2007 Annual Report - AIG.com

More documents

Recommendations

Info

American International Group, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations Continued Life Insurance & Retirement Services Invested Assets With respect to Life Insurance & Retirement Services, AIG uses asset-liability management as a tool worldwide in the life insurance business to influence the composition of the invested assets and appropriate marketing strategies. AIG’s objective is to maintain a matched asset-liability structure. However, in certain markets, the absence of long-dated fixed income investment instruments may preclude a matched asset-liability position. In addition, AIG may occasionally determine that it is economically advantageous to be temporarily in an unmatched position. To the extent that AIG has maintained a matched asset-liability structure, the economic effect of interest rate fluctuations is partially mitigated. AIG’s investment strategy for the Life Insurance & Retirement Services segment is to produce cash flows greater than maturing insurance liabilities. AIG actively manages the asset-liability relationship in its foreign operations, even though certain territories lack qualified long-term investments or certain local regulatory authorities may impose investment restrictions. For example, in several Southeast Asian countries, the duration of investments is shorter than the effective maturity of the related policy liabilities. Therefore, there is 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. AIG actively manages the interest rate assumptions and crediting rates used for its new and in force business. Business strategies continue to evolve to maintain profitability of the overall business. In some countries, new products are being introduced with minimal investment guarantees, resulting in a shift toward investment-linked savings products and away from traditional savings products with higher guarantees. 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, including equities, real estate and foreign currency denominated fixed income instruments in certain foreign jurisdictions where interest rates remain low and there are limited long-dated bond markets 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. In Japan, foreign assets, excluding those matched to foreign liabilities, were approximately 31 percent of statutory assets, which is below the maximum allowable percentage under current local regulation. Foreign assets comprised approximately 33 percent of Nan Shan’s invested assets at December 31, 2007, slightly below the maximum allowable percentage under current local regulation. The majority of Nan Shan’s in-force policy portfolio is traditional life and endowment insurance products with implicit interest rate guarantees. New business with lower interest rate guarantees are gradually reducing the overall interest requirements, but asset portfolio yields have declined faster due to the prolonged low interest rate environment. As a result, although the investment margins for a large block of in-force policies are negative, the block remains profitable overall because the mortality and expense margins presently exceed the negative investment spread. In response to the low interest rate environment and the volatile exchange rate of the Taiwanese dollar, Nan Shan is emphasizing new products with lower implied guarantees, including participating endowments and investment-linked products. Although the risks of a continued low interest rate environment coupled with a volatile Taiwanese 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 availability of qualified long-term investments. 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. AIG invests in equities for various reasons, including diversify- ing its overall exposure to interest rate risk. Available for sale bonds and equity securities are subject to declines in fair value. Such declines in fair value are presented in unrealized apprecia- tion or depreciation of investments, net of taxes, as a component of Accumulated other comprehensive income. Declines that are determined to be other-than-temporary are reflected in income in the period in which the intent to hold the securities to recovery no longer exists. See Valuation of Invested Assets herein. 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 to hedge their exposures. For a further discussion of AIG’s use of derivatives, see Risk Management — Credit Risk Management — 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. For a discussion of these restrictions, see Item 1. Business — Regulation. Life Insurance & Retirement Services invested assets grew by $41.7 billion, or 10 percent, during 2007 as bond holdings grew by $5.3 billion, and listed equity holdings grew by $9.3 billion, or 39 percent. 106 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries Financial Services Invested Assets options, forwards and futures. AIGFP’s super senior credit default Financial Services Securities swaps include structural protection to help minimize risk. For a further discussion on the use of derivatives by Capital Markets, Financial Services securities available for sale of $40.3 billion at see Operating Review — Financial Services Operations — Capital December 31, 2007 is predominantly a diversified portfolio of Markets and Risk Management — Derivatives herein and Note 8 high-grade fixed income securities where the individual securities to Consolidated Financial Statements. have varying degrees of credit risk. At December 31, 2007, the AIGFP owns inventories in certain commodities in which it average credit rating of this portfolio was in the AA+ category or trades, and may reduce the exposure to market risk through the the equivalent thereto as determined through rating agencies or use of swaps, forwards, futures, and option contracts. Physical internal review. AIGFP has also entered into credit derivative commodities held in AIGFP’s wholly owned broker-dealer subsiditransactions to economically hedge its credit risk associated with ary are recorded at fair value. All other commodities are recorded $82 million of these securities. Securities deemed below invest- at the lower of cost or fair value. ment grade at December 31, 2007 totalled $797 million in fair Trading securities, at fair value, and securities and spot value, representing two percent of Financial Services securities commodities sold but not yet purchased, at fair value, are marked available for sale. There have been no significant downgrades of to fair value daily with the unrealized gain or loss recognized in these securities through February 15, 2008. income. These trading securities are purchased and sold as AIGFP’s management