCO, and all other
internationally domiciled subsidiaries. The total reserves
carried at year-end 2005 by AIUO and AIRCO were approximately
$3.72 billion and $4.21 billion, respectively.
AIRCOs $4.21 billion in total general insurance
reserves consist of approximately $3.77 billion from
business assumed from the American Home/National Union pool and
an additional $440 million relating to Foreign General
Insurance business.
Discounting of Reserves
At December 31, 2005, AIGs overall General Insurance
net loss reserves reflects a loss reserve discount of
$2.11 billion, including tabular and non-tabular
calculations. The tabular workers compensation discount is
calculated using a 3.5 percent interest rate and the
1979-81 Decennial
Mortality Table. The non-tabular workers compensation discount
is calculated separately for companies domiciled in New York and
Pennsylvania, and follows the statutory regulations for each
state. For New York companies, the discount is based on a five
percent interest rate and the companies own payout
patterns. For Pennsylvania companies, the statute has specified
discount factors for accident years 2001 and prior, which are
based on a six percent interest rate and an industry payout
pattern. For accident years 2002 and subsequent, the discount is
based on the yield of U.S. Treasury securities ranging from one
to twenty years and the companys own payout pattern, with
the future expected payment for each year using the interest
rate associated with the corresponding Treasury security yield
for that time period. The discount is comprised of the
following: $512 million tabular discount for
workers compensation in DBG; $1.11 billion
non-tabular discount for workers compensation in DBG; and,
$490 million non-tabular discount for other
liability occurrence and products liability occurrence in AIRCO.
The total undiscounted workers compensation loss reserve carried
by DBG is approximately $9.5 billion as of year-end 2005.
The other liability occurrence and products liability occurrence
business in AIRCO that is assumed from DBG is discounted based
on the yield of U.S. Treasury securities ranging from one
to twenty years and the DBG payout pattern for this business.
The undiscounted reserves assumed by AIRCO from DBG totaled
approximately $4.26 billion at December 31, 2005.
Results of 2005 Reserving Process
It is managements belief that the General Insurance net
loss reserves are adequate to cover General Insurance net losses
and
AIG -
Form 10-K/A
27
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
loss expenses as of December 31, 2005. While AIG annually
reviews the adequacy of established loss reserves, there can be
no assurance that AIGs ultimate loss reserves will not
develop adversely and materially exceed AIGs loss reserves
as of December 31, 2005. In the opinion of management, such
adverse development and resulting increase in reserves is not
likely to have a material adverse effect on AIGs
consolidated financial position, although it could have a
material adverse effect on AIGs consolidated results of
operations for an individual reporting period. See Risk
Factors Casualty Insurance and Underwriting
Reserves in Item 1A. Risk Factors.
As part of the 2005 year-end actuarial loss reserve analysis,
AIG expanded its review processes and conducted additional
studies. In addition, in August 2005, AIG commissioned a
third-party actuary to assist in a comprehensive review of the
loss reserves of AIGs principal property-casualty
insurance operations, including an independent ground up study
of AIGs asbestos and environmental exposures. AIGs
management carefully considered the analyses provided by its
actuarial staff and by the third-party actuary for each class of
business in determining AIGs best estimate of its loss
reserves.
The table below presents the reconciliation of net loss
reserves for 2005, 2004 and 2003 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 | |
|
2004 | |
|
2003 | |
|
Net reserve for losses and loss expenses at beginning of year
|
|
$ |
47,254 |
|
|
$ |
36,228 |
|
|
$ |
29,347 |
|
Foreign exchange effect
|
|
|
(628 |
) |
|
|
524 |
|
|
|
580 |
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
391 |
(a) |
|
Losses and loss expenses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
28,426 |
|
|
|
26,793 |
|
|
|
20,509 |
|
Prior
years(b)
|
|
|
4,665 |
(c) |
|
|
3,564 |
(d) |
|
|
2,363 |
|
|
Losses and loss expenses incurred
|
|
|
33,091 |
|
|
|
30,357 |
|
|
|
22,872 |
|
|
Losses and loss expenses paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
7,331 |
|
|
|
7,692 |
|
|
|
6,187 |
|
Prior years
|
|
|
14,910 |
|
|
|
12,163 |
|
|
|
10,775 |
|
|
Losses and loss expenses paid
|
|
|
22,241 |
|
|
|
19,855 |
|
|
|
16,962 |
|
|
Net reserve for losses and loss expenses at end of year
|
|
$ |
57,476 |
|
|
$ |
47,254 |
|
|
$ |
36,228 |
|
|
|
|
(a) |
Reflects the opening balances with respect to the
GE U.S.-based auto
and home insurance business acquired in 2003. |
|
(b) |
Includes accretion of discount of $(15) million in 2005,
including an increase of $375 million in the discount
recorded in 2005; $377 million in 2004 and
$296 million in 2003. Additionally, includes
$269 million in 2005, $317 million in 2004 and
$323 million in 2003 for the general reinsurance operations
of Transatlantic, and $197 million of additional losses
incurred in 2005 resulting from increased labor and material
costs related to the 2004 Florida hurricanes. |
|
(c) |
Includes fourth quarter charge of $1.8 billion. |
|
(d) |
Includes fourth quarter charge of $850 million
attributable to the change in estimate for asbestos and
environmental exposures. |
For 2005, AIGs overall net loss
reserve development from prior accident years was an increase of
approximately $4.67 billion, including approximately
$269 million from the general reinsurance operations of
Transatlantic. This $4.67 billion adverse development in
2005 was comprised of approximately $8.60 billion for the
2002 and prior accident years, partially offset by favorable
development for accident years 2003 and 2004 for most classes of
business, with the notable exception being D&O. The adverse
loss development for 2002 and prior accident years is
attributable to approximately $4.0 billion of development
from D&O and related management liability classes of
business, excess casualty, and excess workers compensation, and
to approximately $900 million of adverse development from
asbestos and environmental claims. The remaining portion of the
adverse development for 2002 and prior accident years includes
approximately $520 million related to Transatlantic with
the balance spread across many other classes of business.
For 2004, AIGs overall net loss
reserve development from prior accident years was an increase of
approximately $3.56 billion, including approximately
$317 million from the general reinsurance operations of
Transatlantic and approximately $377 million from accretion
of loss reserve discount. The overall net adverse development
also included approximately $1.01 billion from asbestos and
environmental claims, including the $850 million charge
reflected in the fourth quarter of 2004. The majority of the
remaining net adverse development was attributable to
approximately $750 million of adverse development
pertaining to accident years 2002 and prior for the D&O and
related management liability classes of business, and to
approximately $500 million of adverse development
pertaining to accident years 2000 and prior for the excess
casualty class.
For 2003, AIGs overall net adverse
reserve development from prior accident years was approximately
$2.36 billion, including approximately $323 million
from the general reinsurance operations of Transatlantic, and
approximately $296 million pertaining to the accretion of
loss reserve discount. The overall net adverse development also
included approximately $95 million of net adverse
development related to asbestos and environmental claims. The
remaining net adverse development was principally attributable
to approximately $400 million of adverse development
pertaining to accident years 2000 and prior for excess casualty,
approximately $450 million of adverse development from
D&O and related management liability classes of business
pertaining to accident years 2002 and prior, and approximately
$250 million of adverse development pertaining to accident
years 2002 and prior for healthcare classes of business. The
adverse development for excess casualty from accident years 2000
and prior was partially offset by favorable development from
accident years 2001 and 2002.
The following is a discussion of the
primary reasons for the adverse development in 2005, 2004 and
2003. See Asbestos and Environmental Reserves below
for a further discussion of asbestos and environmental reserves
and developments.
D&O and related management liability classes of
business: The adverse development relates principally
to accident years 2002 and prior. This adverse development
resulted from significant loss cost escalation due to a variety
of factors, including the following: the increase in
28
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Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
frequency and severity of corporate bankruptcies; the increase
in frequency of financial statement restatements; the sharp rise
in market capitalization of publicly traded companies; and the
increase in the number of initial public offerings, which led to
an unprecedented number of IPO allocation/laddering suits in
2001. In addition, extensive utilization of multi-year policies
during this period limited AIGs ability to respond to
emerging trends as rapidly as would otherwise be the case. AIG
has experienced significant adverse loss development since 2002
as a result of these issues. AIG has taken numerous actions in
response to this development, including rate increases and
policy form and coverage changes to better contain future loss
costs in this class of business.
In the year-end 2003 and 2004 loss
reserve reviews, AIGs actuaries responded to the adverse
development for D&O and related management liability classes
by increasing the loss development factor assumptions. The
development factors applicable to accident years 1997 and
subsequent were increased by approximately 4 percent in the
year-end 2003 reserve study and increased by an additional
5 percent in the year-end 2004 reserve study. In addition,
the expected loss ratios for accident years 2001 and subsequent
were increased in the 2003 study to take into account the higher
ultimate loss ratios for accident years 2000 and prior. In the
2004 study, the expected loss ratios for accident years 2002 and
subsequent were increased to take into account the higher
ultimate loss ratios for accident years 2001 and prior. The loss
ratios for the older accident years increased due to the
combination of higher than expected loss development in the year
and the increase in the loss development factor assumptions.
For the year-end 2005 loss reserve
review, AIGs actuaries responded to the continuing adverse
development by further increasing the loss development factor
assumptions. The loss development factors applicable to 1997 and
subsequent accident years were increased by approximately
4 percent. In addition, AIGs actuaries began to give
greater weight to loss development methods for accident years
2002 and 2003, in order to more fully respond to the recent loss
experience. AIGs claims staff also conducted a series of
ground-up claim
projections covering all open claims for this business through
accident year 2004. AIGs actuaries benchmarked the loss
reserve indications for all accident years through 2004 to these
claim projections. Loss reserves pertaining to D&O and
related management liability classes of business are included in
the Other Liability Claims Made line of business, as presented
in the table on page 25.
Excess Casualty: The adverse development related
principally to accident years 2000 and prior, and to a lesser
extent 2001, and resulted from significant loss cost increases
due to both frequency and severity of claims. The increase in
loss costs resulted primarily from medical inflation, which
increased the economic loss component of tort claims, advances
in medical care, which extended the life span of severely
injured workers, and larger jury verdicts, which increased the
value of severe tort claims. An additional factor affecting
AIGs excess casualty experience in recent years has been
the accelerated exhaustion of underlying primary policies for
homebuilders. This has led to increasing construction
defect-related claims activity on AIGs excess policies.
Many excess casualty policies were written on a multi-year basis
in the late 1990s, which limited AIGs ability to respond
to emerging market trends as rapidly as would otherwise be the
case. In subsequent years, AIG responded to these emerging
trends by increasing rates and implementing numerous policy form
and coverage changes. This led to a significant improvement in
experience beginning with accident year 2001.
In the year-end 2003 and 2004 loss
reserve reviews, AIGs actuaries responded to the adverse
development for excess casualty by increasing the loss
development factor assumptions. In the year-end 2003 study, the
development factors applicable to accident years 1997 and
subsequent were increased by approximately 6 percent. In
the year-end 2004 reserve study, the development factors
applicable to accident years 1998 and subsequent were increased
by 12 percent. In addition, the expected loss ratios for
accident years 2001 and subsequent were increased in the 2003
study to take into account the higher ultimate loss ratios for
accident years 2000 and prior. In the 2004 study, the expected
loss ratios for accident years 2002 and subsequent were
increased to take into account the higher ultimate loss ratios
for accident years 2001 and prior.
For the year-end 2005 loss reserve
review, AIGs actuaries responded to the continuing adverse
development by further increasing the loss development factors
applicable to accident years 1999 and subsequent by
approximately 5 percent. In addition, to more accurately
estimate losses for construction defect-related claims, a
separate review was performed by AIG claims staff for accounts
with significant exposure to these claims. Loss reserves
pertaining to the excess casualty class of business are
generally included in the Other Liability Occurrence line of
business, with a small portion of the excess casualty reserves
included in the Other Liability Claims Made line of business, as
presented in the table on page 25.
Excess Workers Compensation: The adverse development
for prior years was approximately $1.0 billion related to
2002 and prior accident years. This adverse development resulted
primarily from significant loss cost increases, primarily
attributable to rapidly increasing medical inflation and
advances in medical care, which increased the cost of covered
medical care and extended the life span of severely injured
workers. The effect of these factors on excess workers
compensation claims experience is leveraged, as frequency is
increased by the rising number of claims that reach the excess
layers.
In response to the continuing loss
development, an additional study was conducted for the
2005 year-end actuarial reserve analysis for DBG pertaining
to the selection of loss development factors for this class of
business. Claims for excess workers compensation exhibit an
exceptionally long-tail of loss development, running for decades
from the date the loss is incurred. Thus, the adequacy of loss
reserves for this class is sensitive to the estimated loss
development factors, as such factors may be applied to many
years of loss experience. In order to better estimate the tail
development for this class, AIG claims staff conducted a
claim-by-claim projection of the expected ultimate paid loss for
each open claim for 1998 and prior accident years as these are
the primary years from which the tail factors are derived. The
objective of the study was to provide a benchmark against which
loss development factors in the tail could be evaluated. The
resulting loss development factors utilized by the actuaries in
the year-end 2005 study reflected an increase of approximately
18 percent from the factors used in the prior year study
without the benefit of the claims benchmark. In addition, the
loss cost trend assumption for excess workers compensation was
increased from approximately 2.5 percent to 6 percent
for the 2005 study.
AIG -
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29
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
Overview of Loss Reserving Process
The General Insurance loss reserves can generally be categorized
into two distinct groups. One group is short-tail classes of
business consisting principally of property, personal lines and
certain casualty classes. The other group is long-tail casualty
classes of business which includes excess and umbrella
liability, D&O, professional liability, medical malpractice,
workers compensation, general liability, products liability, and
related classes.
Short-Tail Reserves
For operations writing short-tail coverages, such as property
coverages, the process of recording quarterly loss reserves is
generally geared toward maintaining an appropriate reserve for
the outstanding exposure, rather than determining an expected
loss ratio for current business. For example, the IBNR reserve
required for a class of property business might be expected to
approximate 20 percent of the latest years earned
premiums, and this level of reserve would generally be
maintained regardless of the loss ratio emerging in the current
quarter. The 20 percent factor would be adjusted to reflect
changes in rate levels, loss reporting patterns, known exposure
to unreported losses, or other factors affecting the particular
class of business.
Long-Tail Reserves
Estimation of ultimate net losses and loss expenses (net losses)
for long-tail casualty classes of business is a complex process
and depends on a number of factors, including the class and
volume of business involved. Experience in the more recent
accident years of long-tail casualty classes of business shows
limited statistical credibility in reported net losses because a
relatively low proportion of net losses would be reported claims
and expenses and an even smaller percentage would be net losses
paid. Therefore, IBNR would constitute a relatively high
proportion of net losses.
AIGs carried net long-tail loss reserves are tested using
loss trend factors that AIG considers appropriate for each class
of business. A variety of actuarial methods and assumptions is
normally employed to estimate net losses for long-tail casualty
classes of businesses. These methods ordinarily involve the use
of loss trend factors intended to reflect the annual growth in
loss costs from one accident year to the next. For the majority
of long-tail casualty classes of business, net loss trend
factors approximated five percent. Loss trend factors reflect
many items including changes in claims handling, exposure and
policy forms, current and future estimates of monetary inflation
and social inflation and increases in litigation and awards.
These factors are periodically reviewed and adjusted, as
appropriate, to reflect emerging trends which are based upon
past loss experience. Thus, many factors are implicitly
considered in estimating the year to year growth in loss costs.
A number of actuarial assumptions are generally made in the
review of reserves for each class of business. For longer tail
classes of business, actuarial assumptions generally are made
with respect to the following:
|
|
- |
Loss trend factors which are used
to establish expected loss ratios for subsequent accident years
based on the projected loss ratio for prior accident years.
|
- |
Expected loss ratios for the
latest accident year (i.e., accident year 2005 for the year-end
2005 loss reserve analysis) and, in some cases for accident
years prior to the latest accident year. The expected loss ratio
generally reflects the projected loss ratio from prior accident
years, adjusted for the loss trend (see above) and the effect of
rate changes and other quantifiable factors on the loss ratio.
For low-frequency, high-severity classes such as excess
casualty, expected loss ratios generally are used for at least
the three most recent accident years.
|
- |
Loss development factors which
are used to project the reported losses for each accident year
to an ultimate basis. Generally, the actual loss development
factors observed from prior accident years would be used as a
basis to determine the loss development factors for the
subsequent accident years.
|
AIG records quarterly changes in loss reserves for each of its
many General Insurance classes of business. The overall change
in AIGs loss reserves is based on the sum of these classes
of business changes. For most long-tail classes of business, the
process of recording quarterly loss reserve changes involves
determining the estimated current loss ratio for each class of
coverage. This loss ratio is multiplied by the current
quarters net earned premium for that class of coverage to
determine the current accident quarters total estimated
net incurred loss and loss expense. The change in loss reserves
for the quarter for each class is thus the difference between
the net incurred loss and loss expense, estimated as described
above, and the net paid losses and loss expenses in the quarter.
