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 ($8.9 billion after tax). Additional information about these securi- ( Market risk — the potential loss arising from adverse fluctuaties is as follows: tions in interest rates, foreign currencies, equity and commod- ( These securities were valued, in the aggregate, at approxi- ity prices, and their levels of volatility. mately 95 percent of their current amortized cost. ( Operational risk — the potential loss resulting from inadequate ( Less than three percent of these securities were valued at less or failed internal processes, people, and systems, or from than 20 percent of their current cost, or amortized cost. external events. ( Less than four percent of the fixed income securities had ( Liquidity risk — the potential inability to meet all payment issuer credit ratings which were below investment grade. obligations when they become due. AIG did not consider these securities in an unrealized loss ( General insurance risk — the potential loss resulting from position to be other-than-temporarily impaired at December 31, inadequate premiums, insufficient reserves and catastrophic 2007, as management has the intent and ability to hold these exposures. investments until they recover their cost basis. AIG believes the ( Life insurance risk — the potential loss resulting from experisecurities will generally continue to perform in accordance with ence deviating from expectations for mortality, morbidity and the original terms, notwithstanding the present price declines. termination rates in the insurance-oriented products and insuffi- At December 31, 2007, unrealized losses for fixed maturity cient cash flows to cover contract liabilities in the retirement securities and equity securities did not reflect any significant savings products. industry concentrations. AIG senior management establishes the framework, principles In 2007, unrealized losses related to investment grade bonds and guidelines for risk management. The primary focus of risk increased $9.3 billion ($6.1 billion after tax), reflecting the management is to assess the risk of AIG incurring economic widening of credit spreads, partially offset by the effects of a losses from the risk categories outlined above. The business decline in risk-free interest rates. executives are responsible for establishing and implementing risk management processes and responding to the individual needs The amortized cost and fair value of fixed maturity and issues within their business, including risk concentrations securities available for sale in an unrealized loss position within their respective businesses with appropriate oversight by at December 31, 2007, by contractual maturity, is shown Enterprise Risk Management (ERM). below: (in millions) Amortized Cost Fair Value Corporate Risk Management Due in one year or less $ 9,408 $ 9,300 Due after one year through five years 36,032 35,267 AIG’s major risks are addressed at the corporate level through Due after five years through ten years 54,198 52,394 ERM, which is headed by AIG’s Chief Risk Officer (CRO). ERM is Due after ten years 56,557 53,578 responsible for assisting AIG’s business leaders, executive man- Mortgage-backed, asset-backed and agement and the Board of Directors to identify, assess, quantify, collateralized 99,751 92,246 manage and mitigate the risks incurred by AIG. Through the CRO, Total $255,946 $242,785 ERM reports to AIG’s Chief Financial Officer, various senior For the year ended December 31, 2007, the pre-tax realized management committees and the Board of Directors through the losses incurred with respect to the sale of fixed maturities and Finance and Audit Committees. equity securities were $1.3 billion. The aggregate fair value of An important goal of ERM is to ensure that once appropriate securities sold was $38.0 billion, which was approximately governance, authorities, procedures and policies have been 94 percent of amortized cost. The average period of time that established, aggregated risks do not result in inappropriate securities sold at a loss during 2007 were trading continuously at concentrations. Senior management defines the policies, has a price below book value was approximately five months. See Risk established general operating parameters for its global busi- Management — Investments herein for an additional discussion of nesses and has established various oversight committees to investment risks associated with AIG’s investment portfolio. monitor the risks attendant to its businesses: ( The Financial Risk Committee (FRC) oversees AIG’s market risk Risk Management exposures to interest rates, foreign exchange and fair values of Overview shares, partnership interests, real estate and other equity investments and provides strategic direction for AIG’s asset- AIG believes that strong risk management practices and a sound liability management. The FRC meets monthly and acts as a internal control environment are fundamental to its continued central mechanism for AIG senior management to review success and profitable growth. Failure to manage risk properly comprehensive information on AIG’s financial exposures and to exposes AIG to significant losses, regulatory issues and a exercise broad control over these exposures. There are two damaged reputation. subcommittees of the FRC. The major risks to which AIG is exposed include the following: ( The Foreign Exchange Committee monitors trends in foreign ( Credit risk — the potential loss arising from an obligor’s exchange rates, reviews AIG’s foreign exchange exposures, inability or unwillingness to meet its obligations to AIG. and provides recommendations on foreign currency asset allocation and remittance hedging. 