AIG 2005 Annual Report Download - page 103

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
At December 31, 2005, aggregate pretax unrealized gains were $16.1 billion, while the pretax unrealized losses with respect to
investment grade bonds, below investment grade bonds and equity securities were $3.3 billion, $404 million and $257 million,
respectively. Aging of the pretax unrealized losses with respect to these securities, distributed as a percentage of cost relative
to unrealized loss (the extent by which the market value is less than amortized cost or cost), including the number of respective
items, was as follows:
Less than or equal to Greater than 20% to Greater than 50%
20% of Cost(a) 50% of Cost(a) of Cost(a) Total
Aging 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 $101,885 $1,984 12,264 $ 36 $ 9 11 $ — $ — — $101,921 $1,993 12,275
7-12 months 14,271 426 1,749 1 — 1 — — — 14,272 426 1,750
H12 months 19,502 791 2,722 450 107 17 5 3 8 19,957 901 2,747
Total $135,658 $3,201 16,735 $487 $116 29 $ 5 $ 3 8 $136,150 $3,320 16,772
Below investment grade
bonds
0-6 months $ 3,651 $ 129 852 $111 $ 29 24 $11 $ 6 14 $ 3,773 $ 164 890
7-12 months 1,524 93 338 139 38 34 2 1 15 1,665 132 387
H12 months 1,113 84 225 90 24 23 — — 11 1,203 108 259
Total $ 6,288 $ 306 1,415 $340 $ 91 81 $13 $ 7 40 $ 6,641 $ 404 1,536
Total bonds
0-6 months $105,536 $2,113 13,116 $147 $ 38 35 $11 $ 6 14 $105,694 $2,157 13,165
7-12 months 15,795 519 2,087 140 38 35 2 1 15 15,937 558 2,137
H12 months 20,615 875 2,947 540 131 40 5 3 19 21,160 1,009 3,006
Total $141,946 $3,507 18,150 $827 $207 110 $18 $10 48 $142,791 $3,724 18,308
Equity securities
0-6 months $ 3,041 $ 113 1,109 $ 75 $ 23 71 $30 $20 42 $ 3,146 $ 156 1,222
7-12 months 573 41 122 169 45 68 6 4 23 748 90 213
H12 months 66 4 26 30 6 13 1 1 29 97 11 68
Total $ 3,680 $ 158 1,257 $274 $ 74 152 $37 $25 94 $ 3,991 $ 257 1,503
(a) For bonds, represents amortized cost.
(b) As more fully described above, upon realization, certain realized losses will be charged to participating policyholder accounts, or realization will result in a
current decrease in the amortization of certain deferred policy acquisition costs.
As stated previously, the valuation for AIG’s investment Hedge funds and limited partnerships in which AIG holds in
portfolio comes from market exchanges or dealer quotations, the aggregate less than a five percent interest are carried at fair
with the exception of nontraded securities. AIG considers value. The change in fair value is recognized as a component of
nontraded securities to mean certain fixed income investments, accumulated other comprehensive income, net of tax.
certain structured securities, direct private equities, limited With respect to hedge funds and limited partnerships in which
partnerships, and hedge funds. The aggregate carrying value of AIG holds in the aggregate a five percent or greater interest, AIG
these securities at December 31, 2005 was approximately uses the equity method to record these investments. The changes
$62 billion. in such net asset values are recorded in income.
The methodology used to estimate fair value of nontraded AIG obtains the fair value of its investments in limited
fixed income investments is by reference to traded securities partnerships and hedge funds from information provided by the
with similar attributes and using a matrix pricing methodology. general partner or manager of each of these investments, the
This technique takes into account such factors as the industry, accounts of which are generally audited on an annual basis.
the security’s rating and tenor, its coupon rate, its position in Each of these investment categories is tested to determine if
the capital structure of the issuer, and other relevant factors. impairment in value exists. Various valuation techniques are
The change in fair value is recognized as a component of used with respect to each category in this determination.
accumulated other comprehensive income, net of tax.
For certain structured securities, the carrying value is based Financial Services Operations
on an estimate of the security’s future cash flows pursuant to AIG’s Financial Services subsidiaries engage in diversified
the requirements of Emerging Issues Task Force Issue activities including aircraft and equipment leasing, capital
No. 99-20, ‘‘Recognition of Interest Income and Impairment markets transactions, consumer finance and insurance premium
on Purchased and Retained Beneficial Interests in Securitized financing. See also Note 2 of Notes to Consolidated Financial
Financial Assets.’’ The change in carrying value is recognized Statements.
in income.
AIG m Form 10-K 51