Also any change in estimated ultimate losses from prior accident
years, either positive or negative, is reflected in the loss
reserve for the current quarter.
Details of the Loss Reserving Process
The process of determining the current loss ratio for each class
of business is based on a variety of factors. These include, but
are not limited to, the following considerations: prior accident
year and policy year loss ratios; rate changes; changes in
coverage, reinsurance, or mix of business; and actual and
anticipated changes in external factors affecting results, such
as trends in loss costs or in the legal and claims environment.
The current loss ratio for each class of business reflects input
from actuarial, underwriting and claims staff and is intended to
represent managements best estimate of the current loss
ratio after reflecting all of the factors described above. At
the close of each quarter, the assumptions underlying the loss
ratios are reviewed to determine if the loss ratios based
thereon remain appropriate. This process includes a review of
the actual claims experience in the quarter, actual rate changes
achieved, actual changes in coverage, reinsurance or mix of
business, and changes in certain other factors that may affect
the loss ratio. When this review suggests that the initially
determined loss ratio is no longer appropriate, the loss ratio
for current business is changed to reflect the revised
assumptions.
A comprehensive annual loss reserve review is completed in the
fourth quarter of each year for each AIG general insurance
subsidiary. These reviews are conducted in full detail for each
class of business for each subsidiary, and thus consist of
hundreds of individual analyses. The purpose of these reviews is
to confirm the appropriateness of the reserves carried by
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AIG -
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AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
each of the individual subsidiaries, and therefore of AIGs
overall carried reserves. The reserve analysis for each class of
business is performed by the actuarial personnel who are most
familiar with that class of business. In completing these
detailed actuarial reserve analyses, the actuaries are required
to make numerous assumptions, including the selection of loss
development factors and loss cost trend factors. They are also
required to determine and select the most appropriate actuarial
methods to employ for each business class. Additionally, they
must determine the appropriate segmentation of data from which
the adequacy of the reserves can be most accurately tested. In
the course of these detailed reserve reviews a point estimate of
the loss reserve is determined. The sum of these point estimates
for each class of business for each subsidiary provides an
overall actuarial point estimate of the loss reserve for that
subsidiary. The ultimate process by which the actual carried
reserves are determined considers both the actuarial point
estimate and numerous other internal and external factors
including a qualitative assessment of inflation and other
economic conditions in the United States and abroad, changes in
the legal, regulatory, judicial and social environment,
underlying policy pricing, terms and conditions, and claims
handling. Loss reserve development can also be affected by
commutations of assumed and ceded reinsurance agreements.
Actuarial Methods for Major Classes of Business
In testing the reserves for each class of business, a
determination is made by AIGs actuaries as to the most
appropriate actuarial methods. This determination is based on a
variety of factors including the nature of the claims associated
with the class of business, such as frequency or severity. Other
factors considered include the loss development characteristics
associated with the claims, the volume of claim data available
for the applicable class, and the applicability of various
actuarial methods to the class. In addition to determining the
actuarial methods, the actuaries determine the appropriate loss
reserve groupings of data. For example, AIG writes a great
number of unique subclasses of professional liability. For
pricing or other purposes, it is appropriate to evaluate the
profitability of each subclass individually. However, for
purposes of estimating the loss reserves for professional
liability, it is appropriate to combine the subclasses into
larger groups. The greater degree of credibility in the claims
experience of the larger groups may outweigh the greater degree
of homogeneity of the individual subclasses. This determination
of data segmentation and actuarial methods is carefully
considered for each class of business. The segmentation and
actuarial methods chosen are those which together are expected
to produce the most accurate estimate of the loss reserves.
Actuarial methods used by AIG for most long-tail casualty
classes of business include loss development methods and
expected loss ratio methods, including Bornhuetter
Ferguson methods described below. Other methods considered
include frequency/severity methods, although these are generally
used by AIG more for pricing analysis than for loss reserve
analysis. Loss development methods utilize the actual loss
development patterns from prior accident years to project the
reported losses to an ultimate basis for subsequent accident
years. Loss development methods generally are most appropriate
for classes of business which exhibit a stable pattern of loss
development from one accident year to the next, and for which
the components of the classes have similar development
characteristics. For example, property exposures would generally
not be combined into the same class as casualty exposures, and
primary casualty exposures would generally not be combined into
the same class as excess casualty exposures. Expected loss ratio
methods are generally utilized by AIG where the reported loss
data lacks sufficient credibility to utilize loss development
methods, such as for new classes of business or for long-tail
classes at early stages of loss development.
Expected loss ratio methods rely on the application of an
expected loss ratio to the earned premium for the class of
business to determine the loss reserves. For example, an
expected loss ratio of 70 percent applied to an earned
premium base of $10 million for a class of business would
generate an ultimate loss estimate of $7 million.
Subtracting any reported paid losses and loss expense would
result in the indicated loss reserve for this class.
Bornhuetter Ferguson methods are expected loss ratio
methods for which the expected loss ratio is applied only to the
expected unreported portion of the losses. For example, for a
long-tail class of business for which only 10 percent of
the losses are expected to be reported at the end of the
accident year, the expected loss ratio would be applied to the
90 percent of the losses still unreported. The actual
reported losses at the end of the accident year would be added
to determine the total ultimate loss estimate for the accident
year. Subtracting the reported paid losses and loss expenses
would result in the indicated loss reserve. In the example
above, the expected loss ratio of 70 percent would be
multiplied by 90 percent. The result of 63 percent
would be applied to the earned premium of $10 million
resulting in an estimated unreported loss of $6.3 million.
Actual reported losses would be added to arrive at the total
ultimate losses. If the reported losses were $1 million,
the ultimate loss estimate under the Bornhuetter
Ferguson method would be $7.3 million versus the
$7 million amount under the expected loss ratio method
described above. Thus, the Bornhuetter Ferguson
method gives partial credibility to the actual loss experience
to date for the class of business. Loss development methods
generally give full credibility to the reported loss experience
to date. In the example above, loss development methods would
typically indicate an ultimate loss estimate of
$10 million, as the reported losses of $1 million
would be estimated to reflect only 10 percent of the
ultimate losses.
A key advantage of loss development methods is that they respond
quickly to any actual changes in loss costs for the class of
business. Therefore, if loss experience is unexpectedly
deteriorating or improving, the loss development method gives
full credibility to the changing experience. Expected loss ratio
methods would be slower to respond to the change, as they would
continue to give more weight to the expected loss ratio, until
enough evidence emerged for the expected loss ratio to be
modified to reflect the changing loss experience. On the other
hand, loss development methods have the disadvantage of
overreacting to changes in reported losses if in fact the loss
experience is not credible. For example, the presence or absence
of large losses at the early stages of loss development
AIG -
Form 10-K/A
31
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
could cause the loss development method to overreact to the
favorable or unfavorable experience by assuming it will continue
at later stages of development. In these instances, expected
loss ratio methods such as Bornhuetter Ferguson have
the advantage of properly recognizing large losses without
extrapolating unusual large loss activity onto the unreported
portion of the losses for the accident year. AIGs loss
reserve reviews for long-tail classes typically utilize a
combination of both loss development and expected loss ratio
methods. Loss development methods are generally given more
weight for accident years and classes of business where the loss
experience is highly credible. Expected loss ratio methods are
given more weight where the reported loss experience is less
credible, or is driven more by large losses. Expected loss ratio
methods require sufficient information to determine the
appropriate expected loss ratio. This information generally
includes the actual loss ratios for prior accident years, and
rate changes as well as underwriting or other changes which
would affect the loss ratio. Further, an estimate of the loss
cost trend or loss ratio trend is required in order to allow for
the effect of inflation and other factors which may increase or
otherwise change the loss costs from one accident year to the
next.
Frequency/severity methods generally rely on the determination
of an ultimate number of claims and an average severity for each
claim for each accident year. Multiplying the estimated ultimate
number of claims for each accident year by the expected average
severity of each claim produces the estimated ultimate loss for
the accident year. Frequency/severity methods generally require
a sufficient volume of claims in order for the average severity
to be predictable. Average severity for subsequent accident
years is generally determined by applying an estimated annual
loss cost trend to the estimated average claim severity from
prior accident years. Frequency/severity methods have the
advantage that ultimate claim counts can generally be estimated
more quickly and accurately than can ultimate losses. Thus, if
the average claim severity can be accurately estimated, these
methods can more quickly respond to changes in loss experience
than other methods. However, for average severity to be
predictable, the class of business must consist of homogeneous
types of claims for which loss severity trends from one year to
the next are reasonably consistent. Generally these methods work
best for high frequency, low severity classes of business such
as personal auto. AIG utilizes these methods in pricing
subclasses of professional liability. However, AIG does not
generally utilize frequency/severity methods to test loss
reserves, due to the general nature of AIGs reserves being
applicable to lower frequency, higher severity commercial
classes of business where average claim severity is volatile.
Excess Casualty: AIG generally uses a combination of
loss development methods and expected loss ratio methods for
excess casualty classes. Expected loss ratio methods are
generally utilized for at least the three latest accident years,
due to the relatively low credibility of the reported losses.
The loss experience is generally reviewed separately for lead
umbrella classes and for other excess classes, due to the
relatively shorter tail for lead umbrella business.
Automobile-related
claims are generally reviewed separately from non-auto claims,
due to the shorter tail nature of the automobile related claims.
The expected loss ratios utilized for recent accident years are
based on the projected ultimate loss ratios of prior years,
adjusted for rate changes, estimated loss cost trends and all
other changes that can be quantified. The estimated loss cost
trend utilized in the year-end 2005 reviews averaged
approximately 6 percent for excess casualty classes.
Frequency/severity methods are generally not utilized as the
vast majority of reported claims do not result in a claim
payment. In addition, the average severity varies significantly
from accident year to accident year due to large losses which
characterize this class of business, as well as changing
proportions of claims which do not result in a claim payment.
D&O: AIG generally utilizes a combination of
loss development methods and expected loss ratio methods for
D&O and related management liability classes of business.
Expected loss ratio methods are given more weight in the two
most recent accident years, whereas loss development methods are
given more weight in more mature accident years. Beginning with
the year-end 2005 loss reserve review, AIGs actuaries
began to utilize claim projections provided by AIG claims staff
as a benchmark for determining the indicated ultimate losses for
accident years 2004 and prior. In prior years, AIGs
actuaries had utilized these claims projections as a benchmark
for profitability studies for major classes of D&O and
related management liability business. The track record of these
claims projections has indicated a very low margin of error,
thus providing support for their usage as a benchmark in
determining the estimated loss reserve. These classes of
business reflect claims made coverage, and losses are
characterized by low frequency and high severity. Thus, the
claim projections can produce an accurate overall indicator of
the ultimate loss exposure for these classes by identifying and
estimating all large losses. Frequency/severity methods are
generally not utilized for these classes as the overall losses
are driven by large losses more than by claim frequency.
Severity trends have varied significantly from accident year to
accident year.
Workers Compensation: AIG generally utilizes loss
development methods for all but the most recent accident year.
Expected loss ratio methods generally are given significant
weight only in the most recent accident year. Workers
compensation claims are generally characterized by high
frequency, low severity, and relatively consistent loss
development from one accident year to the next. AIG is a leading
writer of workers compensation, and thus has sufficient volume
of claims experience to utilize development methods. AIG does
not believe frequency/severity methods are as appropriate, due
to significant growth and changes in AIGs workers
compensation business over the years. AIG generally segregates
California business from other business in evaluating workers
compensation reserves. Certain classes of workers compensation,
such as construction, are also evaluated separately.
Additionally, AIG writes a number of very large accounts which
include workers compensation coverage. These accounts are
generally priced by AIG actuaries, and to the extent
appropriate, the indicated losses based on the pricing analysis
may be utilized to record the initial estimated loss reserves
for these accounts.
Excess Workers Compensation: AIG generally utilizes
a combination of loss development methods and expected loss
ratio methods. Loss development methods are given the greater
weight for mature accident years such as 1999 and prior.
Expected loss ratio methods are given the greater weight for the
more recent accident years.
32
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Excess workers compensation is an extremely long-tail class of
business, with loss emergence extending for decades. Therefore
there is limited credibility in the reported losses for many of
the more recent accident years. Beginning with the year-end 2005
loss reserve review, AIGs actuaries began to utilize
claims projections provided by AIG claims staff to help
determine the loss development factors for this class of
business.
General Liability: AIG generally uses a combination
of loss development methods and expected loss ratio methods for
primary general liability or products liability classes. For
certain classes of business with sufficient loss volume, loss
development methods may be given significant weight for all but
the most recent one or two accident years, whereas for smaller
or more volatile classes of business, loss development methods
may be given limited weight for the five or more most recent
accident years. Expected loss ratio methods would be utilized
for the more recent accident years for these classes. The loss
experience for primary general liability business is generally
reviewed at a level that is believed to provide the most
appropriate data for reserve analysis. For example, primary
claims made business is generally segregated from business
written on an occurrence policy form. Additionally, certain
subclasses, such as construction, are generally reviewed
separately from business in other subclasses. Due to the fairly
long-tail nature of general liability business, and the many
subclasses that are reviewed individually, there is less
credibility in the reported losses and increased reliance on
expected loss ratio methods. AIGs actuaries generally do
not utilize frequency/severity methods to test reserves for this
business, due to significant changes and growth in AIGs
general liability and products liability business over the years.
Commercial Automobile Liability: AIG generally
utilizes loss development methods for all but the most recent
accident year for commercial automobile classes of business.
Expected loss ratio methods are generally given significant
weight only in the most recent accident year. Frequency/severity
methods are generally not utilized due to significant changes
and growth in this business over the years.
Healthcare: AIG generally uses a combination of loss
development methods and expected loss ratio methods for
healthcare classes of business. The largest component of the
healthcare business consists of coverage written for hospitals
and other healthcare facilities. Reserves for excess coverage
are tested separately from those for primary coverage. For
primary coverages, loss development methods are generally given
the majority of the weight for all but the latest three accident
years, and are given some weight for all years other than the
latest accident year. For excess coverages, expected loss
methods are generally given all the weight for the latest three
accident years, and are also given considerable weight for
accident years prior to the latest three years. For other
classes of healthcare coverage, an analogous weighting between
loss development and expected loss ratio methods is utilized.
The weights assigned to each method are those which are believed
to result in the best combination of responsiveness and
stability. Frequency/severity methods are sometimes utilized for
pricing certain healthcare accounts or business. However, in
testing loss reserves the business is generally combined into
larger groupings to enhance the credibility of the loss
experience. The frequency/severity methods that are applicable
in pricing may not be appropriate for reserve testing and thus
frequency/severity methods are not generally employed in
AIGs healthcare reserve analyses.
Professional Liability: AIG generally uses a
combination of loss development methods and expected loss ratio
methods for professional liability classes of business. Loss
development methods are used for the more mature accident years.
Greater weight is given to expected loss ratio methods in the
more recent accident years. Reserves are tested separately for
claims made classes and classes written on occurrence policy
forms. Further segmentations are made in a manner believed to
provide the most appropriate balance between credibility and
homogeneity of the data. Frequency/severity methods are used in
pricing and profitability analyses for some classes of
professional liability; however, for loss reserve testing, the
need to enhance credibility generally results in classes that
are not sufficiently homogenous to utilize frequency/severity
methods.
Aviation: AIG generally uses a combination of loss
development methods and expected loss ratio methods for aviation
exposures. Aviation claims are not very long-tail in nature;
however, they are driven by claim severity. Thus a combination
of both development and expected loss ratio methods are used for
all but the latest accident year to determine the loss reserves.
Expected loss ratio methods are used to determine the loss
reserves for the latest accident year. Frequency/severity
methods are not employed due to the high severity nature of the
claims and different mix of claims from year to year.
Personal Auto (Domestic): AIG generally utilizes
frequency/severity methods and loss development methods for
domestic personal auto classes. For many classes of business,
greater reliance is placed on frequency/severity methods as
claim counts emerge quickly for personal auto and allow for more
immediate analysis of resulting loss trends and comparisons to
industry and other diagnostic metrics.
Fidelity/ Surety: AIG generally uses loss
development methods for fidelity exposures for all but the
latest accident year. Expected loss ratio methods are also given
weight for the more recent accident years, and for the latest
accident year they may be given 100 percent weight. For
surety exposures, AIG generally uses the same method as for
short-tail classes.
Mortgage Guaranty: AIG tests mortgage guaranty
reserves using loss development methods, supplemented by an
internal claim analysis by actuaries and staff who specialize in
the mortgage guaranty business. The claim analysis projects
ultimate losses for claims within each of several categories of
default based on actual historical experience and is essentially
a frequency/severity analysis for each category of default.
