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 Asset Management Invested Assets Asset Management invested assets are primarily comprised of assets supporting AIG’s Spread-Based Investment business, which includes AIG’s MIP and domestic GIC programs. The Spread-Based Investment business strategy is to generate spread income from investments yielding returns greater than AIG’s cost of funds. The asset-liability relationship is actively managed. The goal of the MIP investment strategy is to capture a spread between income earned on investments and the funding costs of the program while mitigating interest rate and foreign currency exchange rate risk. The invested assets are predominantly fixed income securities and include U.S. residential mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities. In addition, the MIP sold credit protection by issuing single-name high-grade corporate credit default swaps in 2007. Asset Management invested assets grew by $3.8 billion during 2007. The growth in invested assets was primarily attributable to growth in other invested assets and mortgage and other loans receivable partially offset by a decrease in bond holdings, and short-term investments. These increases were primarily driven by continued growth of the MIP and the growth of AIG’s Institutional Asset Management business. These increases were partially offset by the decrease in assets associated with the runoff of the domestic GIC program. Securities Lending Activities AIG’s securities lending program is a centrally managed program facilitated by AIG Investments primarily for the benefit of certain of AIG’s Insurance companies. Securities are loaned to various financial institutions, primarily major banks and brokerage firms. Cash collateral equal to 102 percent of the fair value of the loaned securities is received. The cash collateral is invested in highly-rated fixed income securities to earn a net spread. AIG’s liability to the borrower for collateral received was $82.0 billion and the fair value of the collateral reinvested was $75.7 billion as of December 31, 2007. In addition to the invested collateral, the securities on loan as well as all of the assets of the participating companies are generally available to satisfy the liability for collateral received. The composition of the securities lending invested collateral by credit rating at December 31, 2007 was as follows: BBB/Not Short- (in millions) AAA AA A Rated Term Total Corporate debt $ 1,191 $ 9,341 $3,448 $160 $ — $14,140 Mortgage-backed, asset-backed and collateralized 47,180 2,226 22 82 49,510 Cash and short-term investments — — — — 12,012 12,012 Total $48,371 $11,567 $3,470 $242 $12,012 $75,662 Participation in the securities lending program by reporting unit at investments was $5.0 billion as of December 31, 2007. During December 31, 2007 was as follows: 2007, AIG incurred net realized losses of $1.0 billion on this Percent portfolio, predominantly related to other-than-temporary Participation impairments. Domestic Life Insurance and Retirement Services 79% Foreign Life Insurance 10 Domestic General Insurance 3 Valuation of Invested Assets Foreign General Insurance 4 Asset Management 4 Traded Securities Total 100% The valuation of AIG’s investment portfolio involves obtaining a fair value for each security. The source for the fair value is On December 31, 2007, $11.4 billion (or 13.7 percent) of the generally from market exchanges or dealer quotations, with the liabilities were one-day tenor. These one-day tenor loans do not exception of nontraded securities. have a contractual end date but are terminable by either party on demand. The balance of the liabilities contractually mature within three months; however, the maturing loans are frequently renewed Nontraded Securities and rolled over to extended dates. Collateral held for this program AIG considers nontraded securities to mean certain fixed income at December 31, 2007 included interest bearing cash equivalents investments, certain structured securities, direct private equities, with overnight maturities of $12.0 billion. limited partnerships, and hedge funds. Liquidity in the securities pool is managed based upon The aggregate carrying value of AIG’s nontraded securities at historical experience regarding volatility of daily, weekly and December 31, 2007 was approximately $70 billion. The methodolbiweekly loan balances. Despite the current environment, the ogy used to estimate fair value of nontraded fixed income program has not experienced a significant decrease in loan investments is by reference to traded securities with similar balances. attributes and using a matrix pricing methodology. This methodol- In addition, the invested securities are carried at fair value with ogy takes into account such factors as the issuer’s industry, the unrealized gains and losses recorded in accumulated other security’s rating and tenor, its coupon rate, its position in the comprehensive income (loss) while net realized gains and losses capital structure of the issuer, and other relevant factors. are recorded in earnings. The net unrealized loss on the 108 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries For certain structured securities, the carrying value is based on an estimate of the security’s 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.’’ Hedge funds and limited partnerships in which AIG holds in the aggregate less than a five percent interest are carried at fair value. With respect to hedge funds and limited partnerships in which AIG holds in the aggregate a five percent or greater interest, or less than a five percent interest but where AIG has more than a minor influence over the operations of the investee, AIG accounts for these investments using the equity method. AIG obtains the fair value of its investments in limited partnerships and hedge funds from information provided by the general partner or manager of these investments, the accounts of which generally are audited on an annual basis. Each of these investment categories is regularly tested to determine if impairment in value exists. Various valuation techniques are used with respect to each category in this determination. For a discussion of accounting policies related to changes in fair value of invested assets, see Note 1 to Consolidated Financial Statements. Portfolio Review Other-Than-Temporary Impairments AIG assesses its ability to hold any fixed maturity security in an unrealized loss position to its recovery, including fixed maturity securities classified as available for sale, at each balance sheet date. The decision to sell any such fixed maturity security classified as available for sale reflects the judgment of AIG’s 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 management’s judgment that the risk-discounted anticipated ultimate recovery is less than the value achievable on sale. AIG evaluates its investments for impairments in valuation. The determination that a security has incurred an other-than-temporary impairment in value and the amount of any loss recognition requires the judgment of AIG’s management and a regular review of its investments. See Note 1(c) to Consolidated Financial Statements for further information on AIG’s policy. Once a security has been identified as other-than-temporarily impaired, the amount of such impairment is determined by reference to that security’s contemporaneous fair value and recorded as a charge to earnings. In light of the recent significant disruption in the U.S. residential mortgage and credit markets, particularly in the fourth quarter, AIG has recognized an other-than-temporary impairment charge (severity loss) of $2.2 billion (including $643 million related to AIGFP’s available for sale investment securities recorded in other income), primarily with respect to certain residential mortgage-backed securities and other structured securities. Even while retaining their investment grade ratings, such securities were priced at a significant discount to cost. Notwithstanding AIG’s intent and ability to hold such securities indefinitely, and despite structures which indicate that a substantial amount of the securities should continue to perform in accordance with original terms, AIG concluded that it could not reasonably assert that the recovery period would be temporary. As a result of AIG’s periodic evaluation of its securities for other-than-temporary impairments in value, AIG recorded otherthan-temporary impairment charges of $4.7 billion (including $643 million related to AIGFP recorded on other income), $944 million and $598 million in 2007, 2006 and 2005, respectively. In addition to the above severity losses, AIG recorded other- than-temporary impairment charges in 2007, 2006 and 2005 related to: ( securities which AIG does not intend to hold until recovery; ( declines due to foreign exchange; ( issuer-specific credit events; ( certain structured securities impaired under EITF No. 99-20; and ( other impairments, including equity securities and partnership investments. Net realized capital gains (losses) for the years ended December 31, 2007, 2006 and 2005 were as follows: (in millions) 2007 2006 2005 Sales of fixed maturities $ (468) $(382) $ 372 Sales of equity securities 1,087 813 643 Sales of real estate and other assets 619 303 88 Other-than-temporary impairments (4,072) (944) (598) Foreign exchange transactions (643) (382) 701 Derivative instruments (115) 698 (865) Total $(3,592) $ 106 $ 341 AIGFP other-than-temporary impairments* $ (643) $ — $ — * Reported as part of other income. AIG 2007 Form 10-K 109
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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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