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 />
Management’s Discussion and Analysis of<br />
Financial Condition and Results of Operations Continued<br />
($8.9 billion after tax). Additional information about these securi- ( Market risk — the potential loss arising from adverse fluctuaties<br />
is as follows:<br />
tions in interest rates, foreign currencies, equity and <strong>com</strong>mod-<br />
( These securities were valued, in the aggregate, at approxi- ity prices, and their levels of volatility.<br />
mately 95 percent of their current amortized cost. ( Operational risk — the potential loss resulting from inadequate<br />
( Less than three percent of these securities were valued at less or failed internal processes, people, and systems, or from<br />
than 20 percent of their current cost, or amortized cost.<br />
external events.<br />
( Less than four percent of the fixed in<strong>com</strong>e securities had ( Liquidity risk — the potential inability to meet all payment<br />
issuer credit ratings which were below investment grade.<br />
obligations when they be<strong>com</strong>e due.<br />
<strong>AIG</strong> did not consider these securities in an unrealized loss ( General insurance risk — the potential loss resulting from<br />
position to be other-than-temporarily impaired at December 31, inadequate premiums, insufficient reserves and catastrophic<br />
<strong>2007</strong>, as management has the intent and ability to hold these exposures.<br />
investments until they recover their cost basis. <strong>AIG</strong> believes the ( Life insurance risk — the potential loss resulting from experisecurities<br />
will generally continue to perform in accordance with ence deviating from expectations for mortality, morbidity and<br />
the original terms, notwithstanding the present price declines.<br />
termination rates in the insurance-oriented products and insuffi-<br />
At December 31, <strong>2007</strong>, unrealized losses for fixed maturity cient cash flows to cover contract liabilities in the retirement<br />
securities and equity securities did not reflect any significant<br />
savings products.<br />
industry concentrations.<br />
<strong>AIG</strong> senior management establishes the framework, principles<br />
In <strong>2007</strong>, unrealized losses related to investment grade bonds and guidelines for risk management. The primary focus of risk<br />
increased $9.3 billion ($6.1 billion after tax), reflecting the<br />
management is to assess the risk of <strong>AIG</strong> incurring economic<br />
widening of credit spreads, partially offset by the effects of a losses from the risk categories outlined above. The business<br />
decline in risk-free interest rates.<br />
executives are responsible for establishing and implementing risk<br />
management processes and responding to the individual needs<br />
The amortized cost and fair value of fixed maturity<br />
and issues within their business, including risk concentrations<br />
securities available for sale in an unrealized loss position<br />
within their respective businesses with appropriate oversight by<br />
at December 31, <strong>2007</strong>, by contractual maturity, is shown<br />
Enterprise Risk Management (ERM).<br />
below:<br />
(in millions) Amortized Cost Fair Value Corporate Risk Management<br />
Due in one year or less $ 9,408 $ 9,300<br />
Due after one year through five years 36,032 35,267<br />
<strong>AIG</strong>’s major risks are addressed at the corporate level through<br />
Due after five years through ten years 54,198 52,394 ERM, which is headed by <strong>AIG</strong>’s Chief Risk Officer (CRO). ERM is<br />
Due after ten years 56,557 53,578 responsible for assisting <strong>AIG</strong>’s business leaders, executive man-<br />
Mortgage-backed, asset-backed and<br />
agement and the Board of Directors to identify, assess, quantify,<br />
collateralized 99,751 92,246<br />
manage and mitigate the risks incurred by <strong>AIG</strong>. Through the CRO,<br />
Total $255,946 $242,785<br />
ERM reports to <strong>AIG</strong>’s Chief Financial Officer, various senior<br />
For the year ended December 31, <strong>2007</strong>, the pre-tax realized management <strong>com</strong>mittees and the Board of Directors through the<br />
losses incurred with respect to the sale of fixed maturities and Finance and Audit Committees.<br />
equity securities were $1.3 billion. The aggregate fair value of<br />
An important goal of ERM is to ensure that once appropriate<br />
securities sold was $38.0 billion, which was approximately<br />
governance, authorities, procedures and policies have been<br />
94 percent of amortized cost. The average period of time that established, aggregated risks do not result in inappropriate<br />
securities sold at a loss during <strong>2007</strong> were trading continuously at concentrations. Senior management defines the policies, has<br />
a price below book value was approximately five months. See Risk established general operating parameters for its global busi-<br />
Management — Investments herein for an additional discussion of nesses and has established various oversight <strong>com</strong>mittees to<br />
investment risks associated with <strong>AIG</strong>’s investment portfolio. monitor the risks attendant to its businesses:<br />
( The Financial Risk Committee (FRC) oversees <strong>AIG</strong>’s market risk<br />
Risk Management<br />
exposures to interest rates, foreign exchange and fair values of<br />
Overview<br />
shares, partnership interests, real estate and other equity<br />
investments and provides strategic direction for <strong>AIG</strong>’s asset-<br />
<strong>AIG</strong> believes that strong risk management practices and a sound liability management. The FRC meets monthly and acts as a<br />
internal control environment are fundamental to its continued<br />
central mechanism for <strong>AIG</strong> senior management to review<br />
success and profitable growth. Failure to manage risk properly<br />
<strong>com</strong>prehensive information on <strong>AIG</strong>’s financial exposures and to<br />
exposes <strong>AIG</strong> to significant losses, regulatory issues and a<br />
exercise broad control over these exposures. There are two<br />
damaged reputation.<br />
sub<strong>com</strong>mittees of the FRC.<br />
The major risks to which <strong>AIG</strong> is exposed include the following: ( The Foreign Exchange Committee monitors trends in foreign<br />
( Credit risk — the potential loss arising from an obligor’s exchange rates, reviews <strong>AIG</strong>’s foreign exchange exposures,<br />
inability or unwillingness to meet its obligations to <strong>AIG</strong>.<br />
and provides re<strong>com</strong>mendations on foreign currency asset<br />
allocation and remittance hedging.<br />
112 <strong>AIG</strong> <strong>2007</strong> Form 10-K