Short-Tail Classes: AIG generally uses either loss
development methods or IBNR factor methods to set reserves for
short-tail classes such as property coverages. Where a factor is
used, it generally represents a percent of earned premium or
other exposure measure. The factor is determined based on prior
accident year experience. For example, the IBNR for a class of
property coverage might be expected to approximate
20 percent of the latest years earned premium. The
factor is continually reevaluated in light of emerging claim
experience as well as rate changes or other factors that could
affect the adequacy of the IBNR factor being employed.
International: Business written by AIGs
Foreign General sub-segment includes both long-tail and
short-tail classes of business. For long-tail classes of
business, the actuarial methods utilized would be analogous to
those described above. However, the majority of business written
by Foreign General is short-tail, high frequency and low
severity in
AIG -
Form 10-K/A
33
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
nature. For this business, loss development methods are
generally employed to test the loss reserves. AIG maintains a
data base of detailed historical premium and loss transactions
in original currency for business written by Foreign General,
thereby allowing AIG actuaries to determine the current reserves
without any distortion from changes in exchange rates over time.
In testing the Foreign General reserves, AIGs actuaries
segment the data by region, country or class of business as
appropriate to determine the optimal balance between homogeneity
and credibility.
Loss Adjustment Expenses: AIG determines reserves
for legal defense and cost containment loss adjustment expenses
for each class of business by one or more actuarial methods. The
methods generally include development methods analogous to those
described for loss development methods. The developments could
be based on either the paid loss adjustment expenses or the
ratio of paid loss adjustment expenses to paid losses, or both.
Other methods include the utilization of expected ultimate
ratios of paid loss expense to paid losses, based on actual
experience from prior accident years or from similar classes of
business. AIG generally determines reserves for adjuster loss
adjustment expenses based on calendar year ratios of adjuster
expenses paid to losses paid for the particular class of
business. AIG generally determines reserves for other
unallocated loss adjustment expenses based on the ratio of the
calendar year expenses paid to overall losses paid. This
determination is generally done for all classes of business
combined, and reflects costs of home office claim overhead as a
percent of losses paid.
Catastrophes: Special analyses are conducted by AIG
in response to major catastrophes in order to estimate
AIGs gross and net loss and loss expense liability from
the event. These analyses may include a combination of
approaches, including modeling estimates, ground up claim
analysis, loss evaluation reports from
on-site field
adjusters, and market share estimates.
AIGs loss reserve analyses do not
calculate a range of loss reserve estimates. Because a large
portion of the loss reserves from AIGs General Insurance
business relates to longer-tail casualty classes of business
driven by severity rather than frequency of claims, such as
excess casualty and D&O, developing a range around loss
reserve estimates would not be meaningful. Using the reserving
methodologies described above, AIGs actuaries determine
their best estimate of the required reserve and advise
Management of that amount. AIG then adjusts its aggregate
carried reserves as necessary so that the actual carried
reserves as of December 31 reflect this best estimate.
Volatility of Reserve Estimates and Sensitivity Analyses
As described above, AIG uses numerous assumptions in determining
its best estimate of reserves for each class of business. The
importance of any specific assumption can vary by both class of
business and accident year. If actual experience differs from
key assumptions used in establishing reserves, there is
potential for significant variation in the development of loss
reserves, particularly for long-tail casualty classes of
business such as excess casualty, D&O or workers
compensation. Set forth below is a sensitivity analysis that
estimates the effect on the loss reserve position of using
alternative loss trend or loss development factor assumptions
rather than those actually used in determining AIGs best
estimates in the year-end loss reserve analyses for 2005. The
analysis addresses each major class of business for which a
material deviation to AIGs overall reserve position is
believed reasonably possible, and uses what AIG believes is a
reasonably likely range of potential deviation for each class.
There can be no assurance, however, that actual reserve
development will be consistent with either the original or the
adjusted loss trend or loss development factor assumptions, or
that other assumptions made in the reserving process will not
materially affect reserve development for a particular class of
business.
Excess Casualty: For the excess casualty class of
business, the assumed loss cost trend was approximately six
percent. After evaluating the historical loss cost trends from
prior accident years since the early 1990s, in AIGs
judgment, it is reasonably likely that actual loss cost trends
applicable to the year-end 2005 loss reserve review for excess
casualty will range from negative four percent to positive
16 percent, or approximately ten percent lower or higher
than the assumption actually utilized in the year-end 2005
reserve review. A ten percent change in the assumed loss cost
trend for excess casualty would cause approximately a
$1.4 billion increase or a $1.0 billion decrease in
the net loss and loss expense reserve for this class of
business. It should be emphasized that the ten percent
deviations are not considered the highest possible deviations
that might be expected, but rather what is considered by AIG to
reflect a reasonably likely range of potential deviation. Actual
loss cost trends in the early 1990s were negative for several
years, including amounts below the negative four percent cited
above, whereas actual loss cost trends in the late 1990s ran
well into the double digits for several years, including amounts
greater than the 16 percent cited above. Thus, there can be
no assurance that loss trends will not deviate by more than ten
percent. The loss cost trend assumption is critical for the
excess casualty class of business due the long-tail nature of
the claims and therefore is applied across many accident years.
For the excess casualty class of business, the assumed loss
development factors are also a key assumption. After evaluating
the historical loss development factors from prior accident
years since the early 1990s, in AIGs judgment, it is
reasonably likely that actual loss development factors will
range from approximately five percent below those actually
utilized in the year-end 2005 reserve review to approximately
ten percent above those factors actually utilized. If the loss
development factor assumptions were changed by five percent and
ten percent, respectively, the net loss reserves for the excess
casualty class would decrease by approximately $500 million
under the lower assumptions or increase by approximately
$1.1 billion under the higher assumptions. Generally,
actual historical loss development factors are used to project
future loss development. However there can be no assurance that
future loss development patterns will be the same as in the
past, or that they will not deviate by more than the amounts
illustrated above. Moreover, as excess casualty is a long-tail
class of business, any deviation in loss cost trends or in loss
development factors might not be discernible for an extended
period of time subsequent to the recording of the initial loss
reserve estimates for any accident year. Thus, there is the
potential for the reserves with respect to a number of accident
years to be significantly affected by changes in the loss cost
trends or loss development factors that were initially relied
upon in setting the reserves. These changes in loss trends or
loss development factors could be attributable to changes in
inflation or in the judicial environment, or in other social or
economic conditions affecting claims. Thus, there is the
34
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
potential for variations greater than the amounts cited above,
either positively or negatively.
D&O and Related Management Liability Classes of
Business: For D&O and related management liability
classes of business, the assumed loss cost trend was
approximately four percent. After evaluating the historical loss
cost trends from prior accident years since the early 1990s, in
AIGs judgment, it is reasonably likely that actual loss
cost trends applicable to the year-end 2005 loss reserve review
for these classes will range from negative six percent to
positive 14 percent, or approximately ten percent lower or
higher than the assumption actually utilized in the year-end
2005 reserve review. A ten percent change in the assumed loss
cost trend for these classes would cause approximately a
$625 million increase or a $550 million decrease in
the net loss and loss expense reserves for these classes of
business. It should be emphasized that the ten percent
deviations are not considered the highest possible deviations
that might be expected, but rather what is considered by AIG to
reflect a reasonably likely range of potential deviation. Actual
loss cost trends for these classes in the early 1990s were
negative for several years, including amounts below the negative
six percent cited above, whereas actual loss cost trends in the
late 1990s ran at nearly 50 percent per year, vastly
exceeding the fourteen percent figure cited above. Because the
D&O class of business has exhibited highly volatile loss
trends from one accident year to the next, there is the
possibility of an exceptionally high deviation.
For D&O and related management liability classes of
business, the assumed loss development factors are also an
important assumption but less critical than for excess casualty.
Because these classes are written on a claims made basis, the
loss reporting and development tail is much shorter than for
excess casualty. However, the high severity nature of the claims
does create the potential for significant deviations in loss
development patterns from one year to the next. After evaluating
the historical loss development factors for these classes of
business for accident years since the early 1990s, in AIGs
judgment, it is reasonably likely that actual loss development
factors will range approximately five percent lower or higher
than those factors actually utilized in the year-end 2005 loss
reserve review for these classes. If the loss development factor
assumptions were changed by five percent, the net loss reserves
for these classes would increase or decrease by approximately
$200 million. As noted above for excess casualty, actual
historical loss development factors are generally used to
project future loss development. However, there can be no
assurance that future loss development patterns will be the same
as in the past, or that they will not deviate by more than the
five percent.
Excess Workers Compensation: For excess workers
compensation business, loss costs were trended at six percent
per annum. After reviewing actual industry loss trends for the
past ten years, in AIGs judgment, it is reasonably likely
that actual loss cost trends applicable to the year-end 2005
loss reserve review for excess workers compensation will range
five percent lower or higher than this estimated loss trend. A
five percent change in the assumed loss cost trend would cause
approximately a $250 million increase or decrease in the
net loss reserves for this business. It should be emphasized
that the actual loss cost trend could vary significantly from
this assumption, and there can be no assurance that actual loss
costs will not deviate, perhaps materially, by greater than five
percent.
For excess workers compensation business, the assumed loss
development factors are a critical assumption. Excess workers
compensation is an extremely long-tail class of business, with a
much greater than normal uncertainty as to the appropriate loss
development factors for the tail of the loss development. After
evaluating the historical loss development factors for prior
accident years since the 1980s, in AIGs judgment, it is
reasonably likely that actual loss development factors will
range approximately 15 percent lower or higher than those
factors actually utilized in the year-end 2005 loss reserve
review for excess workers compensation. If the loss development
factor assumptions were changed by 15 percent, the net loss
reserves for excess workers compensation would increase or
decrease by approximately $525 million or
$425 million, respectively. Given the exceptionally
long-tail for this class of business, there is the potential for
actual deviations in the loss development tail to exceed the
deviations assumed, perhaps materially.
Primary Workers Compensation: For primary workers
compensation, the loss cost trend assumption is not believed to
be material with respect to AIGs loss reserves. This is
primarily because AIGs actuaries are generally able to use
loss development projections for all but the most recent
accident years reserves, so there is limited need to rely
on loss cost trend assumptions for primary workers compensation
business.
However, for primary workers compensation business the loss
development factor assumptions are important. Generally,
AIGs actual historical workers compensation loss
development factors would be expected to provide a reasonably
accurate predictor of future loss development. However, workers
compensation is a long-tail class of business, and AIGs
business reflects a very significant volume of losses
particularly in recent accident years due to growth of the
business. After evaluating the actual historical loss
developments since the 1980s for this business, in AIGs
judgment, it is reasonably likely that actual loss development
factors will fall within the range of approximately
2.75 percent below to 7.5 percent above those actually
utilized in the year-end 2005 loss reserve review. If the loss
development factor assumptions were changed by 2.75 percent
and 7.5 percent, respectively, the net loss reserves for
workers compensation would decrease or increase by approximately
$450 million and $1.25 billion, respectively. For
these classes of business, there can be no assurance that actual
deviations from the expected loss development factors will not
exceed the deviations assumed, perhaps materially.
Other Casualty Classes of Business: For casualty
business other than the classes discussed above, there is
generally some potential for deviation in both the loss cost
trend and loss development factor assumptions. However, the
effect of such deviations is expected to be less material when
compared to the effect on the classes cited above.
Asbestos and Environmental Reserves
The estimation of loss reserves relating to asbestos and
environmental claims on insurance policies written many years
ago is subject to greater uncertainty than other types of claims
due to inconsistent court decisions as well as judicial
interpretations and legislative actions that in some cases have
tended to broaden coverage beyond the original intent of such
policies and in others have expanded theories of liability. The
insurance industry as a
AIG -
Form 10-K/A
35
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
whole is engaged in extensive litigation over these coverage and
liability issues and is thus confronted with a continuing
uncertainty in its efforts to quantify these exposures.
AIG continues to receive claims asserting injuries and damages
from toxic waste, hazardous substances, and other environmental
pollutants and alleged claims to cover the cleanup costs of
hazardous waste dump sites, referred to collectively as
environmental claims, and indemnity claims asserting injuries
from asbestos.
The vast majority of these asbestos and environmental claims
emanate from policies written in 1984 and prior years.
Commencing in 1985, standard policies contained an absolute
exclusion for pollution related damage and an absolute asbestos
exclusion was also implemented. However, AIG currently
underwrites environmental impairment liability insurance on a
claims-made basis and has excluded such claims from the analysis
herein.
The majority of AIGs exposures for asbestos and
environmental claims are excess casualty coverages, not primary
coverages. Thus, the litigation costs are treated in the same
manner as indemnity amounts. That is, litigation expenses are
included within the limits of the liability AIG incurs.
Individual significant claim liabilities, where future
litigation costs are reasonably determinable, are established on
a case basis.
Estimation of asbestos and environmental claims loss reserves is
a subjective process and reserves for asbestos and environmental
claims cannot be estimated using conventional reserving
techniques such as those that rely on historical accident year
loss development factors.
Significant factors which affect the trends that influence the
asbestos and environmental claims estimation process are the
inconsistent court resolutions and judicial interpretations
which broaden the intent of the policies and scope of coverage.
The current case law can be characterized as still evolving, and
there is little likelihood that any firm direction will develop
in the near future. Additionally, the exposures for cleanup
costs of hazardous waste dump sites involve issues such as
allocation of responsibility among potentially responsible
parties and the governments refusal to release parties.
Due to this uncertainty, it is not possible to determine the
future development of asbestos and environmental claims with the
same degree of reliability as with other types of claims. Such
future development will be affected by the extent to which
courts continue to expand the intent of the policies and the
scope of the coverage, as they have in the past, as well as by
the changes in Superfund and waste dump site coverage and
liability issues. If the asbestos and environmental reserves
develop deficiently, such deficiency would have an adverse
effect on AIGs future results of operations. AIG does not
discount asbestos and environmental reserves.
With respect to known asbestos and environmental claims, AIG
established over a decade ago specialized toxic tort and
environmental claims units, which investigate and adjust all
such asbestos and environmental claims. These units evaluate
these asbestos and environmental claims utilizing a
claim-by-claim approach that involves a detailed review of
individual policy terms and exposures. Because each policyholder
presents different liability and coverage issues, AIG generally
evaluates exposure on a
policy-by-policy basis,
considering a variety of factors such as known facts, current
law, jurisdiction, policy language and other factors that are
unique to each policy. Quantitative techniques have to be
supplemented by subjective considerations including management
judgment. Each claim is reviewed at least semi-annually
utilizing the aforementioned approach and adjusted as necessary
to reflect the current information.
In both the specialized and dedicated asbestos and environmental
claims units, AIG actively manages and pursues early resolution
with respect to these claims in an attempt to mitigate its
exposure to the unpredictable development of these claims. AIG
attempts to mitigate its known long-tail environmental exposures
by utilizing a combination of proactive claim-resolution
techniques including policy buybacks, complete environmental
releases, compromise settlements, and, where indicated,
litigation.
With respect to asbestos claims handling, AIGs specialized
claims staff operates to mitigate losses through proactive
handling, supervision and resolution of asbestos cases. Thus,
while AIG has resolved all claims with respect to miners and
major manufacturers (Tier One), its claims staff continues
to operate under the same proactive philosophy to resolve claims
involving accounts with products containing asbestos
(Tier Two), products containing small amounts of asbestos,
companies in the distribution process, and parties with remote,
ill defined involvement in asbestos (Tiers Three and Four).
Through its commitment to appropriate staffing, training, and
management oversight of asbestos cases, AIG mitigates to the
extent possible its exposure to these claims.
To determine the appropriate loss reserve as of
December 31, 2005 for its asbestos and environmental
exposures, AIG performed a series of top-down and
ground-up reserve
analyses. In order to ensure it had the most comprehensive
analysis possible, AIG engaged a third-party actuary to assist
in a review of these exposures including
ground-up estimates for
both asbestos reserves and environmental reserves. Prior to
2005, AIGs reserve analyses for asbestos and environmental
exposures was focused around a report year projection of
aggregate losses for both asbestos and environmental reserves.
Additional tests such as market share analyses were also
performed. Ground-up
analyses take into account policyholder-specific and
claim-specific information that has been gathered over many
years from a variety of sources.
Ground-up studies can
thus more accurately assess the exposure to AIGs layers of
coverage for each policyholder, and hence for all policyholders
in the aggregate provided a sufficient sample of the
policyholders can be modeled in this manner.
