AIG 2007 Annual Report Download - page 141

American International Group, Inc. and Subsidiaries
reported in the Life Insurance & Retirement Services segment. partnership income associated with the GIC. In addition to other-
Also, commencing in 2007, the effect of consolidating managed than-temporary impairments, unrealized losses on fixed income
partnerships and funds, which were historically reported as a investments were driven by widening credit spreads, partially
component of the Institutional Asset Management business, are offset by gains due to falling interest rates. These unrealized
now reported in the Consolidation and eliminations category. Prior losses are recorded in Accumulated other comprehensive income
period amounts have been revised to conform to the current (loss).
presentation. During 2007, AIG has issued the equivalent of $8.1 billion of
securities to fund the MIP in the Euromarkets and the U.S. public
and private markets compared to $5.3 billion issued in 2006. At
2006 and 2005 Comparison
December 31, 2007, total issuances were $13.4 billion.
Asset Management operating income decreased in 2006 compared
The following table illustrates the anticipated runoff of the
to 2005 as a decline in Spread-Based Investment operating income
domestic GIC portfolio at December 31, 2007:
was partially offset by higher Institutional Asset Management
operating income. Less Than 1-3 3+-5 Over Five
(in billions) One Year Years Years Years Total
Spread-Based Investment Business Results Domestic GICs $9.4 $6.4 $2.7 $6.8 $25.3
2007 and 2006 Comparison
2006 and 2005 Comparison
The Spread-Based Investment business reported an operating
loss in 2007 compared to operating income in 2006 due to Operating income related to the Spread-Based Investment busi-
foreign exchange, interest rate and credit-related mark to market ness declined in 2006 compared to 2005 due primarily to the
losses and other-than-temporary impairment charges on fixed continued runoff of GIC balances and spread compression related
income investments, partially offset by increased partnership to increases in short-term interest rates. A significant portion of
income. In 2007, the GIC program incurred foreign exchange the remaining GIC portfolio consists of floating rate obligations.
losses of $526 million on foreign-denominated GIC reserves. AIG has entered into hedges to manage against increases in
Partially offsetting these losses were $269 million of net mark to short-term interest rates. AIG believes these hedges are economi-
market gains on derivative positions. These net gains included cally effective, but they did not qualify for hedge accounting
mark to market gains on foreign exchange derivatives used to treatment. The decline in operating income was partially offset by
economically hedge the effect of foreign exchange rate move- improved partnership income, particularly during the fourth quar-
ments on foreign-denominated GIC reserves and mark to market ter of 2006.
losses on interest rate hedges that did not qualify for hedge
accounting treatment. Institutional Asset Management Results
The MIP experienced mark to market losses of $193 million 2007 and 2006 Comparison
due to interest rate and foreign exchange derivative positions that,
while partially effective in hedging interest rate and foreign Operating income for Institutional Asset Management increased in
exchange risk, did not qualify for hedge accounting treatment and 2007 compared to 2006 reflecting increased carried interest
an additional $98 million due to credit default swap losses. The revenues driven by higher valuations of portfolio investments that
MIP credit default swaps are comprised of single-name high-grade are generally associated with improved performance in the equity
corporate exposures. AIG enters into hedging arrangements to markets. The increase also reflects a $398 million gain from the
mitigate the effect of changes in currency and interest rates sale of a portion of AIG’s investment in Blackstone Group, L.P. in
associated with the fixed and floating rate and foreign currency connection with its initial public offering. Also contributing to this
denominated obligations issued under these programs. Some of increase were higher base management fees driven by higher
these hedging relationships qualify for hedge accounting treat- levels of third-party assets under management. Partially offsetting
ment, while others do not. Commencing in the first quarter of these increases were the operating losses from warehousing
2007, AIG applied hedge accounting to certain derivative transac- activities. The consolidated warehoused private equity investments
tions related to the MIP. Income or loss from these hedges not are not wholly owned by AIG and thus, a significant portion of the
qualifying for hedge accounting treatment are classified as net effect of consolidating these operating losses is offset in minority
realized capital gains (losses) in AIG’s Consolidated Statement of interest, which is not a component of operating income.
Income. The mark to market losses for 2007 were driven primarily AIG’s unaffiliated client assets under management, including
by a decline in short-term interest rates, the decline in the value retail mutual funds and institutional accounts, increased 26
of the U.S. dollar and widening credit spreads. percent to $94.2 billion at December 31, 2007 compared to
Also contributing to the operating loss were other-than-tempo- December 31, 2006. Additionally, AIG Investments successfully
rary impairment charges on various fixed income investments held launched several new private equity and real estate funds in
in the GIC and MIP portfolios of approximately $836 million as a 2007, which provide both a base management fee and the
result of movements in credit spreads and decreased market opportunity for future incentive fees.
liquidity. See Invested Assets — Other-than-temporary impair- While unaffiliated client assets under management and the
ments. These losses were partially offset by an increase in resulting management fees continue to increase, the growth in
AIG 2007 Form 10-K 87