2007 Annual Report - AIG.com

American International Group, Inc. and Subsidiaries
The following table presents the year-end, average, high, and low VaRs* on a diversified basis and of each component of market risk
for Capital Markets operations for the years 2007 and 2006. The diversified VaR is usually smaller than the sum of its components
due to correlation effects.
For the Year Ended
For the Year Ended
December 31, 2007 December 31, 2006
(in millions) As of December 31 Average High Low As of December 31 Average High Low
Total AIG trading market risk:
Diversified $5 $5 $8 $4 $4 $4 $7 $3
Interest rate 3 2 3 2 2 2 3 1
Currency 1 1 2 1 1 1 3 1
Equity 3 3 5 2 3 3 4 2
Commodity 3 3 7 2 5 3 5 2
* The VaR calculation has been changed from a 3-year time series to a 5-year time series. The December 31, 2006 VaR reflects this change.
Aircraft Leasing
AIG’s Aircraft Leasing operations represent the operations of ILFC,
which generates its revenues primarily from leasing new and used
commercial jet aircraft to foreign and domestic airlines and
companies associated with the airline industry. Risks inherent in
this business, and which are managed at the business unit level,
include the following:
or 2005. ILFC has been able to re-lease the aircraft without
diminution in lease rates that would result in an impairment under
FAS 144.
Consumer Finance
AIG’s Consumer Finance operations provide a wide variety of
consumer finance products, including real estate and other
( the risk that there will be no market for the aircraft acquired; consumer loans, credit card loans, retail sales finance and credit-
( the risk that aircraft cannot be placed with lessees; related insurance to customers both domestically and overseas,
( the risk of nonperformance by lessees; and particularly in emerging markets. Consumer Finance operations
( the risk that aircraft and related assets cannot be disposed of include AGF as well as AIGCFG. AGF provides a wide variety of
at the time and in a manner desired.
consumer finance products, including real estate loans, non-real
estate loans, retail sales finance and credit-related insurance to
customers in the United States, the U.K., Puerto Rico and the
U.S. Virgin Islands. AIGCFG, through its subsidiaries, is engaged
in developing a multi-product consumer finance business with an
emphasis on emerging markets.
Many of AGF’s borrowers are non-prime or subprime. The real
estate loans are comprised principally of first-lien mortgages on
residential real estate generally having a maximum term of
360 months, and are considered non-conforming. The real estate
loans may be closed-end accounts or open-end home equity lines
of credit and are principally fixed rate products. AGF does not
offer mortgage products with borrower payment options that allow
for negative amortization of the principal balance. The secured
non-real estate loans are secured by consumer goods, automo-
biles or other personal property. Both secured and unsecured nonreal
estate loans and retail sales finance receivables generally
have a maximum term of 60 months.
Current economic conditions, such as interest rate and
employment levels, can have a direct effect on the borrowers’
ability to repay these loans. AGF manages the credit risk inherent
in its portfolio by using credit scoring models at the time of credit
applications, established underwriting criteria, and, in certain
cases, individual loan reviews. AGF monitors the quality of the
finance receivables portfolio and determines the appropriate level
of the allowance for losses through its Credit Strategy and Policy
Committee. This Committee bases its conclusions on quantitative
analyses, qualitative factors, current economic conditions and
trends, and each Committee member’s experience in the consumer
finance industry.
The airline industry is sensitive to changes in economic
conditions and is cyclical and highly competitive. Airlines and
related companies may be affected by political or economic
instability, terrorist activities, changes in national policy, competitive
pressures on certain air carriers, fuel prices and shortages,
labor stoppages, insurance costs, recessions, world health issues
and other political or economic events adversely affecting world or
regional trading markets.
ILFC’s revenues and operating income may be adversely
affected by the volatile competitive environment in which its
customers operate. ILFC is exposed to operating loss and liquidity
strain through nonperformance of aircraft lessees, through owning
aircraft which it is unable to sell or re-lease at acceptable rates at
lease expiration and, in part, through committing to purchase
aircraft which it is unable to lease.
ILFC manages the risk of nonperformance by its lessees with
security deposit requirements, repossession rights, overhaul requirements
and close monitoring of industry conditions through its
marketing force. Approximately 90 percent of ILFC’s fleet is leased
to non-U.S. carriers, and the fleet, comprised of the most efficient
aircraft in the airline industry, continues to be in high demand
from such carriers.
Management formally reviews regularly, and no less frequently
than quarterly, issues affecting ILFC’s fleet, including events and
circumstances that may cause impairment of aircraft values.
Management evaluates aircraft in the fleet as necessary based on
these events and circumstances in accordance with Statement of
Financial Accounting Standards No. 144, ‘‘Accounting for the
Impairment or Disposal of Long-Lived Assets’’ (FAS 144). ILFC has
not recognized any impairment related to its fleet in 2007, 2006
AIG 2007 Form 10-K 125