In order to ensure its
ground-up analysis was
as comprehensive as possible, AIG staff produced the information
required at policy and claim level detail for nearly
1,000 asbestos defendants and over 1,100 environmental
defendants. This represented nearly 90 percent of all
accounts for which AIG had received any claim notice of any
amount pertaining to asbestos or environmental exposure. AIG did
not set any minimum thresholds such as amount of case reserve
outstanding, or paid losses to date, that would have served to
reduce the sample size and hence the comprehensiveness of the
ground-up analysis. The
results of the
ground-up analysis for
each significant account were examined by AIGs claims staff
36
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
for reasonableness, for consistency with policy coverage terms,
and any claim settlement terms applicable. Adjustments were
incorporated accordingly. The results from the universe of
modeled accounts, which as noted above reflects the vast
majority of AIGs known exposures, were then utilized to
estimate the ultimate losses from accounts that could not be
modeled and to determine the appropriate provision for all
unreported claims.
AIG conducted a comprehensive analysis of reinsurance
recoverability to establish the appropriate asbestos and
environmental reserve net of reinsurance. AIG determined the
amount of reinsurance that would be ceded to insolvent
reinsurers or to commuted reinsurance contracts for both
reported claims and for IBNR. These amounts were then deducted
from the indicated amount of reinsurance recoverable.
AIG also completed a top-down report year projection of its
indicated asbestos and environmental loss reserves. These
projections consist of a series of tests performed separately
for asbestos and for environmental exposures.
For asbestos, these tests project the expected losses to be
reported over the next twenty years, i.e., from 2006 through
2025, based on the actual losses reported through 2005 and the
expected future loss emergence for these claims. Three scenarios
were tested, with a series of assumptions ranging from more
optimistic to more conservative. In the first scenario, all
carried asbestos case reserves are assumed to be within ten
percent of their ultimate settlement value. The second scenario
relies on an actuarial projection of report year development for
asbestos claims reported from 1993 to the present to estimate
case reserve adequacy as of
year-end 2005. The
third scenario relies on an actuarial projection of report year
claims for asbestos but reflects claims reported from 1989 to
the present to estimate case reserve adequacy as of
year-end 2005. Based on
the results of the prior report years for each of the three
scenarios described above, the report year approach then
projects forward to the year 2025 the expected future report
year losses, based on AIGs estimate of reasonable loss
trend assumptions. These calculations are performed on losses
gross of reinsurance. The IBNR (including a provision for
development of reported claims) on a net basis is based on
applying a factor reflecting the expected ratio of net losses to
gross losses for future loss emergence.
For environmental claims, an analogous series of frequency/
severity tests are produced. Environmental claims from future
report years, (i.e., IBNR) are projected out ten years, i.e.,
through the year 2015.
At year-end 2005, AIG considered a number of factors and recent
experience, in addition to the results of the respective
top-down and
ground-up analyses
performed for asbestos and environmental reserves. Among the
factors considered by AIG was the continued deterioration in its
asbestos report year experience. The indication from the third
scenario of the
top-down analysis for
the asbestos reserves was approximately $265 million
greater than AIGs carried net asbestos reserves, prior to
its increase in the fourth quarter of 2005. This marks a
continuation of the trend of adverse report year development for
asbestos that has been observed for the past several years. AIG
also noted its asbestos paid losses in 2005 increased from
2004s levels. AIG considered the significant uncertainty
that remains as to AIGs ultimate liability relating to
asbestos and environmental claims. This uncertainty is due to
several factors including:
|
|
- |
The long latency period between
asbestos exposure and disease manifestation and the resulting
potential for involvement of multiple policy periods for
individual claims;
|
- |
The increase in the volume of
claims by currently unimpaired plaintiffs;
|
- |
Claims filed under the
non-aggregate premises or operations section of general
liability policies;
|
- |
The number of insureds seeking
bankruptcy protection and the effect of prepackaged bankruptcies;
|
- |
Diverging legal interpretations;
and
|
- |
With respect to environmental
claims, the difficulty in estimating the allocation of
remediation cost among various parties.
|
After carefully considering the results of the
ground-up analysis,
which AIG now plans to update on an annual basis, as well as all
of the above factors, including the recent report year
experience, AIG determined its best estimate was to recognize an
increase of $843 million in its carried net asbestos
reserves, and an increase of $30 million in its carried net
environmental reserves at December 31, 2005. This increase
in carried net asbestos reserves reflects the change from
AIGs historical
top-down analysis to
the ground-up analysis
described above. The corresponding increases in gross reserves
were approximately $1.97 billion for asbestos and
$56 million for environmental, respectively.
AIG -
Form 10-K/A
37
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
A summary of reserve activity, including estimates for
applicable IBNR, relating to asbestos and environmental claims
separately and combined at December 31, 2005, 2004 and 2003
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
(in millions) |
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
Asbestos:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses at beginning of year
|
|
$ |
2,559 |
|
|
$ |
1,060 |
|
|
$ |
1,235 |
|
|
$ |
386 |
|
|
$ |
1,304 |
|
|
$ |
400 |
|
|
Losses and loss expenses incurred*
|
|
|
2,207 |
(a) |
|
|
903 |
(a) |
|
|
1,595 |
(a) |
|
|
772 |
(a) |
|
|
175 |
|
|
|
43 |
|
|
Losses and loss expenses paid*
|
|
|
(325 |
) |
|
|
(123 |
) |
|
|
(271 |
) |
|
|
(98 |
) |
|
|
(244 |
) |
|
|
(57 |
) |
|
Reserve for losses and loss expenses at end of year
|
|
$ |
4,441 |
|
|
$ |
1,840 |
|
|
$ |
2,559 |
|
|
$ |
1,060 |
|
|
$ |
1,235 |
|
|
$ |
386 |
|
|
Environmental:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses at beginning of year
|
|
$ |
974 |
|
|
$ |
451 |
|
|
$ |
789 |
|
|
$ |
283 |
|
|
$ |
832 |
|
|
$ |
296 |
|
|
Losses and loss expenses incurred*
|
|
|
47 |
(b) |
|
|
27 |
(b) |
|
|
314 |
(b) |
|
|
234 |
(b) |
|
|
133 |
|
|
|
52 |
|
|
Losses and loss expenses paid*
|
|
|
(95 |
) |
|
|
(68 |
) |
|
|
(129 |
) |
|
|
(66 |
) |
|
|
(176 |
) |
|
|
(65 |
) |
|
Reserve for losses and loss expenses at end of year
|
|
$ |
926 |
|
|
$ |
410 |
|
|
$ |
974 |
|
|
$ |
451 |
|
|
$ |
789 |
|
|
$ |
283 |
|
|
Combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses at beginning of year
|
|
$ |
3,533 |
|
|
$ |
1,511 |
|
|
$ |
2,024 |
|
|
$ |
669 |
|
|
$ |
2,136 |
|
|
$ |
696 |
|
|
Losses and loss expenses incurred*
|
|
|
2,254 |
(c) |
|
|
930 |
(c) |
|
|
1,909 |
(c) |
|
|
1,006 |
(c) |
|
|
308 |
|
|
|
95 |
|
|
Losses and loss expenses paid*
|
|
|
(420 |
) |
|
|
(191 |
) |
|
|
(400 |
) |
|
|
(164 |
) |
|
|
(420 |
) |
|
|
(122 |
) |
|
Reserve for losses and loss expenses at end of year
|
|
$ |
5,367 |
|
|
$ |
2,250 |
|
|
$ |
3,533 |
|
|
$ |
1,511 |
|
|
$ |
2,024 |
|
|
$ |
669 |
|
|
|
|
* |
All amounts pertain to policies underwritten in prior
years. |
|
(a) |
Includes increases to gross losses and loss expense reserves
of $2.0 billion and $1.2 billion in the fourth quarter of
2005 and 2004, respectively, and increases to net losses and
loss expense reserves of $843 million and $650 million
for the fourth quarter of 2005 and 2004, respectively. |
|
(b) |
Includes increases to gross losses and loss expense reserves
of $56 million and $250 million in the fourth quarter
of 2005 and 2004, respectively, and increases to net losses and
loss expense reserves of $30 million and $200 million for
the fourth quarter of 2005 and 2004, respectively. |
|
(c) |
Includes increases to gross losses and loss expense reserves
of $2.0 billion and $1.5 billion in the fourth quarter
of 2005 and 2004, respectively, and increases to net losses and
loss expense reserves of $873 million and $850 million
for the fourth quarter of 2005 and 2004, respectively. |
38
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
The gross and net IBNR included in the reserve for losses and
loss expenses, relating to asbestos and environmental claims
separately and combined, at December 31, 2005, 2004 and
2003 were estimated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
(in millions) |
|
Gross |
|
Net |
|
Gross |
|
Net |
|
Gross |
|
Net |
|
Asbestos
|
|
$ |
3,401 |
|
|
$ |
1,465 |
|
|
$ |
2,033 |
|
|
$ |
876 |
|
|
$ |
695 |
|
|
$ |
200 |
|
Environmental
|
|
|
586 |
|
|
|
266 |
|
|
|
606 |
|
|
|
284 |
|
|
|
347 |
|
|
|
80 |
|
|
Combined
|
|
$ |
3,987 |
|
|
$ |
1,731 |
|
|
$ |
2,639 |
|
|
$ |
1,160 |
|
|
$ |
1,042 |
|
|
$ |
280 |
|
|
A summary of asbestos and environmental claims count activity
for the years ended December 31, 2005, 2004 and 2003 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
Asbestos |
|
Environmental |
|
Combined |
|
Asbestos |
|
Environmental |
|
Combined |
|
Asbestos |
|
Environmental |
|
Combined |
|
Claims at beginning of year
|
|
|
7,575 |
|
|
|
8,216 |
|
|
|
15,791 |
|
|
|
7,474 |
|
|
|
8,852 |
|
|
|
16,326 |
|
|
|
7,085 |
|
|
|
8,995 |
|
|
|
16,080 |
|
Claims during year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opened
|
|
|
854 |
|
|
|
5,253 |
* |
|
|
6,107 |
|
|
|
909 |
|
|
|
2,592 |
|
|
|
3,501 |
|
|
|
669 |
|
|
|
2,106 |
|
|
|
2,775 |
|
|
Settled
|
|
|
(67 |
) |
|
|
(219 |
) |
|
|
(286 |
) |
|
|
(100 |
) |
|
|
(279 |
) |
|
|
(379 |
) |
|
|
(86 |
) |
|
|
(244 |
) |
|
|
(330 |
) |
|
Dismissed or otherwise resolved
|
|
|
(1,069 |
) |
|
|
(3,377 |
) |
|
|
(4,446 |
) |
|
|
(708 |
) |
|
|
(2,949 |
) |
|
|
(3,657 |
) |
|
|
(194 |
) |
|
|
(2,005 |
) |
|
|
(2,199 |
) |
|
Claims at end of year
|
|
|
7,293 |
|
|
|
9,873 |
|
|
|
17,166 |
|
|
|
7,575 |
|
|
|
8,216 |
|
|
|
15,791 |
|
|
|
7,474 |
|
|
|
8,852 |
|
|
|
16,326 |
|
|
|
|
* |
The opened claims count increased substantially during 2005
because a court ruling led AIG to report separate opened claims
for previously pending cases relating to alleged MTBE exposures
that AIG previously had counted in the aggregate as only a
single claim on the assumption that the cases would be
consolidated into a single federal court proceeding. |
The table below presents AIGs survival ratios for asbestos
and environmental claims for year end 2005, 2004 and 2003. The
survival ratio is derived by dividing the year end carried loss
reserve by the average payments for the three most recent
calendar years for these claims. Therefore the survival ratio is
a simplistic measure estimating the number of years it would be
before the current ending loss reserves for these claims would
be paid off using recent year average payments. Many factors,
such as aggressive settlement procedures, mix of business and
level of coverage provided, have a significant effect on the
amount of asbestos and environmental reserves and payments and
the resultant survival ratio. Thus, caution should be exercised
in attempting to determine reserve adequacy for these claims
based simply on this survival ratio.
AIGs survival ratios for asbestos and environmental
claims, separately and combined were based upon a three-year
average payment. These ratios for the years ended
December 31, 2005, 2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Net |
|
2005
|
|
|
|
|
|
|
|
|
Survival ratios:
|
|
|
|
|
|
|
|
|
|
Asbestos
|
|
|
15.9 |
|
|
|
19.8 |
|
|
Environmental
|
|
|
6.9 |
|
|
|
6.2 |
|
|
Combined
|
|
|
13.0 |
|
|
|
14.2 |
|
|
2004
|
|
|
|
|
|
|
|
|
Survival ratios:
|
|
|
|
|
|
|
|
|
|
Asbestos
|
|
|
10.7 |
|
|
|
13.5 |
|
|
Environmental
|
|
|
6.5 |
|
|
|
6.8 |
|
|
Combined
|
|
|
9.1 |
|
|
|
10.5 |
|
|
2003
|
|
|
|
|
|
|
|
|
Survival ratios:
|
|
|
|
|
|
|
|
|
|
Asbestos
|
|
|
4.7 |
|
|
|
4.5 |
|
|
Environmental
|
|
|
4.7 |
|
|
|
4.1 |
|
|
Combined
|
|
|
4.7 |
|
|
|
4.3 |
|
|
Life Insurance & Retirement Services Operations
AIGs Life Insurance & Retirement Services
subsidiaries offer a wide range of insurance and retirement
savings products both domestically and abroad.
Insurance-oriented products consist of individual and group
life, payout annuities, endowment and accident and health
policies. Retirement savings products consist generally of fixed
and variable annuities. See also Note 2 of Notes to
Consolidated Financial Statements.
Domestically, AIGs Life Insurance & Retirement
Services operations offer a broad range of protection products,
including life insurance, group life and health products,
including disability income products and payout annuities, which
include single premium immediate annuities, structured
settlements and terminal funding annuities. Home service
operations include an array of life insurance, accident and
health and annuity products sold through career agents. In
addition, home service includes a small block of run-off
property and casualty coverage. Retirement services include
group retirement products, individual fixed and variable
annuities sold through banks, broker dealers and exclusive sales
representatives, and annuity runoff operations which include
previously-acquired closed blocks and other fixed
and variable annuities largely sold through distribution
relationships that have been discontinued.
Overseas, AIGs Life Insurance & Retirement
Services operations include insurance and investment-oriented
products such as whole and term life, investment linked,
universal life and endowments, personal accident and health
products, group products including pension, life and health, and
fixed and variable annuities.
