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 The industry categories of AIG’s available for sale corporate debt securities at December 31, 2007 were as follows: Industry Category Percentage Industrials 47% Financial Institutions 42 Utilities/Other 11 Total* 100% * At December 31, 2007 approximately 95% of these investments were rated investment grade. The amortized cost, gross unrealized gains (losses) and fair value of AIG’s investments in mortgage-backed, assetbacked and collateralized securities at December 31, 2007 were as follows: December 31, 2007 Gross Gross Amortized Unrealized Unrealized Fair (in millions) Cost Gains Losses Value AIG, excluding AIGFP: RMBS $ 89,851 $ 433 $5,504 $ 84,780 CMBS 23,918 237 1,156 22,999 CDO/ABS 10,844 196 593 10,447 Subtotal, excluding AIGFP 124,613 866 7,253 118,226 Total AIGFP investments in mortgage-backed, asset-backed and collateralized securities 16,369 355 450 16,274 Total $140,982 $1,221 $7,703 $134,500 Investments in Residential Mortgage-Backed Securities As part of its strategy to diversify its investments, AIG invests in various types of securities, including residential mortgage-backed securities (RMBS). The amortized cost, gross unrealized gains (losses) and estimated fair value of AIG’s investments in RMBS securities, other than those of AIGFP, at December 31, 2007 were as follows: December 31, 2007 Gross Gross Amortized Unrealized Unrealized Percent (in millions) Cost Gains Losses Fair Value of Total Residential mortgage-backed securities: U.S. agencies $14,575 $320 $ 70 $14,825 17% Prime non-agency (a) 21,552 72 550 21,074 25 Alt-A 25,349 17 1,620 23,746 28 Other housing-related (b) 4,301 2 357 3,946 5 Subprime 24,074 22 2,907 21,189 25 Total $89,851 $433 $ 5,504 $84,780 100% (a) Includes foreign and jumbo RMBS-related securities. (b) Primarily wrapped second-lien. AIG’s operations, other than AIGFP, held investments in RMBS by one or more of the principal rating agencies. AIG’s investments with an estimated fair value of $84.8 billion at December 31, rated BBB or below totaled $621 million, or less than 0.1 percent 2007, or approximately 10 percent of AIG’s total invested assets. of AIG’s total invested assets at December 31, 2007. As of In addition, AIG’s insurance operations held investments with a February 25, 2008, $3.6 billion of AIG’s RMBS backed primarily fair value totaling $4.0 billion in CDOs, of which $58 million by subprime collateral had been downgraded as a result of rating included some level of subprime exposure. AIG’s RMBS invest- agency actions since January 1, 2008, and $6 million of such ments are predominantly in highly-rated tranches that contain investments had been upgraded. Subsequent to December 31, substantial protection features through collateral subordination. At 2007, rating agencies have placed on watch for downgrade a December 31, 2007, approximately 92 percent of these invest- majority of 2006 and 2007 vintage AAA-rated subprime RMBS in ments were rated AAA, and approximately 6 percent were rated AA the market. For AIG, $9.7 billion was on watch for downgrade. 104 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries The fair value of AIG’s RMBS investments, other than those of AIGFP, at December 31, 2007 by year of vintage and credit rating were as follows: Year of Vintage (in millions) Prior 2003 2004 2005 2006 2007 Total Rating: AAA $4,053 $6,202 $7,070 $16,011 $25,392 $18,937 $77,665 AA 63 785 555 1,092 2,117 512 5,124 A 46 242 345 480 248 138 1,499 BBB and below — 53 74 214 114 37 492 Total $4,162 $7,282 $8,044 $17,797 $27,871 $19,624 $84,780 The fair value of AIG’s Alt-A investments included in the RMBS investments above, other than those of AIGFP, at December 31, 2007 by year of vintage and credit rating were as follows: Year of Vintage (in millions) Prior 2003 2004 2005 2006 2007 Total Rating: AAA $208 $623 $ 960 $4,899 $9,301 $6,512 $22,503 AA 23 199 150 391 117 11 891 A 1 37 51 137 48 6 280 BBB and below — 11 19 36 6 — 72 Total $232 $870 $1,180 $5,463 $9,472 $6,529 $23,746 The fair value of AIG’s subprime RMBS investments, other than those of AIGFP, at December 31, 2007 by year of vintage and credit rating were as follows: Year of Vintage (in millions) Prior 2003 2004 2005 2006 2007 Total Rating: AAA $127 $362 $557 $5,403 $7,926 $4,081 $18,456 AA 6 35 116 277 1,562 357 2,353 A 10 82 100 120 34 26 372 BBB and below — — — 8 — — 8 Total $143 $479 $773 $5,808 $9,522 $4,464 $21,189 AIG’s underwriting practices for investing in RMBS, other assetbacked securities and CDOs take into consideration the quality of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower characteristics, and the level of credit enhancement in the transaction. AIG’s strategy is typically to invest in securities rated AA or better and create diversification across multiple underlying asset classes. General Insurance Invested Assets In AIG’s General Insurance business, the duration of liabilities for long-tail casualty lines is greater than other lines. As differentiated from the Life Insurance & Retirement Services companies, the focus is not on asset-liability matching, but on preservation of capital and growth of surplus. Fixed income holdings of the Domestic General Insurance companies are comprised primarily of tax-exempt securities, which provide attractive risk-adjusted after-tax returns. These high quality municipal investments have an average rating of AA. Fixed income assets held in Foreign General Insurance are of high quality and short to intermediate duration, averaging 3.6 years compared to 7.0 years for those in Domestic General Insurance. While invested assets backing reserves are invested in conventional fixed income securities in Domestic General Insurance, a modest portion of surplus is allocated to large capitalization, high-dividend, public equity strategies and to alternative investments, including private equity and hedge funds. These investments have provided a combination of added diversification and attractive long-term returns. General Insurance invested assets grew by $13.7 billion, or 12 percent, during 2007 as bond holdings grew by $6 billion. Listed equity holdings grew by $1.3 billion. AIG 2007 Form 10-K 105
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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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Page 107 and 108: American International Group, Inc.
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Page 191 and 192: Index of Notes to Consolidated Fina
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SHAREHOLDER INFORMATION Corporate H
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