112 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries ( The Liquidity Risk Committee is responsible for liquidity in some cases, insuring, causing the value of the assets to policy and implementation at AIG Parent and exercises decline or insured risks to rise; and (ii) as cross-border risk where oversight and control of liquidity policies at each AIG entity. a country (sovereign government risk) or one or more non- See Capital Resources and Liquidity herein. sovereign obligors within a country are unable to repay an ( The CRC is responsible for the following: obligation or are unable to provide foreign exchange to service a ( approving credit risk policies and procedures for use credit or equity exposure incurred by another AIG business unit throughout AIG; located outside that country. ( delegating credit authority to business unit credit officers AIG’s credit risks are managed at the corporate level by the and select business unit managers; Credit Risk Management department (CRM) whose primary role is ( approving transaction requests and limits for corporate, to support and supplement the work of the CRC. CRM is headed sovereign and cross-border credit exposures that exceed the by AIG’s Chief Credit Officer (CCO), who reports to AIG’s CRO. delegated authorities; AIG’s CCO is primarily responsible for the development and ( establishing and maintaining AIG’s risk rating process for maintenance of credit risk policies and procedures approved by corporate, financial and sovereign obligors; and the CRC. In discharging this function CRM has the following ( conducting regular reviews of credit risk exposures in the responsibilities: portfolios of all credit-incurring business units. ( Manage the approval process for all requests for credit limits, ( The Derivatives Committee (DC) reviews any proposed deriva- program limits and transactions. tive transaction or program not otherwise managed by AIGFP. ( Approve delegated credit authorities to CRM credit executives The DC examines, among other things, the nature and purpose and business unit credit officers. of the derivative transaction, its potential credit exposure, if ( Aggregate globally all credit exposure data by counterparty, any, and the estimated benefits. country and industry and report risk concentrations regularly to ( The CSFTC has the authority and responsibility to review and the CRC and the Finance Committee of the Board of Directors. approve any proposed CSFT. A CSFT is any transaction or ( Administer regular in-depth portfolio credit reviews of all product that may involve a heightened legal, regulatory, investment, derivative and credit-incurring business units and accounting or reputational risk that is developed, marketed or recommend any corrective actions where required. proposed by AIG or a third party. The CSFTC provides guidance ( Develop methodologies for quantification and assessment of to and monitors the activities of transaction review committees credit risks, including the establishment and maintenance of (TRCs) which have been established in all major business AIG’s internal risk rating process. units. TRCs have the responsibility to identify, review and refer ( Approve appropriate credit reserves and methodologies at the CSFTs to the CSFTC. business unit and enterprise levels. AIG closely monitors and controls its company-wide credit risk Credit Risk Management concentrations and attempts to avoid unwanted or excessive risk accumulations, whether funded or unfunded. To minimize the level AIG devotes considerable resources, expertise and controls to of credit risk in certain circumstances, AIG may require third-party managing its direct and indirect credit exposures, such as guarantees, collateral, such as letters of credit or trust account investments, deposits, loans, reinsurance recoverables and deposits or reinsurance. These guarantees, letters of credit and leases, as well as counterparty risk in derivatives activities, reinsurance recoverables are also treated as credit exposure and cessions of insurance risk to reinsurers and customers and credit are added to AIG’s risk concentration exposure data. risk assumed through credit derivatives written and financial AIG defines its aggregate credit exposures to a counterparty as guarantees. Credit risk is defined as the risk that AIG’s customers the sum of its fixed maturities, loans, finance leases, derivatives or counterparties are unable or unwilling to repay their contractual (mark to market), deposits (in the case of financial institutions) obligations when they become due. Credit risk may also be and the specified credit equivalent exposure to certain insurance manifested: (i) through the downgrading of credit ratings of products which embody credit risk. counterparties whose credit instruments AIG may be holding, or, AIG 2007 Form 10-K 113
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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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Page 191 and 192: Index of Notes to Consolidated Fina
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SHAREHOLDER INFORMATION Corporate H
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