AIG -
Form 10-K/A
39
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
Life Insurance & Retirement Services operations
presented on a major product basis for 2005, 2004 and 2003 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 | |
|
2004(a) |
|
2003(a) |
|
GAAP Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$ |
2,108 |
|
|
$ |
1,888 |
|
|
$ |
1,751 |
|
|
Home service
|
|
|
801 |
|
|
|
812 |
|
|
|
834 |
|
|
Group life/health
|
|
|
1,012 |
|
|
|
1,128 |
|
|
|
1,046 |
|
|
Payout
annuities(b)
|
|
|
1,473 |
|
|
|
1,484 |
|
|
|
1,272 |
|
|
|
Total
|
|
|
5,394 |
|
|
|
5,312 |
|
|
|
4,903 |
|
|
Domestic Retirement Services: |
|
|
|
|
|
|
|
|
|
Group retirement products
|
|
|
351 |
|
|
|
313 |
|
|
|
250 |
|
|
Individual fixed annuities
|
|
|
100 |
|
|
|
59 |
|
|
|
53 |
|
|
Individual variable annuities
|
|
|
467 |
|
|
|
407 |
|
|
|
331 |
|
|
Individual fixed annuities
runoff(c)
|
|
|
72 |
|
|
|
80 |
|
|
|
86 |
|
|
|
Total
|
|
|
990 |
|
|
|
859 |
|
|
|
720 |
|
|
Total Domestic
|
|
|
6,384 |
|
|
|
6,171 |
|
|
|
5,623 |
|
|
Foreign Life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
|
15,631 |
|
|
|
14,938 |
|
|
|
13,204 |
|
|
Personal accident & health
|
|
|
5,002 |
|
|
|
4,301 |
|
|
|
3,126 |
|
|
Group
products(d)
|
|
|
1,925 |
|
|
|
2,215 |
|
|
|
1,267 |
|
|
|
Total
|
|
|
22,558 |
|
|
|
21,454 |
|
|
|
17,597 |
|
|
Foreign Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual fixed annuities
|
|
|
361 |
|
|
|
395 |
|
|
|
255 |
|
|
Individual variable annuities
|
|
|
97 |
|
|
|
68 |
|
|
|
21 |
|
|
|
Total
|
|
|
458 |
|
|
|
463 |
|
|
|
276 |
|
|
Total Foreign
|
|
|
23,016 |
|
|
|
21,917 |
|
|
|
17,873 |
|
|
Total GAAP Premiums
|
|
$ |
29,400 |
|
|
$ |
28,088 |
|
|
$ |
23,496 |
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$ |
1,411 |
|
|
$ |
1,287 |
|
|
$ |
1,179 |
|
|
Home service
|
|
|
605 |
|
|
|
608 |
|
|
|
616 |
|
|
Group life/health
|
|
|
142 |
|
|
|
123 |
|
|
|
121 |
|
|
Payout annuities
|
|
|
912 |
|
|
|
801 |
|
|
|
699 |
|
|
|
Total
|
|
|
3,070 |
|
|
|
2,819 |
|
|
|
2,615 |
|
|
Domestic Retirement Services: |
|
|
|
|
|
|
|
|
|
Group retirement products
|
|
|
2,233 |
|
|
|
2,201 |
|
|
|
2,055 |
|
|
Individual fixed annuities
|
|
|
3,393 |
|
|
|
3,100 |
|
|
|
2,567 |
|
|
Individual variable annuities
|
|
|
217 |
|
|
|
239 |
|
|
|
239 |
|
|
Individual fixed annuities
runoff(c)
|
|
|
1,046 |
|
|
|
1,076 |
|
|
|
1,266 |
|
|
|
Total
|
|
|
6,889 |
|
|
|
6,616 |
|
|
|
6,127 |
|
|
Total Domestic
|
|
|
9,959 |
|
|
|
9,435 |
|
|
|
8,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 | |
|
2004(a) |
|
2003(a) |
|
Foreign Life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
|
4,844 |
|
|
|
4,065 |
|
|
|
3,356 |
|
|
Personal accident & health
|
|
|
255 |
|
|
|
179 |
|
|
|
161 |
|
|
Group products
|
|
|
613 |
|
|
|
431 |
|
|
|
326 |
|
|
Intercompany adjustments
|
|
|
(36 |
) |
|
|
(18 |
) |
|
|
(15 |
) |
|
|
Total
|
|
|
5,676 |
|
|
|
4,657 |
|
|
|
3,828 |
|
|
Foreign Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual fixed annuities
|
|
|
1,728 |
|
|
|
1,034 |
|
|
|
368 |
|
|
Individual variable annuities
|
|
|
771 |
|
|
|
143 |
|
|
|
4 |
|
|
|
Total
|
|
|
2,499 |
|
|
|
1,177 |
|
|
|
372 |
|
|
|
Total Foreign
|
|
|
8,175 |
|
|
|
5,834 |
|
|
|
4,200 |
|
|
Total net investment income
|
|
$ |
18,134 |
|
|
$ |
15,269 |
|
|
$ |
12,942 |
|
|
Realized capital gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic realized capital gains
(losses)(e)
|
|
$ |
(302 |
) |
|
$ |
(329 |
) |
|
$ |
(246 |
) |
|
Foreign realized capital gains
(losses)(f)
|
|
|
(260 |
) |
|
|
147 |
|
|
|
330 |
|
Pricing net investment
gains(g)
|
|
|
344 |
|
|
|
225 |
|
|
|
156 |
|
|
Total Foreign
|
|
|
84 |
|
|
|
372 |
|
|
|
486 |
|
|
Total realized capital gains (losses)
|
|
$ |
(218 |
) |
|
$ |
43 |
|
|
$ |
240 |
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic(h)
|
|
|
3,599 |
|
|
|
3,075 |
|
|
|
2,765 |
|
|
Foreign
|
|
|
5,245 |
|
|
|
4,848 |
|
|
|
4,042 |
|
|
Total operating income
|
|
$ |
8,844 |
|
|
$ |
7,923 |
|
|
$ |
6,807 |
|
|
Life insurance inforce:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
825,151 |
(i) |
|
$ |
772,251 |
|
|
$ |
645,606 |
|
|
Foreign
|
|
|
1,027,682 |
|
|
|
1,085,843 |
|
|
|
937,425 |
|
|
Total
|
|
$ |
1,852,833 |
|
|
$ |
1,858,094 |
|
|
$ |
1,583,031 |
|
|
|
|
(a) |
Adjusted to conform to 2005 presentation. |
|
(b) |
Includes structured settlements, single premium immediate
annuities and terminal funding annuities. |
|
(c) |
Primarily represents runoff annuity business sold through
discontinued distribution relationships. |
|
(d) |
Revenues in 2004 includes approximately $640 million of
single premium from a reinsurance transaction involving terminal
funding business, which is offset by a similar increase of
benefit reserves. |
|
(e) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133 and the
application of FAS 52. For 2005, 2004, and 2003,
respectively, the amounts included are $63 million,
$(6) million, and $19 million. |
|
(f) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133 and the
application of FAS 52. For 2005, 2004, and 2003,
respectively, the amounts included are $(500) million,
$(134) million, and $59 million. |
|
(g) |
For purposes of this presentation, pricing net investment
gains are segregated as a component of total realized gains
(losses). They represent certain amounts of realized capital
gains where gains are an inherent element in pricing certain
life products in some foreign countries. |
40
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
|
|
(h) |
Operating income includes the effect on deferred policy
acquisition cost amortization for FAS 97 products related
to realized capital gains (losses) and has reduced amortization
costs totaling $59 million, $44 million and
$54 million for 2005, 2004 and 2003, respectively. |
|
(i) |
Domestic in-force for 2005 includes the effect of the
non-renewal of a single large group life case of
$36 billion. |
AIGs Life Insurance & Retirement Services subsidiaries
report their operations through the following operating units:
Domestic Life AIG American General, including
American General Life Insurance Company (AG Life), USLIFE
and AGLA; Domestic Retirement Services VALIC, AIG
Annuity and AIG SunAmerica; Foreign Life ALICO,
AIRCO, AIG Edison Life, AIG Star Life, AIA, Nan Shan and
Philamlife.
Life Insurance & Retirement Services Results
The increase in operating income in 2005 compared to 2004 was
caused by growth in both domestic and overseas operations.
Similarly, the increase in operating income in 2004 compared to
2003 was due to strong growth, particularly overseas.
Life Insurance & Retirement Services GAAP premiums grew
in 2005 when compared with 2004 as well as 2004 when compared
with 2003. AIGs Domestic Life operations had continued
growth in term and universal life sales with good performance
from the independent distribution channels. GAAP premiums for
life insurance grew 12 percent in 2005 reflecting
consistently strong sales from the independent distribution
channels. Retail periodic life sales increased 18 percent
in 2005, representing a compound rate of growth of
16 percent since 2001, compared to modest growth in the
industry. Profit margins have been maintained through strict
underwriting discipline and low cost. In addition, increases in
product prices and retention have offset price increases by
reinsurers. Payout annuities declined slightly due to the low
interest rate environment and the competitive market conditions
for structured settlement and single premium individual annuity
business. The domestic group business is below AIGs growth
standards, largely because several accounts where pricing was
unacceptable were not renewed and loss experience was higher
than anticipated. Restructuring efforts in this business are
focused on new product introductions, cross selling and other
growth strategies. AGLA, the home service business, is
diversifying product offerings, enhancing the capabilities and
quality of the sales force, and broadening the markets served
beyond those historically serviced in an effort to accelerate
growth, although it is expected to remain a slow growth business.
Domestic Retirement Services businesses faced a challenging
environment in 2005 and 2004, as deposits declined approximately
17 percent for 2005 compared to 2004 and 1 percent for
2004 compared to 2003. The decrease in AIGs individual
variable annuity product sales in 2005 was largely attributable
to significant variable annuity sales declines at several of
AIGs largest distribution firms due to lackluster equity
markets, more intense industry competition with regard to living
benefit product features and heightened compliance procedures
over selling practices. AIGs introduction of more
competitive guaranteed minimum withdrawal features was delayed
until late in the fourth quarter due to filing delays associated
with the Restatements. During 2005, the interest yield curve
flattened and, as a result, competing bank products such as
certificates of deposit and other money market instruments with
shorter durations than AIGs individual fixed annuity
products became more attractive. The following table reflects
deposit amounts for Domestic Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Retirement Services Deposits |
|
|
|
|
|
|
|
December 31, |
(in millions) |
|
2005 | |
|
2004 | |
|
2003 | |
|
Group retirement products*
|
|
$ |
6,436 |
|
|
$ |
6,502 |
|
|
$ |
5,918 |
|
Individual fixed annuities
|
|
|
7,337 |
|
|
|
9,947 |
|
|
|
11,384 |
|
Individual variable annuities
|
|
|
3,319 |
|
|
|
4,126 |
|
|
|
3,412 |
|
Individual fixed annuities - runoff
|
|
|
200 |
|
|
|
253 |
|
|
|
350 |
|
|
Total
|
|
$ |
17,292 |
|
|
$ |
20,828 |
|
|
$ |
21,064 |
|
|
In 2005, AIG experienced a significant increase in surrender
rates in all product lines. Group retirement products
experienced higher surrenders as the average participant age
increased and a greater percentage of these participants are
near retirement age and/or termination of service from their
employers. Individual fixed annuities surrender rates are higher
in 2005 primarily due to the shape of the interest yield curve
and the general aging of the
in-force reserves.
However, less than 20 percent of the individual fixed
annuity reserves are available to surrender without charge. The
increase in individual variable annuity surrender rates
primarily reflects the higher shock-lapse that occurred
following expiration of the surrender charge period on certain
3-year and
7-year contracts
(including a large closed block of acquired business).
Reflecting a widespread industry phenomenon, this lapse rate,
much of which was anticipated when the products were issued, has
recently been affected by investor demand to exchange existing
policies for new-generation contracts with living benefits or
lower fees. In addition, partial withdrawals on certain variable
annuity products have increased as AIG has introduced features
designed to generate a stream of income to the participants. The
following chart shows the amount of reserves by surrender charge
category as of December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
Domestic Retirement Services |
|
|
|
|
|
|
Reserves Subject to Surrender Charges |
|
|
|
|
|
|
|
|
|
Group |
|
Individual | |
|
Individual | |
|
|
Retirement |
|
Fixed | |
|
Variable | |
(in millions) |
|
Products* |
|
Annuities | |
|
Annuities | |
|
Zero or no surrender charge
|
|
$39,831 |
|
$ |
9,324 |
|
|
$ |
9,765 |
|
Greater than 0% - 4%
|
|
11,248 |
|
|
10,815 |
|
|
|
8,386 |
|
Greater than 4%
|
|
2,648 |
|
|
31,183 |
|
|
|
10,035 |
|
Non-Surrenderable
|
|
892 |
|
|
3,148 |
|
|
|
81 |
|
|
Total
|
|
$54,619 |
|
$ |
54,470 |
|
|
$ |
28,267 |
|
|
A continued increase in the level of surrenders in any of these
businesses could increase the amortization of deferred
acquisition costs in future years and will negatively affect fee
income earned on assets under management. The combination of
reduced sales and increased surrenders and withdrawals resulted
in significantly lower net flows for total domestic Retirement
Services than in the prior year. AIG expects that
AIG -
Form 10-K/A
41
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
net flows will remain lower than in prior years as long as an
environment of lackluster equity market performance persists and
the yield curve remains flat. The following table reflects the
net flows for Domestic Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Retirement Services Net Flows(a) |
|
|
|
December 31, |
(in millions) |
|
2005 | |
|
2004 | |
|
2003 | |
|
Group retirement
products(b)
|
|
$ |
628 |
|
|
$ |
1,706 |
|
|
$ |
2,756 |
|
Individual fixed annuities
|
|
|
1,759 |
|
|
|
6,169 |
|
|
|
8,679 |
|
Individual variable annuities
|
|
|
(336 |
) |
|
|
1,145 |
|
|
|
927 |
|
Individual fixed annuities - runoff
|
|
|
(2,508 |
) |
|
|
(2,084 |
) |
|
|
(1,967 |
) |
|
Total
|
|
$ |
(457 |
) |
|
$ |
6,936 |
|
|
$ |
10,395 |
|
|
|
|
(a) |
Net flows are defined as deposits received, less benefits,
surrenders, withdrawals and death benefits. |
(b) |
Includes mutual funds. |
The majority of the growth in Life Insurance &
Retirement Services GAAP premiums in Foreign Life operations was
attributable to the life insurance and personal
accident & health lines of business. Globally,
AIGs deep and diverse distribution, which includes
bancassurance, worksite marketing, direct marketing, and strong
agency organizations, provides a powerful platform for growth.
This growth was most significant in Japan, where AIG has
benefited from a flight to quality and development of multiple
distribution channels. In Southeast Asia, AIG maintains
significant market share by offering an attractive and diverse
product line, distributed by its strong agency force. There has
been a continuing trend in Southeast Asia, as the insurance
market continues to develop, for clients to purchase
investment-oriented products at the expense of traditional term
or whole life products. For GAAP reporting purposes, only
revenues from policy charges for insurance, administration, and
surrender charges are reported as GAAP premiums. This product
mix shift contributed to the single digit growth rate in Foreign
Life Insurance & Retirement Services GAAP premiums.
Also in Japan, AIG Edison Life has improved the quality and
productivity of its sales force resulting in higher sales and
improved new business persistency. AIG Star Life is growing
first year premiums as a result of new product introductions and
an expanded agency force, and is benefiting from growth in the
bank annuity market.
However, in March of 2006, Japanese tax authorities are expected
to announce a reduction in the amount of premium policyholders
may deduct from their Japanese tax returns for certain accident
and health products. These products are generally sold by
independent agents to corporate clients and thus represent a
specific niche market segment and not the mainstream accident
and health products sold by AIG in Japan. A reduction in the
amount of tax deduction related to these products will make them
less attractive to the market and will reduce the level of
future sales. In addition, a portion of existing policies may be
canceled, and depending on the duration of those policies and
other factors, could result in a write-off of deferred
acquisition costs. At the current time, management does not
believe that such losses, should they occur, would be material
to AIGs consolidated financial condition, results of
operations or liquidity.
The Foreign Retirement Services business continues its strong
growth based upon its success in Japan and Korea by expanding
its extensive distribution network and leveraging AIGs
product expertise. Somewhat offsetting this growth were the
negative effects on customer demand for certain multi-currency
fixed annuity products in Japan stemming from currency exchange
rate fluctuations. AIG is introducing annuity products in new
markets. In January 2005, AIG Star Life entered into an
agreement with the Bank of Tokyo Mitsubishi, one of Japans
largest banks, to market a multi-currency fixed annuity.
Foreign Life Insurance & Retirement Services operations
produced 78 percent, 78 percent and 76 percent of
Life Insurance & Retirement Services GAAP premiums in
2005, 2004 and 2003, respectively.
AIG transacts business in most major foreign currencies. The
following table summarizes the effect of changes in foreign
currency exchange rates on the growth of Life
Insurance & Retirement Services GAAP premiums.
|
|
|
|
|
|
|
|
2005 |
|
Growth in original currency
|
|
|
2.7 |
% |
Foreign exchange effect
|
|
|
2.0 |
|
Growth as reported in U.S. dollars
|
|
|
4.7 |
% |
|
The growth in net investment income in 2005 and 2004 parallels
the growth in general account reserves and surplus for both
Foreign and Domestic Life Insurance & Retirement
Services companies. Also, net investment income was positively
affected by the compounding of previously earned and reinvested
net investment income along with the addition of new cash flow
from operations available for investment. The global flattening
of the yield curve put additional pressure on yields and
spreads, which was partially offset with income generated from
other investment sources, including income from partnerships.
Partnership income was $273 million and $192 million
for 2005 and 2004, respectively. As of first quarter 2004,
foreign separate accounts were transferred to the general
account per Statement of
Position 03-1,
resulting in increased net investment income volatility. The
positive effect of Statement of
Position 03-1 on
Foreign Life Insurance & Retirement Services net
investment income was $1.34 billion and $271 million
for 2005 and 2004, respectively. These amounts do not affect
operating income as they are offset in incurred policy benefits.
AIGs domestic subsidiaries invest in certain limited
liability companies that invest in synthetic fuel production
facilities as a means of generating income tax credits. Net
investment income includes operating losses of approximately
$143 million, $121 million and $108 million,
respectively, for 2005, 2004 and 2003 and income taxes includes
tax credits and benefits of approximately $203 million,
$160 million and $155 million, respectively, for 2005,
2004 and 2003 from these investments. See also Note 12(k)
of Notes to Consolidated Financial Statements Commitments
and Contingent Liabilities.
