AIG 2007 Annual Report Download - page 162

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
short-term investments. These increases were primarily driven by
Asset Management Invested Assets
continued growth of the MIP and the growth of AIG’s Institutional
Asset Management invested assets are primarily comprised of Asset Management business. These increases were partially
assets supporting AIG’s Spread-Based Investment business, offset by the decrease in assets associated with the runoff of the
which includes AIG’s MIP and domestic GIC programs. domestic GIC program.
The Spread-Based Investment business strategy is to generate
spread income from investments yielding returns greater than Securities Lending Activities
AIG’s cost of funds. The asset-liability relationship is actively
AIG’s securities lending program is a centrally managed program
managed. The goal of the MIP investment strategy is to capture a
facilitated by AIG Investments primarily for the benefit of certain of
spread between income earned on investments and the funding
AIG’s Insurance companies. Securities are loaned to various
costs of the program while mitigating interest rate and foreign
financial institutions, primarily major banks and brokerage firms.
currency exchange rate risk. The invested assets are predomi-
Cash collateral equal to 102 percent of the fair value of the
nantly fixed income securities and include U.S. residential mort-
loaned securities is received. The cash collateral is invested in
gage-backed securities, asset-backed securities and commercial
highly-rated fixed income securities to earn a net spread.
mortgage-backed securities. In addition, the MIP sold credit
AIG’s liability to the borrower for collateral received was $82.0
protection by issuing single-name high-grade corporate credit
billion and the fair value of the collateral reinvested was $75.7
default swaps in 2007.
billion as of December 31, 2007. In addition to the invested
Asset Management invested assets grew by $3.8 billion during
collateral, the securities on loan as well as all of the assets of
2007. The growth in invested assets was primarily attributable to
the participating companies are generally available to satisfy the
growth in other invested assets and mortgage and other loans
liability for collateral received.
receivable partially offset by a decrease in bond holdings, and
The composition of the securities lending invested collateral by credit rating at December 31, 2007 was as follows:
BBB/Not Short-
(in millions) AAA AA A Rated Term Total
Corporate debt $ 1,191 $ 9,341 $3,448 $160 $ — $14,140
Mortgage-backed, asset-backed and collateralized 47,180 2,226 22 82 49,510
Cash and short-term investments — — — — 12,012 12,012
Total $48,371 $11,567 $3,470 $242 $12,012 $75,662
Participation in the securities lending program by reporting unit at investments was $5.0 billion as of December 31, 2007. During
December 31, 2007 was as follows: 2007, AIG incurred net realized losses of $1.0 billion on this
Percent portfolio, predominantly related to other-than-temporary
Participation impairments.
Domestic Life Insurance and Retirement Services 79%
Foreign Life Insurance 10 Valuation of Invested Assets
Domestic General Insurance 3
Foreign General Insurance 4 Traded Securities
Asset Management 4
The valuation of AIG’s investment portfolio involves obtaining a
Total 100%
fair value for each security. The source for the fair value is
On December 31, 2007, $11.4 billion (or 13.7 percent) of the generally from market exchanges or dealer quotations, with the
liabilities were one-day tenor. These one-day tenor loans do not exception of nontraded securities.
have a contractual end date but are terminable by either party on
demand. The balance of the liabilities contractually mature within Nontraded Securities
three months; however, the maturing loans are frequently renewed
and rolled over to extended dates. Collateral held for this program AIG considers nontraded securities to mean certain fixed income
at December 31, 2007 included interest bearing cash equivalents investments, certain structured securities, direct private equities,
with overnight maturities of $12.0 billion. limited partnerships, and hedge funds.
Liquidity in the securities pool is managed based upon The aggregate carrying value of AIG’s nontraded securities at
historical experience regarding volatility of daily, weekly and December 31, 2007 was approximately $70 billion. The methodol-
biweekly loan balances. Despite the current environment, the ogy used to estimate fair value of nontraded fixed income
program has not experienced a significant decrease in loan investments is by reference to traded securities with similar
balances. attributes and using a matrix pricing methodology. This methodol-
In addition, the invested securities are carried at fair value with ogy takes into account such factors as the issuer’s industry, the
unrealized gains and losses recorded in accumulated other security’s rating and tenor, its coupon rate, its position in the
comprehensive income (loss) while net realized gains and losses capital structure of the issuer, and other relevant factors.
are recorded in earnings. The net unrealized loss on the
108 AIG 2007 Form 10-K