2007 Annual Report - AIG.com

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