Life Insurance & Retirement Services operating income
grew by 12 percent in 2005. Operating income for the AIG
42
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Domestic Life insurance line of business was up 8 percent
and in line with the growth in GAAP premiums for the current
year, due in part to growth in the business base and improved
mortality results, offset by higher losses recorded in 2005 from
limited partnership investments in synthetic fuel production
facilities. Operating income for the home service line of
business declined as a result of the continued decline in
premiums in force and higher insurance and acquisition expenses,
combined with an increase in property casualty losses related to
hurricanes. The group life/health business and operating income
were affected by non-renewal of cases where acceptable margins
could not be achieved. In addition, 2005 results were affected
by reserve strengthening related to disability income products
totaling $12 million compared to reserve strengthening of
$178 million for Superior National and $68 million for
all other items in 2004. Operating income for the payout
annuities line of business increased 22 percent in line
with the growth in policy benefit reserves. The group retirement
products business recorded a modest increase in operating income
due primarily to higher variable annuity fee income and growth
in average reserves. Individual fixed annuity results are higher
than last year due primarily to 13 percent growth in
average reserves, higher surrender charges and reductions in
acquisition cost amortization expense resulting from increased
capital losses realized on bonds. Individual variable annuity
earnings are lower in 2005 when compared to 2004 principally due
to favorable deferred acquisition cost amortization variances
attributable to changes in assumptions and realized capital loss
activity in 2004.
Foreign Life Insurance & Retirement Services operating
income of $5.25 billion for 2005 included $84 million
of realized capital gains, and for 2004, operating income of
$4.85 billion included $372 million of realized
capital gains. Underwriting and investment results before the
effects of realized capital gains (losses) increased for all
lines of business. On this basis, the life insurance line of
business benefited in part from lower amortization of
acquisition costs for FAS 97 products, reflective of the
increasing investment yields for those portfolios, particularly
in Japan. In Southeast Asia, operating income growth
attributable to life insurance and deposit-based businesses was
partially offset by higher incurred policy benefit costs for
contributions to the participating policyholder fund in
Singapore, totaling $137 million, related to the settlement
of a long disputed local tax issue. Growth in the personal
accident & health line of business is generally in line
with the growth in premiums and reflects stable profit margins.
The group products business grew across all segments and
maintained profit margins. The largest contributor to the growth
in group products is the pension profit center which enjoyed
higher fee income emanating from higher assets under management
in Brazil and Southeast Asia. Growth in individual fixed
annuities, emanating primarily from Japan, is generally in line
with the growth in reserves and net spread rates were
maintained. The individual variable annuity line of business
also grew in line with the growth in reserves.
The contribution of Life Insurance & Retirement
Services operating income to AIGs consolidated income
before income taxes, minority interest and cumulative effect of
accounting changes amounted to 58 percent in 2005, compared
to 53 percent in 2004 and 57 percent in 2003.
Underwriting and Investment Risk
The risks associated with the life and accident & health
products are underwriting risk and investment risk. The risk
associated with the financial and investment contract products
is primarily investment risk.
Underwriting risk represents the exposure to loss resulting from
the actual policy experience adversely emerging in comparison to
the assumptions made in the product pricing associated with
mortality, morbidity, termination and expenses. The emergence of
significant adverse experience would require an adjustment to
DAC and benefit reserves that could have a substantial effect on
AIGs results of operations.
Natural disasters such as hurricanes, earthquakes and other
catastrophes have the potential to adversely affect AIGs
operating results. Other risks, such as an outbreak of a
pandemic disease, such as the Avian Influenza A Virus
(H5N1), could adversely affect AIGs business and operating
results to an extent that may be only minimally offset by
reinsurance programs.
While to date, outbreaks of the Avian Flu continue to occur
among poultry or wild birds in a number of countries in Asia,
parts of Europe, and recently in Africa, transmission to humans
has been rare. If the virus mutates to a form that can be
transmitted from human to human, it has the potential to spread
rapidly worldwide. If such an outbreak were to take place, early
quarantine and vaccination could be critical to containment.
Both the contagion and mortality rate of any mutated H5N1 virus
that can be transmitted from human to human are highly
speculative. AIG continues to monitor the developing facts. A
significant global outbreak could have a material adverse effect
on Life Insurance & Retirement Services operating
results and liquidity from increased mortality and morbidity
rates.
AIGs Foreign Life Insurance & Retirement Services
companies generally limit their maximum underwriting exposure on
life insurance of a single life to approximately $1.7 million of
coverage. AIGs Domestic Life Insurance &
Retirement Services companies limit their maximum underwriting
exposure on life insurance of a single life to $10 million
of coverage in certain circumstances by using yearly renewable
term reinsurance. See the discussion under Liquidity
herein and Note 6 of Notes to Consolidated Financial Statements.
AIRCO acts primarily as an internal reinsurance company for
AIGs foreign life operations. This facilitates insurance
risk management (retention, volatility, concentrations) and
capital planning locally (branch and subsidiary). It also allows
AIG to pool its insurance risks and purchase reinsurance more
efficiently at a consolidated level, manage global counterparty
risk and relationships and manage global life catastrophe risks.
AIGs domestic Life Insurance & Retirement
Services operations utilize internal and third-party reinsurance
relationships to manage insurance risks and to facilitate
capital management strategies. Pools of highly-rated third-party
rein-
AIG -
Form 10-K/A
43
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
surers are utilized to manage net amounts at risk in excess of
retention limits. AIGs domestic life insurance companies
also cede excess, non-economic reserves carried on a
statutory-basis only on certain term and universal life
insurance policies and certain fixed annuities to AIG Life of
Bermuda Ltd., a wholly owned Bermuda reinsurer.
AIG generally obtains letters of credit in order to obtain
statutory recognition of these intercompany reinsurance
transactions. For this purpose, AIG entered into a
$2.5 billion syndicated letter of credit facility in
December 2004. Letters of credit totaling $2.17 billion
were outstanding as of December 31, 2004, and letters of
credit for all $2.5 billion were outstanding as of
December 31, 2005, all of which relate to life intercompany
reinsurance transactions. The letter of credit facility has a
ten-year term, but the facility can be reduced or terminated by
the lenders beginning after seven years.
In November 2005, AIG entered into a revolving credit
facility for an aggregate amount of $3 billion. The
facility can be drawn in the form of letters of credit with
terms of up to ten years. As of December 31, 2005 and as of
the date hereof, $1.86 billion principal amount of letters
of credit are outstanding under this facility, of which
approximately $494 million relates to life intercompany
reinsurance transactions. AIG also obtained approximately
$212 million letters of credit on a bilateral basis.
The investment risk represents the exposure to loss resulting
from the cash flows from the invested assets, primarily
long-term fixed rate investments, being less than the cash flows
required to meet the obligations of the expected policy and
contract liabilities and the necessary return on investments.
See also the discussion under Liquidity herein.
To minimize its exposure to investment risk, AIG tests the cash
flows from invested assets and policy and contract liabilities
using various interest rate scenarios to evaluate investment
risk and to confirm that assets are sufficient to pay these
liabilities.
AIG actively manages the asset-liability relationship in its
foreign operations, as it has been doing throughout AIGs
history, even though certain territories lack qualified
long-term investments or certain local regulatory authorities
may impose investment restrictions. For example, in several
Asian countries, the duration of the investments is shorter than
the effective maturity of the related policy liabilities.
Therefore, there is a risk that the reinvestment of the proceeds
at the maturity of the initial investments may be at a yield
below that of the interest required for the accretion of the
policy liabilities. Additionally, there exists a future
investment risk associated with certain policies currently in
force which will have premium receipts in the future. That is,
the investment of these future premium receipts may be at a
yield below that required to meet future policy liabilities.
In 2005, new money investment yields increased in some markets
and continued to decrease in others, leading to more frequent
adjustments in new business premium rates, credited rates, and
discontinuance of some products. In regard to the inforce
business, to maintain an adequate yield to match the interest
necessary to support future policy liabilities, management focus
is required in both the investment and product management
process. Business strategies continue to evolve to maintain
profitability of the overall business. As such, in some
countries, sales growth may slow for some product lines and
accelerate for others.
The investment of insurance cash flows and reinvestment of the
proceeds of matured securities and coupons requires active
management of investment yields while maintaining satisfactory
investment quality and liquidity.
AIG may use alternative investments in certain foreign
jurisdictions where interest rates remain low and there are
limited long-dated bond markets, including equities, real estate
and foreign currency denominated fixed income instruments to
extend the duration or increase the yield of the investment
portfolio to more closely match the requirements of the
policyholder liabilities and DAC recoverability. This strategy
has been effectively used in Japan and more recently by Nan Shan
in Taiwan. Foreign assets comprised approximately
33 percent of Nan Shans invested assets at
December 31, 2005, slightly below the maximum allowable
percentage under current regulation. In response to continued
declining interest rates and the volatile exchange rate of the
NT dollar, Nan Shan is emphasizing new products with lower
implied guarantees, including participating endowments and
variable universal life. Although the risks of a continued low
interest rate environment coupled with a volatile NT dollar
could increase net liabilities and require additional capital to
maintain adequate local solvency margins, Nan Shan currently
believes it has adequate resources to meet all future policy
obligations.
AIG actively manages the asset-liability relationship in its
domestic operations. This relationship is more easily managed
through the ample supply of appropriate long-term investments.
AIG uses asset-liability matching as a management tool worldwide
to determine the composition of the invested assets and
appropriate marketing strategies. As a part of these strategies,
AIG may determine that it is economically advantageous to be
temporarily in an unmatched position due to anticipated interest
rate or other economic changes. In addition, the absence of
long-dated fixed income instruments in certain markets may
preclude a matched asset-liability position in those markets.
A number of guaranteed benefits, such as living benefits or
guaranteed minimum death benefits, are offered on certain
variable life and variable annuity products. AIG manages its
exposure resulting from these long-term guarantees through
reinsurance or capital market hedging instruments. See
Note 21 of Notes to Consolidated Financial Statements for a
discussion of new accounting guidance for these benefits.
DAC for Life Insurance & Retirement Services products
arises from the deferral of those costs that vary with, and are
directly related to, the acquisition of new or renewal business.
Policy acquisition costs for life insurance products are
generally deferred and amortized over the premium paying period
of the policy. Policy acquisition costs which relate to
universal life and investment-type products, including variable
and fixed annuities (investment-oriented products) are deferred
and amortized, with interest, as appropriate, in relation to the
historical and future incidence of estimated gross profits to be
realized over the estimated lives of the contracts. Amortization
expense includes
44
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
the effects of current period realized capital gains and losses.
With respect to universal life and investment-oriented products,
AIGs policy, as appropriate, has been to adjust
amortization assumptions for DAC when estimates of current or
future gross profits to be realized from these contracts are
revised. With respect to variable annuities sold domestically
(representing the vast majority of AIGs variable annuity
business), the assumption for the long-term annual net growth
rate of the equity markets used in the determination of DAC
amortization is approximately ten percent. A methodology
referred to as reversion to the mean is used to
maintain this long-term net growth rate assumption, while giving
consideration to short-term variations in equity markets.
Estimated gross profits include investment income and gains and
losses on investments less interest required as well as other
charges in the contract less actual mortality and expenses.
Current experience and changes in the expected future gross
profits are analyzed to determine the effect on the amortization
of DAC. The estimation of projected gross profits requires
significant management judgment. The elements with respect to
the current and projected gross profits are reviewed and
analyzed quarterly and are adjusted accordingly.
AIGs variable annuity earnings will be affected by changes
in market returns because separate account revenues, primarily
composed of mortality and expense charges and asset management
fees, are a function of asset values.
DAC for both insurance-oriented and investment-oriented products
as well as retirement services products are reviewed for
recoverability, which involve estimating the future
profitability of current business. This review also involves
significant management judgment. If the actual emergence of
future profitability were to be substantially different than
that estimated, AIGs results of operations could be
significantly affected in future periods. See also Note 4
of Notes to Consolidated Financial Statements.
Insurance and Asset Management Invested Assets
AIGs investment strategy is to invest primarily in high
quality securities while maintaining diversification to avoid
significant exposure to issuer, industry and/or country
concentrations. With respect to Domestic General Insurance,
AIGs strategy is to invest in longer duration fixed
maturity investments to maximize the yields at the date of
purchase. With respect to Life Insurance & Retirement
Services, AIGs strategy is to produce cash flows required
to meet maturing insurance liabilities. See also the discussion
under Operating Review: Life Insurance &
Retirement Services Operations herein. AIG invests in
equities for various reasons, including diversifying its overall
exposure to interest rate risk. Available for sale bonds and
equity securities are subject to declines in fair value. Such
changes in fair value are presented in unrealized appreciation
or depreciation of investments, net of taxes, as a component of
accumulated other comprehensive income. Generally, insurance
regulations restrict the types of assets in which an insurance
company may invest. When permitted by regulatory authorities and
when deemed necessary to protect insurance assets, including
invested assets, from adverse movements in foreign currency
exchange rates, interest rates and equity prices, AIG and its
insurance subsidiaries may enter into derivative transactions as
end users. See also the discussion under Derivatives
herein.
In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate
free flow of funds between insurance subsidiaries or from the
insurance subsidiaries to AIG parent.
