2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations Continued Life Insurance & Retirement Services no liquidity demands with respect to these warehoused investments. To the extent adverse market conditions prevent AIG Investments from transferring or otherwise divesting these warehoused investments, repayment of the temporary equity funding provided by AIG would be delayed until the investment is transferred or otherwise divested. AIG Investments incurs expenses associated with cash outflows from the operation of its business, including costs related to portfolio management and related back and middle office costs. In addition, cash is used in association with investment warehousing activities wherein AIG Investments funds and temporarily holds an investment until transferred, sold or otherwise divested. Cash needs for the Spread-Based Investment business are principally the result of GIC maturities. Significant blocks of the GIC portfolio will mature over the next five years. AIG utilizes asset liability matching to control liquidity risks associated with this business. In addition, AIG believes that its products incorporate certain restrictions which encourage persistency, limiting the magnitude of unforeseen early surrenders in the GIC portfolio. Liquidity for Asset Management operations can be affected by significant credit or geopolitical events that might cause a delay in fund closings, securitizations or an inability of AIG’s clients to fund their capital commitments. AIG (Parent Company) The liquidity of the parent company is principally derived from its subsidiaries. The primary sources of cash flow are dividends and other payments from its regulated and unregulated subsidiaries, as well as issuance of debt securities. Primary uses of cash flow are for debt service, subsidiary funding, shareholder dividend payments and common stock repurchases. In 2007, AIG parent collected $4.9 billion in dividends and other payments from subsidiaries (primarily from insurance company subsidiaries), issued $11.7 billion of debt and retired $865 million of debt, excluding MIP and Series AIGFP debt. AIG parent also advanced $6 billion for structured share repurchase arrangements. Exclud- ing MIP and Series AIGFP debt, AIG parent made interest payments totaling $550 million, made $5.90 billion in capital contributions to subsidiaries, and paid $1.93 billion in dividends to shareholders in 2007. In February 2008, AIG contributed approximately $445 million in the form of forgiveness of Federal income tax recoverables to certain domestic general insurance subsidiaries and $500 million to certain domestic life insurance subsidiaries, both effective December 31, 2007. AIG parent funds its short-term working capital needs through commercial paper issued by AIG Funding. As of December 31, 2007, AIG Funding had $4.2 billion of commercial paper outstanding with an average maturity of 29 days. As additional liquidity, AIG parent and AIG Funding maintain committed revolving credit facilities that, as of December 31, 2007, had an aggregate of $9.3 billion available to be drawn, and which are summarized above under Revolving Credit Facilities. At the parent company level, liquidity management activities are conducted in a manner intended to preserve and enhance funding stability, flexibility, and diversity through the full range of Life Insurance & Retirement Services operating cash flow is derived from underwriting and investment activities. If a substan- tial portion of the Life Insurance & Retirement Services operations bond portfolio diminished significantly in value and/or defaulted, AIG might need to liquidate other portions of its Life Insurance & Retirement Services investment portfolio and/or arrange financ- ing. Possible events causing such a liquidity strain could include economic collapse of a nation or region in which Life Insurance & Retirement Services operations exist, nationalization, catastrophic terrorist acts, or other economic or political upheaval. In addition, a significant rise in interest rates in a particular region or regions leading to a major increase in policyholder surrenders could also create a liquidity strain. Financial Services AIG’s major Financial Services operating subsidiaries consist of AIGFP, ILFC, AGF and AIGCFG. Sources of funds considered in meeting the liquidity needs of AIGFP’s operations include GIAs, issuance of long- and short-term debt, proceeds from maturities, sales of securities available for sale and securities and spot commodities leased or sold under repurchase agreements. ILFC, AGF and AIGCFG utilize the commercial paper markets, bank loans and bank credit facilities as sources of liquidity. ILFC and AGF also fund in the domestic and international capital markets without reliance on any guarantee from AIG. An additional source of liquidity for ILFC is the use of export credit facilities. AIGCFG also uses wholesale and retail bank deposits as sources of funds. On occasion, AIG has provided equity capital to ILFC, AGF and AIGCFG and provides intercompany loans to AIGCFG. Financial Services liquidity could be impaired by an inability to access the capital markets or by collateral calls. The credit default swaps written by AIGFP on super senior tranches of multi-sector CDOs require, in most cases, physical settlement following an event constituting a failure to pay in respect of the underlying super senior CDO securities. The majority of the other credit default swaps are cash settled, whereby AIGFP would be required upon an event constituting a failure to pay in respect of the underlying super senior CDO securities to make cash payments to the counterparty equal to any actual losses that attach to the super senior risk layer, rather than to purchase the reference obligation. Additionally, certain of the credit default swaps are subject to collateral call provisions. In the case of such swaps written on CDOs, the amount of the collateral to be posted is determined based on the value of the CDO securities referenced in the documentation for the credit default swaps. Asset Management Asset Management’s sources of funds include cash flows from investment management fees, carried interest and returns on various investments. These investments are financed through the issuance of AIG debt in the MIP, the issuance of GICs and funding from AIG. From time to time, AIG Investments utilizes temporary debt funding from AIG primarily to acquire warehoused investments. Subsequent to the initial investment, there are generally 