AIG 2005 Annual Report Download - page 102

Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
any such fixed maturity security classified as available for sale No impairment charge with respect to any one single credit
reflects the judgment of AIG’s management that the security was significant to AIG’s consolidated financial condition or
sold is unlikely to provide, on a relative value basis, as results of operations, and no individual impairment loss
attractive a return in the future as alternative securities exceeded 1.0 percent of consolidated net income for 2005.
entailing comparable risks. With respect to distressed securities, Excluding the other-than-temporary impairments noted
the sale decision reflects management’s judgment that the risk- above, the changes in market value for AIG’s available for sale
discounted anticipated ultimate recovery is less than the value portfolio, which constitutes the vast majority of AIG’s invest-
achievable on sale. ments, were recorded in accumulated other comprehensive
The valuation of invested assets involves obtaining a market income as unrealized gains or losses, net of tax.
value for each security. The source for the market value is At December 31, 2005, the fair value of AIG’s fixed
generally from market exchanges or dealer quotations, with the maturities and equity securities aggregated to $409.8 billion. At
exception of nontraded securities. December 31, 2005, aggregate unrealized gains after taxes for
If AIG chooses to hold a security, it evaluates the security fixed maturity and equity securities were $10.5 billion. At
for an other-than-temporary impairment in valuation. As a December 31, 2005, the aggregate unrealized losses after taxes
matter of policy, the determination that a security has incurred of fixed maturity and equity securities were approximately
an other-than-temporary decline in value and the amount of $2.6 billion.
any loss recognition requires the judgment of AIG’s manage- The effect on net income of unrealized losses after taxes
ment and a continual review of its investments. will be further mitigated upon realization, because certain
In general, a security is considered a candidate for other- realized losses will be charged to participating policyholder
than-temporary impairment if it meets any of the following accounts, or realization will result in current decreases in the
criteria: amortization of certain deferred policy acquisition costs.
mTrading at a significant (25 percent or more) discount to par At December 31, 2005, unrealized losses for fixed maturity
or amortized cost (if lower) for an extended period of time securities and equity securities did not reflect any significant
(nine months or longer); industry concentrations.
mThe occurrence of a discrete credit event resulting in (i) the The amortized cost of fixed maturities available for sale in an
issuer defaulting on a material outstanding obligation; or unrealized loss position at December 31, 2005, by contractual
(ii) the issuer seeking protection from creditors under the maturity, is shown below:
bankruptcy laws or any similar laws intended for the court
supervised reorganization of insolvent enterprises; or (iii) the (in millions) Amortized Cost
issuer proposing a voluntary reorganization pursuant to
Due in one year or less $ 3,882
which creditors are asked to exchange their claims for cash
Due after one year through five years 25,919
or securities having a fair value substantially lower than par
Due after five years through ten years 56,204
value of their claims; or
Due after ten years 56,786
mIn the opinion of AIG’s management, it is probable that
Total $142,791
AIG may not realize a full recovery on its investment,
irrespective of the occurrence of one of the foregoing In the twelve months ended December 31, 2005, the pretax
events. realized losses incurred with respect to the sale of fixed
Once a security has been identified as other-than-tempora- maturities and equity securities were $1.6 billion. The aggre-
rily impaired, the amount of such impairment is determined by gate fair value of securities sold was $51.7 billion, which was
reference to that security’s contemporaneous market price and approximately 97 percent of amortized cost. The average period
recorded as a charge to earnings. of time that securities sold at a loss during the twelve months
As a result of these policies, AIG recorded other-than- ended December 31, 2005 were trading continuously at a price
temporary impairment losses net of taxes of approximately below book value was approximately three months.
$389 million, $369 million and $1.0 billion in 2005, 2004 and
2003, respectively.
50 AIG m Form 10-K