AIG -
Form 10-K/A
45
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
The following tables summarize the composition of AIGs
invested assets by segment, as of December 31, 2005 and
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Life | |
|
|
|
Percent | |
|
|
|
As Reported: | |
|
|
Insurance & | |
|
|
|
Distribution | |
|
|
|
Consolidated | |
|
|
General | |
|
Retirement | |
|
Asset | |
|
|
|
Percent | |
|
| |
|
Financial | |
|
|
|
Balance | |
(dollars in millions) |
|
Insurance | |
|
Services | |
|
Management | |
|
Total | |
|
of Total | |
|
Domestic | |
|
Foreign | |
|
Services | |
|
Other | |
|
Reclassification* | |
|
Sheet | |
| |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale, at market value
|
|
$ |
50,870 |
|
|
$ |
273,165 |
|
|
$ |
34,174 |
|
|
$ |
358,209 |
|
|
|
66.2 |
% |
|
|
59.2 |
% |
|
|
40.8 |
% |
|
$ |
1,307 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
359,516 |
|
|
Bonds held to maturity, at amortized cost
|
|
|
21,528 |
|
|
|
|
|
|
|
|
|
|
|
21,528 |
|
|
|
4.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,528 |
|
|
Bond trading securities, at market value
|
|
|
|
|
|
|
1,073 |
|
|
|
3,563 |
|
|
|
4,636 |
|
|
|
0.9 |
|
|
|
3.3 |
|
|
|
96.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,636 |
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks, at market value
|
|
|
4,930 |
|
|
|
15,558 |
|
|
|
639 |
|
|
|
21,127 |
|
|
|
3.9 |
|
|
|
18.6 |
|
|
|
81.4 |
|
|
|
|
|
|
|
59 |
|
|
|
(21,186) |
|
|
|
|
|
|
Common stocks available for sale, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,227 |
|
|
|
12,227 |
|
|
Common stocks trading, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,959 |
|
|
|
8,959 |
|
|
Preferred stocks available for sale, at market value
|
|
|
1,632 |
|
|
|
760 |
|
|
|
|
|
|
|
2,392 |
|
|
|
0.4 |
|
|
|
88.8 |
|
|
|
11.2 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
2,402 |
|
Mortgage loans on real estate, policy and collateral loans
|
|
|
19 |
|
|
|
18,406 |
|
|
|
4,594 |
|
|
|
23,019 |
|
|
|
4.3 |
|
|
|
65.5 |
|
|
|
34.5 |
|
|
|
|
|
|
|
|
|
|
|
(23,019) |
|
|
|
|
|
Mortgage loans on real estate, net of allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
14,229 |
|
|
|
14,300 |
|
Policy loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
7,037 |
|
|
|
7,039 |
|
Collateral and guaranteed loans, net of allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,719 |
|
|
|
98 |
|
|
|
1,753 |
|
|
|
3,570 |
|
Financial services assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment primarily under operating leases, net of
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,245 |
|
|
|
|
|
|
|
|
|
|
|
36,245 |
|
|
Securities available for sale, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,511 |
|
|
|
|
|
|
|
|
|
|
|
37,511 |
|
|
Trading securities, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,499 |
|
|
|
|
|
|
|
|
|
|
|
6,499 |
|
|
Spot commodities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
92 |
|
|
Unrealized gain on swaps, options and forward transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,695 |
|
|
|
|
|
|
|
|
|
|
|
18,695 |
|
|
Trading assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,204 |
|
|
|
|
|
|
|
|
|
|
|
1,204 |
|
|
Securities purchased under agreements to resell, at contract
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,519 |
|
|
|
|
|
|
|
28 |
|
|
|
14,547 |
|
|
Finance receivables, net of allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,995 |
|
|
|
|
|
|
|
|
|
|
|
27,995 |
|
Securities lending collateral, at market value
|
|
|
4,931 |
|
|
|
42,991 |
|
|
|
11,549 |
|
|
|
59,471 |
|
|
|
11.0 |
|
|
|
87.3 |
|
|
|
12.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,471 |
|
Other invested assets
|
|
|
6,272 |
|
|
|
7,805 |
|
|
|
10,459 |
|
|
|
24,536 |
|
|
|
4.5 |
|
|
|
85.7 |
|
|
|
14.3 |
|
|
|
2,751 |
|
|
|
8 |
|
|
|
(28) |
|
|
|
27,267 |
|
Short-term investments, at cost
|
|
|
2,787 |
|
|
|
6,844 |
|
|
|
5,815 |
|
|
|
15,446 |
|
|
|
2.8 |
|
|
|
26.1 |
|
|
|
73.9 |
|
|
|
1,713 |
|
|
|
80 |
|
|
|
(1,897) |
|
|
|
15,342 |
|
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,897 |
|
|
|
1,897 |
|
Investment income due and accrued
|
|
|
1,232 |
|
|
|
4,073 |
|
|
|
402 |
|
|
|
5,707 |
|
|
|
1.1 |
|
|
|
56.9 |
|
|
|
43.1 |
|
|
|
18 |
|
|
|
2 |
|
|
|
|
|
|
|
5,727 |
|
Real estate, net of accumulated depreciation
|
|
|
603 |
|
|
|
2,729 |
|
|
|
1,710 |
|
|
|
5,042 |
|
|
|
0.9 |
|
|
|
45.2 |
|
|
|
54.8 |
|
|
|
24 |
|
|
|
32 |
|
|
|
|
|
|
|
5,098 |
|
|
Total
|
|
$ |
94,804 |
|
|
$ |
373,404 |
|
|
$ |
72,905 |
|
|
$ |
541,113 |
|
|
|
100.0 |
% |
|
|
62.3 |
% |
|
|
37.7 |
% |
|
$ |
150,375 |
|
|
$ |
279 |
|
|
$ |
|
|
|
$ |
691,767 |
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
305 |
|
|
|
989 |
|
|
|
196 |
|
|
|
1,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331 |
|
|
|
76 |
|
|
|
|
|
|
|
1,897 |
|
|
Investment income due and accrued
|
|
|
1,232 |
|
|
|
4,073 |
|
|
|
402 |
|
|
|
5,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
2 |
|
|
|
|
|
|
|
5,727 |
|
|
Real estate, net of accumulated depreciation
|
|
|
603 |
|
|
|
2,729 |
|
|
|
1,710 |
|
|
|
5,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
32 |
|
|
|
|
|
|
|
5,098 |
|
|
Total investments and financial services assets
|
|
$ |
92,664 |
|
|
$ |
365,613 |
|
|
$ |
70,597 |
|
|
$ |
528,874 |
|
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
$ |
150,002 |
|
|
$ |
169 |
|
|
$ |
|
|
|
$ |
679,045 |
|
|
|
|
* |
Certain accounts presented separately in the Consolidated
Balance Sheet are combined in the above tables. |
46
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Life | |
|
|
|
Percent | |
|
|
|
As Reported: | |
|
|
Insurance & | |
|
|
|
Distribution | |
|
|
|
Consolidated | |
|
|
General | |
|
Retirement | |
|
Asset | |
|
|
|
Percent | |
|
| |
|
Financial | |
|
|
|
Balance | |
(dollars in millions) |
|
Insurance | |
|
Services | |
|
Management | |
|
Total | |
|
of Total | |
|
Domestic | |
|
Foreign | |
|
Services | |
|
Other | |
|
Reclassification* | |
|
Sheet | |
| |
|
| |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale, at market value
|
|
$ |
44,376 |
|
|
$ |
259,602 |
|
|
$ |
39,077 |
|
|
$ |
343,055 |
|
|
|
68.5 |
% |
|
|
61.2 |
% |
|
|
38.8 |
% |
|
$ |
1,344 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
344,399 |
|
|
Bonds held to maturity, at amortized cost
|
|
|
18,294 |
|
|
|
|
|
|
|
|
|
|
|
18,294 |
|
|
|
3.7 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,294 |
|
|
Bond trading securities, at market value
|
|
|
|
|
|
|
600 |
|
|
|
2,384 |
|
|
|
2,984 |
|
|
|
0.6 |
|
|
|
1.2 |
|
|
|
98.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,984 |
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks, at market value
|
|
|
4,165 |
|
|
|
11,280 |
|
|
|
177 |
|
|
|
15,622 |
|
|
|
3.1 |
|
|
|
21.9 |
|
|
|
78.1 |
|
|
|
|
|
|
|
44 |
|
|
|
(15,666) |
|
|
|
|
|
|
Common stocks available for sale, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,772 |
|
|
|
9,772 |
|
|
Common stocks trading, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,894 |
|
|
|
5,894 |
|
|
Preferred stocks available for sale, at market value
|
|
|
1,466 |
|
|
|
565 |
|
|
|
|
|
|
|
2,031 |
|
|
|
0.4 |
|
|
|
91.9 |
|
|
|
8.1 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
2,040 |
|
Mortgage loans on real estate, policy and collateral loans
|
|
|
22 |
|
|
|
16,858 |
|
|
|
5,093 |
|
|
|
21,973 |
|
|
|
4.4 |
|
|
|
65.6 |
|
|
|
34.4 |
|
|
|
|
|
|
|
|
|
|
|
(21,973) |
|
|
|
|
|
Mortgage loans on real estate, net of allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
13,093 |
|
|
|
13,146 |
|
Policy loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
7,033 |
|
|
|
7,035 |
|
Collateral and guaranteed loans, net of allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,456 |
|
|
|
|
|
|
|
1,847 |
|
|
|
3,303 |
|
Financial services assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment primarily under operating leases, net of
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,130 |
|
|
|
|
|
|
|
|
|
|
|
32,130 |
|
|
Securities available for sale, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,225 |
|
|
|
|
|
|
|
|
|
|
|
31,225 |
|
|
Trading securities, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,746 |
|
|
|
|
|
|
|
|
|
|
|
2,746 |
|
|
Spot commodities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534 |
|
|
|
|
|
|
|
|
|
|
|
534 |
|
|
Unrealized gain on swaps, options and forward transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,670 |
|
|
|
|
|
|
|
|
|
|
|
22,670 |
|
|
Trading assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,433 |
|
|
|
|
|
|
|
|
|
|
|
3,433 |
|
|
Securities purchased under agreements to resell, at contract
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,272 |
|
|
|
|
|
|
|
|
|
|
|
26,272 |
|
|
Finance receivables, net of allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,574 |
|
|
|
|
|
|
|
|
|
|
|
23,574 |
|
Securities lending collateral, at market value
|
|
|
4,889 |
|
|
|
34,923 |
|
|
|
9,357 |
|
|
|
49,169 |
|
|
|
9.8 |
|
|
|
86.7 |
|
|
|
13.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,169 |
|
Other invested assets
|
|
|
5,604 |
|
|
|
7,072 |
|
|
|
8,316 |
|
|
|
20,992 |
|
|
|
4.2 |
|
|
|
86.7 |
|
|
|
13.3 |
|
|
|
2,230 |
|
|
|
337 |
|
|
|
|
|
|
|
23,559 |
|
Short-term investments, at cost
|
|
|
2,113 |
|
|
|
5,515 |
|
|
|
9,679 |
|
|
|
17,307 |
|
|
|
3.4 |
|
|
|
37.1 |
|
|
|
62.9 |
|
|
|
799 |
|
|
|
5 |
|
|
|
(2,009) |
|
|
|
16,102 |
|
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,009 |
|
|
|
2,009 |
|
Investment income due and accrued
|
|
|
997 |
|
|
|
4,035 |
|
|
|
461 |
|
|
|
5,493 |
|
|
|
1.1 |
|
|
|
57.3 |
|
|
|
42.7 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
5,556 |
|
Real estate, net of accumulated depreciation
|
|
|
592 |
|
|
|
3,007 |
|
|
|
326 |
|
|
|
3,925 |
|
|
|
0.8 |
|
|
|
22.8 |
|
|
|
77.2 |
|
|
|
26 |
|
|
|
28 |
|
|
|
|
|
|
|
3,979 |
|
|
Total
|
|
$ |
82,518 |
|
|
$ |
343,457 |
|
|
$ |
74,870 |
|
|
$ |
500,845 |
|
|
|
100.0 |
% |
|
|
63.8 |
% |
|
|
36.2 |
% |
|
$ |
148,566 |
|
|
$ |
414 |
|
|
$ |
|
|
|
$ |
649,825 |
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
290 |
|
|
|
502 |
|
|
|
966 |
|
|
|
1,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
1 |
|
|
|
|
|
|
|
2,009 |
|
|
Investment income due and accrued
|
|
|
997 |
|
|
|
4,035 |
|
|
|
461 |
|
|
|
5,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
5,556 |
|
|
Real estate, net of accumulated depreciation
|
|
|
592 |
|
|
|
3,007 |
|
|
|
326 |
|
|
|
3,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
28 |
|
|
|
|
|
|
|
3,979 |
|
|
Total investments and financial services assets
|
|
$ |
80,639 |
|
|
$ |
335,913 |
|
|
$ |
73,117 |
|
|
$ |
489,669 |
|
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
$ |
148,227 |
|
|
$ |
385 |
|
|
$ |
|
|
|
$ |
638,281 |
|
|
|
|
* |
Certain accounts presented separately in the Consolidated
Balance Sheet are combined in the above tables. |
Credit Quality
At December 31, 2005, approximately 61 percent of the
fixed maturities investments were domestic securities.
Approximately 35 percent of such domestic securities were
rated AAA by one or more of the principal rating agencies.
Approximately six percent were below investment grade or
not rated.
A significant portion of the foreign fixed income portfolio is
rated by Moodys, S&P or similar foreign services.
Similar credit quality rating services are not available in all
overseas locations. AIG reviews the credit quality of the
foreign portfolio nonrated fixed income investments, including
mortgages. At December 31, 2005, approximately
19 percent of the foreign fixed income investments were
either rated AAA or, on the basis of AIGs internal
analysis, were equivalent from a
AIG -
Form 10-K/A
47
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
credit standpoint to securities so rated. Approximately
five percent were below investment grade or not rated at
that date. A large portion of the foreign fixed income portfolio
are sovereign fixed maturity securities supporting the policy
liabilities in the country of issuance.
Any fixed income security may be subject to downgrade for a
variety of reasons subsequent to any balance sheet date.
Valuation of Invested Assets
AIG has the ability to hold any fixed maturity security to its
stated maturity, including those fixed maturity securities
classified as available for sale. Therefore, the decision to
sell any such fixed maturity security classified as available
for sale reflects the judgment of AIGs management that the
security sold is unlikely to provide, on a relative value basis,
as attractive a return in the future as alternative securities
entailing comparable risks. With respect to distressed
securities, the sale decision reflects managements
judgment that the risk-discounted anticipated ultimate recovery
is less than the value achievable on sale.
The valuation of invested assets involves obtaining a market
value for each security. The source for the market value is
generally from market exchanges or dealer quotations, with the
exception of nontraded securities.
If AIG chooses to hold a security, it evaluates the security for
an other-than-temporary impairment in valuation. As a matter of
policy, the determination that a security has incurred an
other-than-temporary decline in value and the amount of any loss
recognition requires the judgment of AIGs management and a
continual review of its investments.
In general, a security is considered a candidate for
other-than-temporary impairment if it meets any of the following
criteria:
|
|
- |
Trading at a significant
(25 percent or more) discount to par or amortized cost (if
lower) for an extended period of time (nine months or longer);
|
- |
The occurrence of a discrete
credit event resulting in (i) the issuer defaulting
on a material outstanding obligation; or (ii) the
issuer seeking protection from creditors under the bankruptcy
laws or any similar laws intended for the court supervised
reorganization of insolvent enterprises; or
(iii) the issuer proposing a voluntary
reorganization pursuant to which creditors are asked to exchange
their claims for cash or securities having a fair value
substantially lower than par value of their claims; or
|
- |
In the opinion of AIGs
management, it is probable that AIG may not realize a full
recovery on its investment, irrespective of the occurrence of
one of the foregoing events.
|
Once a security has been identified as other-than-temporarily
impaired, the amount of such impairment is determined by
reference to that securitys contemporaneous market price
and recorded as a charge to earnings.
As a result of these policies, AIG recorded other-than-temporary
impairment losses net of taxes of approximately
$389 million, $369 million and $1.0 billion in
2005, 2004 and 2003, respectively.
No impairment charge with respect to any one single credit was
significant to AIGs consolidated financial condition or
results of operations, and no individual impairment loss
exceeded 1.0 percent of consolidated net income for 2005.
Excluding the other-than-temporary impairments noted above, the
changes in market value for AIGs available for sale
portfolio, which constitutes the vast majority of AIGs
investments, were recorded in accumulated other comprehensive
income as unrealized gains or losses, net of tax.
At December 31, 2005, the fair value of AIGs fixed
maturities and equity securities aggregated to
$409.8 billion. At December 31, 2005, aggregate
unrealized gains after taxes for fixed maturity and equity
securities were $10.5 billion. At December 31, 2005,
the aggregate unrealized losses after taxes of fixed maturity
and equity securities were approximately $2.6 billion.
The effect on net income of unrealized losses after taxes will
be further mitigated upon realization, because certain realized
losses will be charged to participating policyholder accounts,
or realization will result in current decreases in the
amortization of certain deferred policy acquisition costs.
At December 31, 2005, unrealized losses for fixed maturity
securities and equity securities did not reflect any significant
industry concentrations.
The amortized cost of fixed maturities available for sale in
an unrealized loss position at December 31, 2005, by
contractual maturity, is shown below:
|
|
|
|
|
|
(in millions) |
|
Amortized Cost | |
|
Due in one year or less
|
|
$ |
3,882 |
|
Due after one year through five years
|
|
|
25,919 |
|
Due after five years through ten years
|
|
|
56,204 |
|
Due after ten years
|
|
|
56,786 |
|
|
Total
|
|
$ |
142,791 |
|
|
In the twelve months ended December 31, 2005, the pretax
realized losses incurred with respect to the sale of fixed
maturities and equity securities were $1.6 billion. The
aggregate fair value of securities sold was $51.7 billion,
which was approximately 97 percent of amortized cost. The
average period of time that securities sold at a loss during the
twelve months ended December 31, 2005 were trading
continuously at a price below book value was approximately three
months.
