AIG 2007 Annual Report Download - page 154

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
Life Insurance & Retirement Services no liquidity demands with respect to these warehoused invest-
ments. To the extent adverse market conditions prevent AIG
Life Insurance & Retirement Services operating cash flow is Investments from transferring or otherwise divesting these ware-
derived from underwriting and investment activities. If a substan- housed investments, repayment of the temporary equity funding
tial portion of the Life Insurance & Retirement Services operations provided by AIG would be delayed until the investment is
bond portfolio diminished significantly in value and/or defaulted, transferred or otherwise divested.
AIG might need to liquidate other portions of its Life Insurance & AIG Investments incurs expenses associated with cash out-
Retirement Services investment portfolio and/or arrange financ- flows from the operation of its business, including costs related to
ing. Possible events causing such a liquidity strain could include portfolio management and related back and middle office costs.
economic collapse of a nation or region in which Life Insurance & In addition, cash is used in association with investment warehous-
Retirement Services operations exist, nationalization, catastrophic ing activities wherein AIG Investments funds and temporarily holds
terrorist acts, or other economic or political upheaval. In addition, an investment until transferred, sold or otherwise divested.
a significant rise in interest rates in a particular region or regions Cash needs for the Spread-Based Investment business are
leading to a major increase in policyholder surrenders could also principally the result of GIC maturities. Significant blocks of the
create a liquidity strain. GIC portfolio will mature over the next five years. AIG utilizes
asset liability matching to control liquidity risks associated with
Financial Services this business. In addition, AIG believes that its products incorpo-
rate certain restrictions which encourage persistency, limiting the
AIG’s major Financial Services operating subsidiaries consist of
magnitude of unforeseen early surrenders in the GIC portfolio.
AIGFP, ILFC, AGF and AIGCFG. Sources of funds considered in
Liquidity for Asset Management operations can be affected by
meeting the liquidity needs of AIGFP’s operations include GIAs,
significant credit or geopolitical events that might cause a delay in
issuance of long- and short-term debt, proceeds from maturities,
fund closings, securitizations or an inability of AIG’s clients to
sales of securities available for sale and securities and spot
fund their capital commitments.
commodities leased or sold under repurchase agreements. ILFC,
AGF and AIGCFG utilize the commercial paper markets, bank loans
AIG (Parent Company)
and bank credit facilities as sources of liquidity. ILFC and AGF
also fund in the domestic and international capital markets The liquidity of the parent company is principally derived from its
without reliance on any guarantee from AIG. An additional source subsidiaries. The primary sources of cash flow are dividends and
of liquidity for ILFC is the use of export credit facilities. AIGCFG other payments from its regulated and unregulated subsidiaries,
also uses wholesale and retail bank deposits as sources of funds. as well as issuance of debt securities. Primary uses of cash flow
On occasion, AIG has provided equity capital to ILFC, AGF and are for debt service, subsidiary funding, shareholder dividend
AIGCFG and provides intercompany loans to AIGCFG. payments and common stock repurchases. In 2007, AIG parent
Financial Services liquidity could be impaired by an inability to collected $4.9 billion in dividends and other payments from
access the capital markets or by collateral calls. The credit default subsidiaries (primarily from insurance company subsidiaries),
swaps written by AIGFP on super senior tranches of multi-sector issued $11.7 billion of debt and retired $865 million of debt,
CDOs require, in most cases, physical settlement following an excluding MIP and Series AIGFP debt. AIG parent also advanced
event constituting a failure to pay in respect of the underlying $6 billion for structured share repurchase arrangements. Exclud-
super senior CDO securities. The majority of the other credit ing MIP and Series AIGFP debt, AIG parent made interest
default swaps are cash settled, whereby AIGFP would be required payments totaling $550 million, made $5.90 billion in capital
upon an event constituting a failure to pay in respect of the contributions to subsidiaries, and paid $1.93 billion in dividends
underlying super senior CDO securities to make cash payments to to shareholders in 2007. In February 2008, AIG contributed
the counterparty equal to any actual losses that attach to the approximately $445 million in the form of forgiveness of Federal
super senior risk layer, rather than to purchase the reference income tax recoverables to certain domestic general insurance
obligation. Additionally, certain of the credit default swaps are subsidiaries and $500 million to certain domestic life insurance
subject to collateral call provisions. In the case of such swaps subsidiaries, both effective December 31, 2007.
written on CDOs, the amount of the collateral to be posted is AIG parent funds its short-term working capital needs through
determined based on the value of the CDO securities referenced commercial paper issued by AIG Funding. As of December 31,
in the documentation for the credit default swaps. 2007, AIG Funding had $4.2 billion of commercial paper outstand-
ing with an average maturity of 29 days. As additional liquidity,
Asset Management AIG parent and AIG Funding maintain committed revolving credit
facilities that, as of December 31, 2007, had an aggregate of
Asset Management’s sources of funds include cash flows from
$9.3 billion available to be drawn, and which are summarized
investment management fees, carried interest and returns on
above under Revolving Credit Facilities.
various investments. These investments are financed through the
At the parent company level, liquidity management activities
issuance of AIG debt in the MIP, the issuance of GICs and funding
are conducted in a manner intended to preserve and enhance
from AIG. From time to time, AIG Investments utilizes temporary
funding stability, flexibility, and diversity through the full range of
debt funding from AIG primarily to acquire warehoused invest-
ments. Subsequent to the initial investment, there are generally
100 AIG 2007 Form 10-K