2007 Annual Report - AIG.com
2007 Annual Report - AIG.com
2007 Annual Report - AIG.com
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American International Group, Inc. and Subsidiaries<br />
For certain structured securities, the carrying value is based<br />
on an estimate of the security’s future cash flows pursuant to the<br />
requirements of Emerging Issues Task Force Issue No. 99-20,<br />
‘‘Recognition of Interest In<strong>com</strong>e and Impairment on Purchased<br />
and Retained Beneficial Interests in Securitized Financial Assets.’’<br />
Hedge funds and limited partnerships in which <strong>AIG</strong> holds in the<br />
aggregate less than a five percent interest are carried at fair<br />
value.<br />
With respect to hedge funds and limited partnerships in which<br />
<strong>AIG</strong> holds in the aggregate a five percent or greater interest, or<br />
less than a five percent interest but where <strong>AIG</strong> has more than a<br />
minor influence over the operations of the investee, <strong>AIG</strong> accounts<br />
for these investments using the equity method.<br />
<strong>AIG</strong> obtains the fair value of its investments in limited<br />
partnerships and hedge funds from information provided by the<br />
general partner or manager of these investments, the accounts of<br />
which generally are audited on an annual basis.<br />
Each of these investment categories is regularly tested to<br />
determine if impairment in value exists. Various valuation techniques<br />
are used with respect to each category in this<br />
determination.<br />
For a discussion of accounting policies related to changes in<br />
fair value of invested assets, see Note 1 to Consolidated<br />
Financial Statements.<br />
Portfolio Review<br />
Other-Than-Temporary Impairments<br />
<strong>AIG</strong> assesses its ability to hold any fixed maturity security in an<br />
unrealized loss position to its recovery, including fixed maturity<br />
securities classified as available for sale, at each balance sheet<br />
date. The decision to sell any such fixed maturity security<br />
classified as available for sale reflects the judgment of <strong>AIG</strong>’s<br />
management that the security sold is unlikely to provide, on a<br />
relative value basis, as attractive a return in the future as<br />
alternative securities entailing <strong>com</strong>parable risks. With respect to<br />
distressed securities, the sale decision reflects management’s<br />
judgment that the risk-discounted anticipated ultimate recovery is<br />
less than the value achievable on sale.<br />
<strong>AIG</strong> evaluates its investments for impairments in valuation. The<br />
determination that a security has incurred an other-than-temporary<br />
impairment in value and the amount of any loss recognition<br />
requires the judgment of <strong>AIG</strong>’s management and a regular review<br />
of its investments. See Note 1(c) to Consolidated Financial<br />
Statements for further information on <strong>AIG</strong>’s policy.<br />
Once a security has been identified as other-than-temporarily<br />
impaired, the amount of such impairment is determined by<br />
reference to that security’s contemporaneous fair value and<br />
recorded as a charge to earnings.<br />
In light of the recent significant disruption in the<br />
U.S. residential mortgage and credit markets, particularly in the<br />
fourth quarter, <strong>AIG</strong> has recognized an other-than-temporary impairment<br />
charge (severity loss) of $2.2 billion (including $643 million<br />
related to <strong>AIG</strong>FP’s available for sale investment securities re-<br />
corded in other in<strong>com</strong>e), primarily with respect to certain residen-<br />
tial mortgage-backed securities and other structured securities.<br />
Even while retaining their investment grade ratings, such securi-<br />
ties were priced at a significant discount to cost. Notwithstanding<br />
<strong>AIG</strong>’s intent and ability to hold such securities indefinitely, and<br />
despite structures which indicate that a substantial amount of the<br />
securities should continue to perform in accordance with original<br />
terms, <strong>AIG</strong> concluded that it could not reasonably assert that the<br />
recovery period would be temporary.<br />
As a result of <strong>AIG</strong>’s periodic evaluation of its securities for<br />
other-than-temporary impairments in value, <strong>AIG</strong> recorded otherthan-temporary<br />
impairment charges of $4.7 billion (including $643<br />
million related to <strong>AIG</strong>FP recorded on other in<strong>com</strong>e), $944 million<br />
and $598 million in <strong>2007</strong>, 2006 and 2005, respectively.<br />
In addition to the above severity losses, <strong>AIG</strong> recorded other-<br />
than-temporary impairment charges in <strong>2007</strong>, 2006 and 2005<br />
related to:<br />
( securities which <strong>AIG</strong> does not intend to hold until recovery;<br />
( declines due to foreign exchange;<br />
( issuer-specific credit events;<br />
( certain structured securities impaired under EITF No. 99-20;<br />
and<br />
( other impairments, including equity securities and partnership<br />
investments.<br />
Net realized capital gains (losses) for the years ended December 31, <strong>2007</strong>, 2006 and 2005 were as follows:<br />
(in millions) <strong>2007</strong> 2006 2005<br />
Sales of fixed maturities $ (468) $(382) $ 372<br />
Sales of equity securities 1,087 813 643<br />
Sales of real estate and other assets 619 303 88<br />
Other-than-temporary impairments (4,072) (944) (598)<br />
Foreign exchange transactions (643) (382) 701<br />
Derivative instruments (115) 698 (865)<br />
Total $(3,592) $ 106 $ 341<br />
<strong>AIG</strong>FP other-than-temporary impairments* $ (643) $ — $ —<br />
* <strong>Report</strong>ed as part of other in<strong>com</strong>e.<br />
<strong>AIG</strong> <strong>2007</strong> Form 10-K 109