48
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
At December 31, 2005, aggregate pretax unrealized gains
were $16.1 billion, while the pretax unrealized losses with
respect to investment grade bonds, below investment grade bonds
and equity securities were $3.3 billion, $404 million
and $257 million, respectively. Aging of the pretax
unrealized losses with respect to these securities, distributed
as a percentage of cost relative to unrealized loss (the extent
by which the market value is less than amortized cost or cost),
including the number of respective items, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Less than or equal to | |
|
Greater than 20% to | |
|
Greater than 50% | |
|
|
|
|
20% of Cost(a) | |
|
50% of Cost(a) | |
|
of Cost(a) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Aging |
|
Unrealized | |
|
Unrealized | |
|
Unrealized | |
|
Unrealized | |
(dollars in millions) |
|
Cost(a) | |
|
Loss | |
|
Items | |
|
Cost(a) | |
|
Loss | |
|
Items | |
|
Cost(a) | |
|
Loss | |
|
Items | |
|
Cost(a) | |
|
Loss(b) | |
|
Items | |
| |
Investment grade bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$ |
101,885 |
|
|
$ |
1,984 |
|
|
|
12,264 |
|
|
$ |
36 |
|
|
$ |
9 |
|
|
|
11 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
101,921 |
|
|
$ |
1,993 |
|
|
|
12,275 |
|
|
7-12 months
|
|
|
14,271 |
|
|
|
426 |
|
|
|
1,749 |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,272 |
|
|
|
426 |
|
|
|
1,750 |
|
|
>12 months
|
|
|
19,502 |
|
|
|
791 |
|
|
|
2,722 |
|
|
|
450 |
|
|
|
107 |
|
|
|
17 |
|
|
|
5 |
|
|
|
3 |
|
|
|
8 |
|
|
|
19,957 |
|
|
|
901 |
|
|
|
2,747 |
|
|
Total
|
|
$ |
135,658 |
|
|
$ |
3,201 |
|
|
|
16,735 |
|
|
$ |
487 |
|
|
$ |
116 |
|
|
|
29 |
|
|
$ |
5 |
|
|
$ |
3 |
|
|
|
8 |
|
|
$ |
136,150 |
|
|
$ |
3,320 |
|
|
|
16,772 |
|
|
Below investment grade bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$ |
3,651 |
|
|
$ |
129 |
|
|
|
852 |
|
|
$ |
111 |
|
|
$ |
29 |
|
|
|
24 |
|
|
$ |
11 |
|
|
$ |
6 |
|
|
|
14 |
|
|
$ |
3,773 |
|
|
$ |
164 |
|
|
|
890 |
|
|
7-12 months
|
|
|
1,524 |
|
|
|
93 |
|
|
|
338 |
|
|
|
139 |
|
|
|
38 |
|
|
|
34 |
|
|
|
2 |
|
|
|
1 |
|
|
|
15 |
|
|
|
1,665 |
|
|
|
132 |
|
|
|
387 |
|
|
>12 months
|
|
|
1,113 |
|
|
|
84 |
|
|
|
225 |
|
|
|
90 |
|
|
|
24 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
1,203 |
|
|
|
108 |
|
|
|
259 |
|
|
Total
|
|
$ |
6,288 |
|
|
$ |
306 |
|
|
|
1,415 |
|
|
$ |
340 |
|
|
$ |
91 |
|
|
|
81 |
|
|
$ |
13 |
|
|
$ |
7 |
|
|
|
40 |
|
|
$ |
6,641 |
|
|
$ |
404 |
|
|
|
1,536 |
|
|
Total bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$ |
105,536 |
|
|
$ |
2,113 |
|
|
|
13,116 |
|
|
$ |
147 |
|
|
$ |
38 |
|
|
|
35 |
|
|
$ |
11 |
|
|
$ |
6 |
|
|
|
14 |
|
|
$ |
105,694 |
|
|
$ |
2,157 |
|
|
|
13,165 |
|
|
7-12 months
|
|
|
15,795 |
|
|
|
519 |
|
|
|
2,087 |
|
|
|
140 |
|
|
|
38 |
|
|
|
35 |
|
|
|
2 |
|
|
|
1 |
|
|
|
15 |
|
|
|
15,937 |
|
|
|
558 |
|
|
|
2,137 |
|
|
>12 months
|
|
|
20,615 |
|
|
|
875 |
|
|
|
2,947 |
|
|
|
540 |
|
|
|
131 |
|
|
|
40 |
|
|
|
5 |
|
|
|
3 |
|
|
|
19 |
|
|
|
21,160 |
|
|
|
1,009 |
|
|
|
3,006 |
|
|
Total
|
|
$ |
141,946 |
|
|
$ |
3,507 |
|
|
|
18,150 |
|
|
$ |
827 |
|
|
$ |
207 |
|
|
|
110 |
|
|
$ |
18 |
|
|
$ |
10 |
|
|
|
48 |
|
|
$ |
142,791 |
|
|
$ |
3,724 |
|
|
|
18,308 |
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$ |
3,041 |
|
|
$ |
113 |
|
|
|
1,109 |
|
|
$ |
75 |
|
|
$ |
23 |
|
|
|
71 |
|
|
$ |
30 |
|
|
$ |
20 |
|
|
|
42 |
|
|
$ |
3,146 |
|
|
$ |
156 |
|
|
|
1,222 |
|
|
7-12 months
|
|
|
573 |
|
|
|
41 |
|
|
|
122 |
|
|
|
169 |
|
|
|
45 |
|
|
|
68 |
|
|
|
6 |
|
|
|
4 |
|
|
|
23 |
|
|
|
748 |
|
|
|
90 |
|
|
|
213 |
|
|
>12 months
|
|
|
66 |
|
|
|
4 |
|
|
|
26 |
|
|
|
30 |
|
|
|
6 |
|
|
|
13 |
|
|
|
1 |
|
|
|
1 |
|
|
|
29 |
|
|
|
97 |
|
|
|
11 |
|
|
|
68 |
|
|
Total
|
|
$ |
3,680 |
|
|
$ |
158 |
|
|
|
1,257 |
|
|
$ |
274 |
|
|
$ |
74 |
|
|
|
152 |
|
|
$ |
37 |
|
|
$ |
25 |
|
|
|
94 |
|
|
$ |
3,991 |
|
|
$ |
257 |
|
|
|
1,503 |
|
|
|
|
(a) |
For bonds, represents amortized cost. |
|
(b) |
As more fully described above, upon realization, certain
realized losses will be charged to participating policyholder
accounts, or realization will result in a current decrease in
the amortization of certain deferred policy acquisition
costs. |
As stated previously, the valuation for AIGs investment
portfolio comes from market exchanges or dealer quotations, with
the exception of nontraded securities. AIG considers nontraded
securities to mean certain fixed income investments, certain
structured securities, direct private equities, limited
partnerships, and hedge funds. The aggregate carrying value of
these securities at December 31, 2005 was approximately
$62 billion.
The methodology used to estimate fair value of nontraded fixed
income investments is by reference to traded securities with
similar attributes and using a matrix pricing methodology. This
technique takes into account such factors as the industry, the
securitys rating and tenor, its coupon rate, its position
in the capital structure of the issuer, and other relevant
factors. The change in fair value is recognized as a component
of accumulated other comprehensive income, net of tax.
For certain structured securities, the carrying value is based
on an estimate of the securitys future cash flows pursuant
to the requirements of Emerging Issues Task Force Issue
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial
Assets. The change in carrying value is recognized in
income.
Hedge funds and limited partnerships in which AIG holds in the
aggregate less than a five percent interest are carried at fair
value. The change in fair value is recognized as a component of
accumulated other comprehensive income, net of tax.
With respect to hedge funds and limited partnerships in which
AIG holds in the aggregate a five percent or greater interest,
AIG uses the equity method to record these investments. The
changes in such net asset values are recorded in income.
AIG obtains the fair value of its investments in limited
partnerships and hedge funds from information provided by the
general partner or manager of each of these investments, the
accounts of which are generally audited on an annual basis.
Each of these investment categories is tested to determine if
impairment in value exists. Various valuation techniques are
used with respect to each category in this determination.
Financial Services Operations
AIGs Financial Services subsidiaries engage in diversified
activities including aircraft and equipment leasing, capital
markets transactions, consumer finance and insurance premium
financing. See also Note 2 of Notes to Consolidated
Financial Statements.
AIG -
Form 10-K/A
49
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
Aircraft Finance
AIGs Aircraft Finance operations represent the operations
of ILFC, which generates its revenues primarily from leasing new
and used commercial jet aircraft to domestic and foreign
airlines. Revenues also result from the remarketing of
commercial jets for its own account, for airlines and for
financial institutions.
ILFC finances its purchases of aircraft primarily through the
issuance of a variety of debt instruments. The composite
borrowing rates at December 31, 2005, 2004 and 2003 were
5.00 percent, 4.34 percent and 4.53 percent,
respectively. See also the discussions under Capital
Resources and Liquidity herein and
Notes 2 and 9 of Notes to Consolidated Financial
Statements.
ILFCs sources of revenue are principally from scheduled
and charter airlines and companies associated with the airline
industry. The airline industry is sensitive to changes in
economic conditions, cyclical and highly competitive. Airlines
and related companies may be affected by political or economic
instability, terrorist activities, changes in national policy,
competitive pressures on certain air carriers, fuel prices and
shortages, labor stoppages, insurance costs, recessions, and
other political or economic events adversely affecting world or
regional trading markets. ILFCs revenues and income will
be affected by its customers ability to react and cope
with the volatile competitive environment in which they operate,
as well as ILFCs own competitive environment.
ILFC is exposed to operating loss and liquidity strain through
nonperformance of aircraft lessees, through owning aircraft
which it would be unable to sell or re-lease at acceptable rates
at lease expiration and, in part, through committing to purchase
aircraft which it would be unable to lease.
ILFC manages the risk of nonperformance by its lessees with
security deposit requirements, through repossession rights,
overhaul requirements, and closely monitoring industry
conditions through its marketing force. However, there can be no
assurance that ILFC would be able to successfully manage the
risks relating to the effect of possible future deterioration in
the airline industry. Approximately 90 percent of
ILFCs fleet is leased to non-U.S. carriers, and this
fleet, comprised of the most efficient aircraft in the airline
industry, continues to be in high demand from such carriers.
ILFC typically contracts to re-lease aircraft before the end of
the existing lease term. For aircraft returned before the end of
the lease term, ILFC has generally been able to re-lease such
aircraft within two to six months of its return. As a lessor,
ILFC considers an aircraft idle or off
lease when the aircraft is not subject to a signed lease
agreement or signed letter of intent. ILFC had no aircraft off
lease at December 31, 2005. As of March 10, 2006, all
new aircraft deliveries in 2006 have been leased, and
76 percent of 2007 new aircraft deliveries have been
leased. See also the discussions under Capital
Resources and Liquidity herein.
ILFC sold two portfolios consisting of 34 and 37 aircraft in
2004 and 2003, respectively, to two trusts connected to
securitization transactions. Certain of AIGs Life
Insurance & Retirement Services businesses purchased a
large share of the securities issued in connection with these
securitizations, which included both debt and equity securities.
Management formally reviews regularly, and no less frequently
than quarterly, issues affecting ILFCs fleet, including
events and circumstances that may cause impairment of aircraft
values. Management evaluates aircraft in the fleet as necessary,
based on these events and circumstances in accordance with
Statement of Financial Accounting Standards
No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144). ILFC has not
recognized any impairment related to its fleet, as the existing
service potential of the aircraft in ILFCs portfolio has
not been diminished. Further, ILFC has been able to re-lease the
aircraft without diminution in lease rates to an extent that
would require an impairment
write-down. See also
the discussions under Liquidity herein.
Capital Markets
Capital Markets represents the operations of AIGFP, which
engages in a wide variety of financial transactions, including
standard and customized interest rate, currency, equity,
commodity and credit products and structured borrowings through
notes, bonds and guaranteed investment agreements. AIGFP also
engages in various commodity and foreign exchange trading, and
market-making activities.
As Capital Markets is a transaction-oriented operation, current
and past revenues and operating results may not provide a basis
for predicting future performance. Also, AIGs Capital
Markets operations may be adversely affected by the downgrades
in AIGs credit ratings. See Risk Factors
AIGs Credit Ratings, in Item 1A. Risk Factors
for a further discussion of the potential effect of the rating
downgrades on AIGs Capital Markets businesses.
AIGs Capital Markets operations derive substantially all
their revenues from hedged financial positions entered in
connection with counterparty transactions rather than from
speculative transactions. AIGFP participates in the derivatives
and financial transactions dealer markets conducting, primarily
as principal, an interest rate, currency, equity, commodity,
energy and credit products business.
As a dealer in financial derivatives, AIGFP marks all derivative
and trading transactions to fair value daily. Thus, a gain or
loss on each transaction is recognized daily. Under GAAP, in
certain instances, gains and losses are required to be recorded
in earnings immediately, whereas in other instances, they are
required to be recognized over the life of the underlying
instruments. AIGFP economically hedges the market risks arising
from its transactions, although hedge accounting is not
currently being applied to any of the derivatives and related
assets and liabilities. Accordingly, revenues and operating
income are exposed to volatility resulting from differences in
the timing of revenue recognition between the derivatives and
the hedged assets and liabilities. Revenues and operating income
of the Capital Markets operations and the percentage change in
these amounts for any given period are also significantly
affected by the number, size and profitability of transactions
entered into by these subsidiaries during that
50
AIG -
Form 10-K/A
AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
period relative to those entered into during the prior period.
Generally, the realization of trading revenues as measured by
the receipt of funds is not a significant reporting event as the
gain or loss on AIGFPs trading transactions is currently
reflected in operating income as the fair values change from
period to period.
Derivative transactions are entered into in the ordinary course
of Capital Markets operations. Therefore, income on interest
rate, currency, equity, commodity, energy and credit derivatives
is recorded at fair value, determined by reference to the mark
to market value of the derivative or their estimated fair value
where market prices are not readily available. The resulting
aggregate unrealized gains or losses from the derivative are
reflected in the income statement in the current year. Where
Capital Markets cannot verify significant model inputs to
observable market data and verify the model value to market
transactions, Capital Markets values the contract at the
transaction price at inception and, consequently, records no
initial gain or loss in accordance with Emerging Issues Task
Force Issue
No. 02-03,
Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities
(EITF 02-03). Such
initial gain or loss is recognized over the life of the
transaction. Capital Markets periodically reevaluates its
revenue recognition under
EITF 02-03 based
on the observability of market parameters. The mark to fair
value of derivative transactions is reflected in the balance
sheet in the captions Unrealized gain on swaps, options
and forward transactions, Unrealized loss on swaps,
options and forward transactions, Trading
assets and Trading liabilities. Unrealized
gains represent the present value of the aggregate of each net
receivable by counterparty, and the unrealized losses represent
the present value of the aggregate of each net payable by
counterparty as of December 31, 2005. These amounts will
change from one period to the next due to changes in interest
rates, currency rates, equity and commodity prices and other
market variables, as well as cash movements, execution of new
transactions and the maturing of existing transactions. See also
the discussion under Derivatives herein and
Note 20 of Notes to Consolidated Financial Statements.
Spread income on investments and borrowings is recorded on an
accrual basis over the life of the transaction. Investments are
classified as securities available for sale and are marked to
market with the resulting unrealized gains or losses reflected
in accumulated other comprehensive income. U.S. dollar
denominated borrowings are carried at cost, while borrowings in
any currency other than the U.S. dollar result in
unrealized foreign exchange gains or losses reported in income.
AIGFP hedges the economic exposure on its investments and
borrowings through its derivatives portfolio. The requirements
under FAS 133 hedge accounting were not met for these hedge
transactions for the years ending December 31, 2005, 2004
and 2003. Thus, these hedges are marked to fair value with the
unrealized gains or losses reported in income.
Consumer Finance
Domestically, AIGs Consumer Finance operations are
principally conducted through AGF. AGF derives a substantial
portion of its revenues from finance charges assessed on
outstanding mortgages, home equity loans, secured and unsecured
consumer loans and retail merchant financing. The real estate
loans include first or second mortgages on residential real
estate generally having a maximum term of 360 months, and are
considered non-conforming. These loans may be closed-end
accounts or open-end home equity lines of credit and may be
fixed-rate or adjustable rate products. The secured consumer
loans are secured by consumer goods, automobiles, or other
personal property. Both secured and unsecured consumer loans
generally have a maximum term of 60 months. The core of
AGFs originations are sourced through its branches.
However, a significant volume of real estate loans are also
originated through broker relationships, and to lesser extents,
through correspondent relationships and direct mail
solicitations.
Many of AGFs borrowers are non-conforming, non-prime or
sub-prime. Current economic conditions, such as interest rate
and employment, have a direct effect on the borrowers
ability to repay these loans. AGF manages the credit risk
inherent in its portfolio by using credit scoring models at the
time of credit applications, established underwriting criteria,
and in certain cases, individual loan reviews. AGFs Credit
Strategy and Policy Committee monitors the quality of the
finance receivables portfolio on a monthly basis when
determining the appropriate level of the allowance for finance
receivable losses. The Credit Strategy and Policy Committee
bases its conclusions on quantitative analyses, qualitative
factors, current economic conditions and trends, and each
committee members experience in the consumer finance
industry. Through 2005, the credit quality of AGFs finance
receivables continues to be strong.
Overseas operations, particularly those in emerging markets,
provide credit cards, personal and auto loans, term deposits,
savings accounts, sales finance and mortgages.
Consumer Finance operations are exposed to loss when contractual
payments are not received. Credit loss exposure is managed
through tight underwriting controls, mix of loans, collateral,
and collection efficiency.
AIG -
Form 10-K/A
51
Managements Discussion and Analysis of
Financial Condition and Results of
Operations Continued
Financial Services operations for 2005, 2004 and 2003 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2005 | |
|
2004 | |
|
2003 | |
|
Revenues(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
Finance(b)
|
|
$ |
3,578 |
|
|
$ |
3,136 |
|
|
$ |
2,897 |
|
|
Capital
Markets(c)(d)
|
|
|
3,260 |
|
|
|
1,278 |
|
|
|
595 |
|
|
Consumer
Finance(e)
|
|
|
3,613 |
|
|
|
2,978 |
|
|
|
2,642 |
|
|
Other
|
|
|
74 |
|
|
|
103 |
|
|
|
108 |
|
|
Total
|
|
$ |
10,525 |
|
|
$ |
7,495 |
|
|
$ |
6,242 |
|
|
Operating income
(loss)(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Finance
|
|
$ |
679 |
|
|
$ |
642 |
|
|
$ |
672 |
|
|
Capital
Markets(d)
|
|
|
2,661 |
|
|
|
662 |
|
|
|
(188 |
) |
|
Consumer
Finance(f)
|
|
|
901 |
|
|
|
808 |
|
|
|
623 |
|
|
Other, including intercompany adjustments
|
|
|
35 |
|
|
|
68 |
|
|
|
75 |
|
|
Total
|
|
$ |
4,276 |
|
|
$ |
2,180 |
|
|
$ |
1,182 |
|
|
|
|
(a) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133, including the
related foreign exchange gains and losses. For 2005, 2004 and
2003, the effect was $(34) million, $(27) million and
$49 million, respectively, in operating income for Aircraft
Finance and $2.01 billion, $(122) million and
$(1.01) billion in both revenues and operating income for
Capital Markets. |
|
(b) |
Revenues are primarily from ILFC aircraft lease rentals. |
|
|
(c) |
Revenues, shown net of interest expense, are primarily from
hedged financial positions entered into in connection with
counterparty transactions and the effect of hedgin |