objective is to minimize interest rate, necessary to meet the risk management and business objectives currency, commodity and equity risks associated with its securi- of Capital Markets operations. ties available for sale. When AIGFP purchases a security for its The gross unrealized gains and gross unrealized losses of securities available for sale investment portfolio, it simultaneously Capital Markets operations included in Financial Services enters into an offsetting hedge such that the payment terms of assets and liabilities at December 31, 2007 were as the hedging transaction offset the payment terms of the investfollows: ment security. This achieves the economic result of converting the return on the underlying security to U.S. dollar LIBOR plus or Gross Gross Unrealized Unrealized minus a spread based on the underlying profit on each security on (in millions) Gains Losses the initial trade date. The market risk associated with such Securities available for sale, at fair value $939 $777 hedges is managed on a portfolio basis. Unrealized gain/loss on swaps, options Because hedge accounting treatment was not applied in 2006, and forward transactions* $17,134 $22,982 the unrealized gains and losses on the derivative transactions with unaffiliated third parties were reflected in operating income. The * These amounts are also presented as the respective balance sheet unrealized gains and losses on the underlying securities available for amounts. sale resulting from changes in interest rates and currency rates and commodity and equity prices were included in accumulated other ILFC comprehensive income (loss), or in operating income, as appropriate. The cash used for the purchase of flight equipment is derived When a security is sold, the realized gain or loss with respect to this primarily from the proceeds of ILFC’s debt financings. The primary security is included in operating income. sources for the repayment of this debt and the related interest Securities purchased under agreements to resell are treated expense are ILFC’s cash flow from operations, proceeds from the as collateralized financing transactions. AIGFP takes possession sale of flight equipment and the rollover and refinancing of the of or obtains a security interest in securities purchased under prior debt. During 2007, ILFC acquired flight equipment costing agreements to resell. $4.7 billion. For a further discussion of ILFC’s borrowings, see Operating Review — Financial Services Operations — Aircraft Leas- Capital Markets ing and Capital Resources and Liquidity — Borrowings herein. At December 31, 2007, ILFC had committed to purchase 234 AIGFP uses the proceeds from the issuance of notes and bonds new aircraft deliverable from 2008 through 2017 for an estimated and GIAs to invest in a diversified portfolio of securities, including aggregate purchase price of $20.1 billion. As of February 22, securities available for sale, and derivative transactions. The 2008, ILFC has entered into leases for all of the new aircraft to funds may also be invested in securities purchased under be delivered in 2008, and for 65 of 161 of the new aircraft to be agreements to resell. The proceeds from the disposal of the delivered subsequent to 2008. ILFC will be required to find aforementioned securities available for sale and securities purcustomers for any aircraft currently on order and any aircraft to be chased under agreements to resell are used to fund the maturing ordered, and it must arrange financing for portions of the GIAs or other AIGFP financings, or to invest in new assets. For a purchase price of such equipment. ILFC has been successful to further discussion of AIGFP’s borrowings, see Capital Resources date both in placing its new aircraft on lease or under sales and Liquidity — Borrowings herein. contract and obtaining adequate financing, but there can be no Capital Markets derivative transactions are carried at fair assurance that such success will continue in future environments. value. AIGFP reduces its economic risk exposure through similarly valued offsetting transactions including swaps, trading securities, AIG 2007 Form 10-K 107
Page 1 and 2:
AMERICAN INTERNATIONAL GROUP, INC.
Page 3 and 4:
FINANCIAL HIGHLIGHTS (in millions,
Page 5 and 6:
overall financial condition, althou
Page 7 and 8:
Group Executive Committee We are ad
Page 9 and 10:
AIG’s life insurance network is t
Page 11 and 12:
We have also begun to address the e
Page 13 and 14:
WHAT WE SEE The ability to see and
Page 15 and 16:
The Major Accounts Practice within
Page 17 and 18:
Around the world, the middle class
Page 19 and 20:
WE SEE GROWTH OPPORTUNITIES IN EMER
Page 21 and 22:
To grow the strength of the AIG glo
Page 23 and 24:
Since 2003, the AIG Disaster Relief
Page 25 and 26:
RESPECT Respect encompasses how we
Page 27 and 28:
Life Insurance & Retirement Service
Page 29 and 30:
Domestic Brokerage Group— Gross P
Page 31 and 32:
In the summer of 2007, widespread f
Page 33 and 34:
in gross premiums written. It launc
Page 35 and 36:
It grew new business premiums from
Page 37 and 38:
emerging markets for its services,
Page 39 and 40:
ILFC—Revenues by Region Total = $
Page 41 and 42:
AIG Investments acquired a 94 perce
Page 43 and 44:
and changing interest rates, as wel
Page 45 and 46:
American International Group, Inc.
Page 47 and 48:
Page 49 and 50:
Page 51 and 52:
Page 53 and 54:
Page 55 and 56:
UNITED STATES SECURITIES AND EXCHAN
Page 57 and 58:
Page 59 and 60:
Page 61 and 62:
Page 63 and 64:
Page 65 and 66:
Page 67 and 68:
Page 69 and 70:
Page 71 and 72:
Page 73 and 74:
Page 75 and 76:
Page 77 and 78:
Page 79 and 80:
Page 81 and 82:
Page 83 and 84:
Page 85 and 86:
Page 87 and 88:
Page 89 and 90:
Page 91 and 92:
Page 93 and 94:
Page 95 and 96:
Page 97 and 98:
Page 99 and 100:
Page 101 and 102:
Page 103 and 104:
Page 105 and 106:
Page 107 and 108:
Page 109 and 110: American International Group, Inc.
Page 159: American International Group, Inc.
Page 191 and 192: Index of Notes to Consolidated Fina
Page 211 and 212:
Page 213 and 214:
Page 215 and 216:
Page 217 and 218:
Page 219 and 220:
Page 221 and 222:
Page 223 and 224:
Page 225 and 226:
Page 227 and 228:
Page 229 and 230:
Page 231 and 232:
Page 233 and 234:
Page 235 and 236:
Page 237 and 238:
Page 239 and 240:
Page 241 and 242:
Page 243 and 244:
Page 245 and 246:
Page 247 and 248:
Page 249 and 250:
Page 251 and 252:
Page 253 and 254:
Page 255 and 256:
Page 257 and 258:
Page 259 and 260:
Page 261 and 262:
Page 263 and 264:
Page 265 and 266:
Page 267 and 268:
Page 269 and 270:
Page 271 and 272:
Page 273 and 274:
Page 275 and 276:
SHAREHOLDER INFORMATION Corporate H
show all

2007 Annual Report - AIG.com

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?