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 Other-than-temporary impairment charges for the years ended December 31, 2007, 2006 and 2005 were as follows: (in millions) 2007 2006 2005 Impairment type: Severity* $2,200 $ — $ — Lack of intent to hold to recovery 1,054 619 335 Foreign currency declines 500 — — Issuer-specific credit events 515 279 257 Adverse projected cash flows on structured securities (EITF 99-20) 446 46 6 Total $4,715 $944 $598 * Includes $643 million related to AIGFP reported in other income. Other-than-temporary impairment charges for the year ended December 31, 2007 by Reporting Segment were as follows: Life Insurance & General Retirement Financial Asset (in millions) Insurance Services Services Management Other Total Impairment Type: Severity $ 71 $1,070 $643 $416 $ — $2,200 Lack of intent to hold to recovery 91 885 7 71 — 1,054 Foreign currency declines — 500 — — — 500 Issuer-specific credit events 113 177 — 69 156 515 Adverse projected cash flows on structured securities 1 166 — 279 — 446 Total $276 $2,798 $650 $835 $156 $4,715 Other-than-temporary severity-related impairment charges for the year ended December 31, 2007 were as follows: Rating: RMBS CDO CMBS Other Securities Total AAA $ 168 $621 $ — $ — $ 789 AA 870 53 6 — 929 A 66 32 77 — 175 BBB and below 28 — 52 — 80 Nonrated — — — 227 227 Total $1,132 $706 $135 $227 $2,200 No other-than-temporary impairment charge with respect to any U.S. loan exposure. At that date, none of the U.S. loans were in one single credit was significant to AIG’s consolidated financial default or delinquent by 90 days or more. The remaining condition or results of operations, and no individual other-than- commercial mortgage loans are secured predominantly by propertemporary impairment charge exceeded two percent of consoli- ties in Japan. In addition, at December 31, 2007, AIG had dated net income in 2007. approximately $2.0 billion in residential mortgage loans in In periods subsequent to the recognition of an other-than- jurisdictions outside the United States, primarily backed by temporary impairment charge for fixed maturity securities, which is properties in Taiwan and Thailand. not credit or foreign exchange related, AIG generally accretes into At December 31, 2007, AIG owned $23.9 billion in cost basis income the discount or amortizes the reduced premium resulting of CMBS. Approximately 78 percent of such holdings were rated from the reduction in cost basis over the remaining life of the ‘‘AAA’’, approximately 98 percent were rated ‘‘A’’ or higher, and security. less than 2 percent were rated ‘‘BBB’’ or below. At December 31, 2007, all such securities were current in the payment of principal Commercial Mortgage Loan Exposure and interest and none had default rates on underlying collateral at levels viewed by AIG as likely to result in the loss of principal or At December 31, 2007, AIG had direct commercial mortgage loan interest. exposure of $17.1 billion, with $16.3 billion representing 110 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries There have been disruptions in the commercial mortgage markets in general, and the CMBS market in particular, with credit default swaps indices and quoted prices of securities at levels consistent with a severe correction in lease rates, occupancy and fair value of properties. In addition, spreads in the primary mortgage market have widened significantly. While this capital market stress has not to date been reflected in the performance of commercial mortgage securitization in the form of increased defaults in underlying mortgage pools, pricing of CMBS has been adversely affected by market perceptions that underlying mortgage defaults will increase. As a result, AIG recognized $135 million of other-than-temporary impairment charges on CMBS trading at a severe discount to cost, despite the absence of any deterioration in performance of the underlying credits, because AIG concluded that it could not reasonably assert that the recovery period was temporary. At this time, AIG anticipates full recovery of principal and interest on the securities to which such other-than-temporary impairment charges were recorded. An aging of the pre-tax unrealized losses of fixed maturity and equity securities, distributed as a percentage of cost relative to unrealized loss (the extent by which the fair value is less than amortized cost or cost), including the number of respective items, was as follows at December 31, 2007: Less than or equal to Greater than 20% to Greater than 50% 20% of Cost (e) 50% of Cost (e) of Cost (e) Total Aging (d) Unrealized Unrealized Unrealized Unrealized (dollars in millions) Cost (a) Loss Items Cost (a) Loss Items Cost (a) Loss Items Cost (a) Loss (b) Items Investment grade bonds 0-6 months $124,681 $ 5,099 16,539 $ 2,588 $ 681 633 $ $ $127,269 $ 5,780 17,172 7-12 months 53,515 3,078 7,174 3,219 859 1,110 — — — 56,734 3,937 8,284 H12 months 63,146 2,966 9,598 699 180 119 63,845 3,146 9,717 Total $241,342 $11,143 33,311 $ 6,506 $1,720 1,862 $ — $ — — $247,848 $12,863 35,173 Below investment grade bonds 0-6 months $ 5,909 $ 147 1,611 $ 68 $ 18 24 $ — $ — — $ 5,977 $ 165 1,635 7-12 months 782 45 246 47 8 14 — — — 829 53 260 H12 months 1,222 61 204 70 19 9 — — — 1,292 80 213 Total $ 7,913 $ 253 2,061 $ 185 $ 45 47 $ — $ — — $ 8,098 $ 298 2,108 Total bonds 0-6 months $130,590 $ 5,246 18,150 $ 2,656 $ 699 657 $ — $ — — $133,246 $ 5,945 18,807 7-12 months 54,297 3,123 7,420 3,266 867 1,124 — — — 57,563 3,990 8,544 H12 months 64,368 3,027 9,802 769 199 128 — — — 65,137 3,226 9,930 Total (c) $249,255 $11,396 35,372 $ 6,691 $1,765 1,909 $ — $ — — $255,946 $13,161 37,281 Equity securities 0-6 months $ 3,603 $ 297 2,051 $ 262 $ 69 39 $ $ $ 3,865 $ 366 2,090 7-12 months 283 33 181 285 64 36 568 97 217 H12 months — — — — — — — — — — — — Total $ 3,886 $ 330 2,232 $ 547 $ 133 75 $ — $ — — $ 4,433 $ 463 2,307 (a) For bonds, represents amortized cost. (b) The effect on net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will be charged to participating policyholder accounts, or realization will result in current decreases in the amortization of certain DAC. (c) Includes securities lending invested collateral. (d) Represents the number of continuous months that fair value has been less than cost by any amount. (e) Represents the percentage by which fair value is less than cost at the balance sheet date. Unrealized gains and losses At December 31, 2007, the fair value of AIG’s fixed maturity and equity securities aggregated $587.1 billion. At December 31, 2007, aggregate pre-tax unrealized gains for fixed maturity and equity securities were $18.1 billion ($11.8 billion after tax). At December 31, 2007, the aggregate pre-tax gross unrealized losses on fixed maturity and equity securities were $13.6 billion AIG 2007 Form 10-K 111
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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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