100 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries situation may arise due to circumstances that AIG may be unable to control, such as a general market disruption or an operational problem that affects third parties or AIG. Regulatory and other legal restrictions may limit AIG’s ability to transfer funds freely, either to or from its subsidiaries. In particular, many of AIG’s subsidiaries, including its insurance subsidiaries, are subject to laws and regulations that authorize regulatory bodies to block or reduce the flow of funds to the parent holding company, or that prohibit such transfers altogether in certain circumstances. These laws and regulations may hinder AIG’s ability to access funds that it may need to make payments on its obligations. Because of the wide geographic profile of AIG’s regulated subsidiaries, management believes that these cash flows represent a diversified source of liquidity for AIG. For a further discussion of the regulatory environment in which AIG subsidiaries operate and other issues affecting AIG’s liquidity, see Item 1A. Risk Factors. potential operating environments and market conditions. Assessing liquidity risk involves forecasting of cash inflows and outflows on both a short- and long-term basis. Corporate Treasury is responsible for formulating the parent company’s liquidity and contingency planning efforts, as well as for execution of AIG’s specific funding activities. Through active liquidity management, AIG seeks to retain stable, reliable and cost-effective funding sources. In addition to current liquidity requirements, factors which affect funding decisions include market conditions, prevailing interest rates and the desired maturity profile of liabilities. The objectives of contingency planning are to ensure maintenance of appropriate liquidity during normal and stressed periods, to measure and project funding requirements during periods of stress, and to manage access to funding sources. Diversification of funding sources is an important element of AIG’s liquidity risk management approach. AIG’s liquidity could be impaired by an inability to access the capital markets or by unforeseen significant outflows of cash. This Invested Assets The following tables summarize the composition of AIG’s invested assets by segment: Life Insurance & General Retirement Financial Asset (in millions) Insurance Services Services Management Other Total 2007 Fixed maturities: Bonds available for sale, at fair value $ 74,057 $294,162 $ 1,400 $27,753 $ — $397,372 Bonds held to maturity, at amortized cost 21,355 1 — 225 — 21,581 Bond trading securities, at fair value — 9,948 — 34 — 9,982 Equity securities: Common stocks available for sale, at fair value 5,599 11,616 — 609 76 17,900 Common and preferred stocks trading, at fair value 321 21,026 — 29 — 21,376 Preferred stocks available for sale, at fair value 1,885 477 8 — — 2,370 Mortgage and other loans receivable, net of allowance 13 24,851 1,365 7,442 56 33,727 Financial services assets: Flight equipment primarily under operating leases, net of accumulated depreciation — — 41,984 — — 41,984 Securities available for sale, at fair value — — 40,305 — — 40,305 Trading securities, at fair value — — 4,197 — — 4,197 Spot commodities — — 238 — — 238 Unrealized gain on swaps, options and forward transactions — — 17,134 — (692) 16,442 Trade receivables — — 6,467 — — 6,467 Securities purchased under agreements to resell, at contract value — — 20,950 — — 20,950 Finance receivables, net of allowance — 5 31,229 — — 31,234 Securities lending invested collateral, at fair value 5,031 57,471 148 13,012 — 75,662 Other invested assets 11,895 19,015 3,663 17,261 6,989 58,823 Short-term investments, at cost 7,356 25,236 12,249 4,919 1,591 51,351 Total investments and financial services assets as shown on the balance sheet 127,512 463,808 181,337 71,284 8,020 851,961 Cash 497 1,000 389 269 129 2,284 Investment income due and accrued 1,431 4,728 29 401 (2) 6,587 Real estate, net of accumulated depreciation 349 976 17 89 231 1,662 Total invested assets * $129,789 $470,512 $181,772 $72,043 $8,378 $862,494 * At December 31, 2007, approximately 65 percent and 35 percent of invested assets were held in domestic and foreign investments, respectively. AIG 2007 Form 10-K 101
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AMERICAN INTERNATIONAL GROUP, INC.
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FINANCIAL HIGHLIGHTS (in millions,
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overall financial condition, althou
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Group Executive Committee We are ad
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AIG’s life insurance network is t
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We have also begun to address the e
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WHAT WE SEE The ability to see and
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The Major Accounts Practice within
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Around the world, the middle class
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WE SEE GROWTH OPPORTUNITIES IN EMER
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To grow the strength of the AIG glo
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Since 2003, the AIG Disaster Relief
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RESPECT Respect encompasses how we
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Life Insurance & Retirement Service
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Domestic Brokerage Group— Gross P
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In the summer of 2007, widespread f
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in gross premiums written. It launc
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It grew new business premiums from
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emerging markets for its services,
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ILFC—Revenues by Region Total = $
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AIG Investments acquired a 94 perce
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and changing interest rates, as wel
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American International Group, Inc.
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UNITED STATES SECURITIES AND EXCHAN
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SHAREHOLDER INFORMATION Corporate H
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