AIG 2006 Annual Report Download - page 134

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
nities. In doing so, AIGFP must continually manage a variety of available for sale. Therefore, the decision to sell any such fixed
exposures, including credit, market, liquidity, operational and legal maturity security classified as available for sale reflects the
risks. judgment of AIG’s management that the security sold is unlikely to
provide, on a relative value basis, as attractive a return in the
future as alternative securities entailing comparable risks. With
Consumer Finance
respect to distressed securities, the sale decision reflects
AIG’s Consumer Finance operations provide a wide variety of management’s judgment that the risk-discounted anticipated ulti-
consumer finance products, including real estate and other mate recovery is less than the value achievable on sale.
consumer loans, credit card loans, retail sales finance and credit-
related insurance to customers both domestically and overseas, Traded Securities
particularly in emerging markets. These products are funded
through a combination of deposits and various borrowings, The valuation of AIG’s investment portfolio involves obtaining a
including commercial paper and medium-term notes. AIG’s Con- market value for each security. The source for the fair value is
sumer Finance operations are exposed to credit risk and risk of generally from market exchanges or dealer quotations, with the
loss resulting from adverse fluctuations in interest rates. Over half exception of nontraded securities. AIG considers nontraded securi-
of the finance receivables are real estate loans which are ties to mean certain fixed income investments, certain structured
substantially collateralized by the related properties. securities, direct private equities, limited partnerships, and hedge
With respect to credit losses, the allowance for losses is funds.
maintained at a level considered adequate to absorb anticipated
credit losses existing in that portfolio as of the balance sheet Nontraded Securities
date. The aggregate carrying value of AIG’s nontraded securities at
December 31, 2006 was approximately $67 billion. The methodol-
Asset Management Invested Assets ogy used to estimate fair value of nontraded fixed income
Asset Management invested assets are primarily comprised of investments is by reference to traded securities with similar
assets supporting AIG’s spread-based investment business, which attributes and using a matrix pricing methodology. This methodol-
includes AIG’s MIP and domestic GIC programs as well as AIG’s ogy takes into account such factors as the issuer’s industry, the
foreign spread-based business. Asset Management invested as- security’s rating and tenor, its coupon rate, its position in the
sets also include assets attributable to certain consolidated capital structure of the issuer, and other relevant factors. The
partnerships and variable interest entities. A portion of these change in fair value is recognized as a component of Accumulated
consolidated assets is offset by minority interest liabilities other comprehensive income, net of tax.
attributable to unaffiliated investor entities in AIG-sponsored For certain structured securities, the carrying value is based
investment vehicles. on an estimate of the security’s future cash flows pursuant to the
The spread-based investment business strategy is to produce requirements of Emerging Issues Task Force Issue No. 99-20,
cash flows greater than maturing liabilities. The asset-liability ‘‘Recognition of Interest Income and Impairment on Purchased
relationship is managed actively, leveraging the organization’s and Retained Beneficial Interests in Securitized Financial Assets.’’
experience in the Life Insurance & Retirement Services segment. The change in carrying value is recognized in income.
Margins are emphasized while maintaining satisfactory investment Hedge funds and limited partnerships in which AIG holds in the
quality and liquidity. The invested assets are predominantly fixed aggregate less than a five percent interest are carried at fair
income securities for the spread-based investment business. value. The change in fair value is recognized as a component of
Asset Management invested assets grew by $14.3 billion, or Accumulated other comprehensive income, net of tax.
20 percent during 2006, although aggregate Asset Management With respect to hedge funds and limited partnerships in which
fixed income investments remained essentially flat at $37.7 bil- AIG holds in the aggregate a five percent or greater interest, or
lion. The growth in invested assets was primarily attributable to less than a five percent interest but where AIG has more than a
increases in short-term investments, securities lending collateral minor influence over the operations of the investee, AIG accounts
and real estate investments. These increases were primarily for these investments using the equity method. The changes in
driven by continued growth of the MIP and AIG’s foreign spread- such net asset values are included in operating income.
based business, and the growth of AIG’s institutional Asset AIG obtains the fair value of its investments in limited
Management business. These increases were partially offset by partnerships and hedge funds from information provided by the
the decrease in assets associated with the runoff of the domestic general partner or manager of each of these investments, the
GIC program. accounts of which generally are audited on an annual basis.
Each of these investment categories is regularly tested to
determine if impairment in value exists. Various valuation tech-
Valuation of Invested Assets
niques are used with respect to each category in this
AIG has the ability to hold any fixed maturity security to its stated determination.
maturity, including those fixed maturity securities classified as
84 AIG 2006 Form 10-K