AIG 2006 Annual Report Download - page 136

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
At December 31, 2006, the fair value of AIG’s fixed maturities responsible for establishing and implementing risk management
and equity securities aggregated $496.0 billion. At December 31, processes and responding to the individual needs and issues
2006, aggregate unrealized gains after taxes for fixed maturity within their business, including risk concentrations within their
and equity securities were $11.4 billion. At December 31, 2006, business segments.
the aggregate unrealized losses after taxes of fixed maturity and
equity securities were approximately $2.5 billion. Corporate Risk Management
The effect on net income of unrealized losses after taxes will AIG’s major risks are addressed at the corporate level through the
be mitigated upon realization because certain realized losses will Enterprise Risk Management Depar tment (ERM). ERM is headed
be charged to participating policyholder accounts, or realization by AIG’s Chief Risk Officer (CRO) and is responsible for assisting
will result in current decreases in the amortization of certain DAC. AIG’s business leaders, executive management and the Board of
At December 31, 2006, unrealized losses for fixed maturity Directors to identify, assess, quantify, manage and mitigate the
securities and equity securities did not reflect any significant risks incurred by AIG. An important goal of ERM is to ensure that
industry concentrations. once appropriate governance, authorities, procedures and policies
The amortized cost of fixed maturities available for sale have been established, aggregated risks do not result in inappro-
in an unrealized loss position at December 31, 2006, by priate concentrations.
contractual maturity, is shown below: Senior management defines the policies, has established
general operating parameters for its global businesses and has
(in millions) Amortized Cost established various oversight committees to monitor the risks
Due in one year or less $ 6,139 attendant to its businesses:
Due after one year through five years 31,839
(The Credit Risk Committee (CRC) is responsible for
Due after five years through ten years 51,084
Due after ten years 64,634 (i) approving credit risk policies and procedures for use
Total $153,696 throughout AIG; (ii) delegating credit authority to business unit
credit officers and select business unit managers;
For the year ended December 31, 2006, the pretax realized (iii) approving transaction requests and limits for corporate,
losses incurred with respect to the sale of fixed maturities and sovereign and cross-border credit exposures that exceed the
equity securities were $1.3 billion. The aggregate fair value of delegated authorities; (iv) establishing and maintaining AIG’s
securities sold was $43 billion, which was approximately 97 per- risk rating process for corporate, financial and sovereign
cent of amortized cost. The average period of time that securities obligors; and (v) regular reviews of credit risk exposures in the
sold at a loss during the year ended December 31, 2006 were portfolios of all credit-incurring business units.
trading continuously at a price below book value was approxi- (The Financial Risk Committee (FRC) oversees AIG’s market risk
mately four months. See Risk Management — Investments herein exposures to interest rates, foreign exchange and equity prices
for an additional discussion of investment risks associated with and provides strategic direction for AIG’s asset-liability manage-
AIG’s investment portfolio. ment. The FRC meets monthly and acts as a central mecha-
nism for AIG senior management to review comprehensive
Risk Management information on AIG’s financial exposures and to exercise broad
control over these exposures.
Overview
(The Foreign Exchange Committee (FEC) monitors trends in
AIG believes that strong risk management practices and a sound foreign exchange rates, reviews AIG’s foreign exchange expo-
internal control environment are fundamental to its continued sures, and provides recommendations on foreign currency
success and profitable growth. Failure to manage risk properly asset allocation and remittance hedging.
could expose AIG to significant losses, regulatory issues and a (The Derivatives Review Committee (DRC) provides an indepen-
damaged reputation. dent review of any proposed derivative transaction or program
The major risks to which AIG is exposed include the following: not otherwise managed by AIGFP. The DRC examines, among
(Insurance risk — the potential loss resulting from ultimate other things, the nature and purpose of the derivative transac-
claims and expenses exceeding held reserves. tion, its potential credit exposure, if any, and the estimated
(Credit risk — the potential loss arising from an obligor’s benefits.
inability or unwillingness to meet its obligations to AIG. (The Complex Structured Finance Transaction Committee
(Market risk — the potential loss arising from adverse fluctua- (CSFTC) has the authority and responsibility to review and
tions in interest rates, foreign currencies, equity and commod- approve proposed transactions that could subject AIG to
ity prices, and their levels of volatility. heightened legal, reputational, accounting, or regulatory risk
(Operational risk — the potential loss resulting from inadequate (CSFTs). The CSFTC provides guidance to and monitors the
or failed internal processes, people, and systems, or from activities of transaction review committees (TRCs) which have
external events. been established in all major business units. TRCs have the
AIG senior management establishes the framework, principles responsibility to identify, review and refer CSFTs to the CSFTC.
and guidelines for risk management. The business executives are
86 AIG 2006 Form 10-K