AIG 2007 Annual Report Download - page 163

American International Group, Inc. and Subsidiaries
For certain structured securities, the carrying value is based AIG evaluates its investments for impairments in valuation. The
on an estimate of the security’s future cash flows pursuant to the determination that a security has incurred an other-than-temporary
requirements of Emerging Issues Task Force Issue No. 99-20, impairment in value and the amount of any loss recognition
‘‘Recognition of Interest Income and Impairment on Purchased requires the judgment of AIG’s management and a regular review
and Retained Beneficial Interests in Securitized Financial Assets.’’ of its investments. See Note 1(c) to Consolidated Financial
Hedge funds and limited partnerships in which AIG holds in the Statements for further information on AIG’s policy.
aggregate less than a five percent interest are carried at fair Once a security has been identified as other-than-temporarily
value. impaired, the amount of such impairment is determined by
With respect to hedge funds and limited partnerships in which reference to that security’s contemporaneous fair value and
AIG holds in the aggregate a five percent or greater interest, or recorded as a charge to earnings.
less than a five percent interest but where AIG has more than a In light of the recent significant disruption in the
minor influence over the operations of the investee, AIG accounts U.S. residential mortgage and credit markets, particularly in the
for these investments using the equity method. fourth quarter, AIG has recognized an other-than-temporary impair-
AIG obtains the fair value of its investments in limited ment charge (severity loss) of $2.2 billion (including $643 million
partnerships and hedge funds from information provided by the related to AIGFP’s available for sale investment securities re-
general partner or manager of these investments, the accounts of corded in other income), primarily with respect to certain residen-
which generally are audited on an annual basis. tial mortgage-backed securities and other structured securities.
Each of these investment categories is regularly tested to Even while retaining their investment grade ratings, such securi-
determine if impairment in value exists. Various valuation tech- ties were priced at a significant discount to cost. Notwithstanding
niques are used with respect to each category in this AIG’s intent and ability to hold such securities indefinitely, and
determination. despite structures which indicate that a substantial amount of the
For a discussion of accounting policies related to changes in securities should continue to perform in accordance with original
fair value of invested assets, see Note 1 to Consolidated terms, AIG concluded that it could not reasonably assert that the
Financial Statements. recovery period would be temporary.
As a result of AIG’s periodic evaluation of its securities for
other-than-temporary impairments in value, AIG recorded other-
Portfolio Review
than-temporary impairment charges of $4.7 billion (including $643
Other-Than-Temporary Impairments million related to AIGFP recorded on other income), $944 million
and $598 million in 2007, 2006 and 2005, respectively.
AIG assesses its ability to hold any fixed maturity security in an
In addition to the above severity losses, AIG recorded other-
unrealized loss position to its recovery, including fixed maturity
than-temporary impairment charges in 2007, 2006 and 2005
securities classified as available for sale, at each balance sheet
related to:
date. The decision to sell any such fixed maturity security
(securities which AIG does not intend to hold until recovery;
classified as available for sale reflects the judgment of AIG’s
(declines due to foreign exchange;
management that the security sold is unlikely to provide, on a
(issuer-specific credit events;
relative value basis, as attractive a return in the future as
(certain structured securities impaired under EITF No. 99-20;
alternative securities entailing comparable risks. With respect to
and
distressed securities, the sale decision reflects management’s
(other impairments, including equity securities and partnership
judgment that the risk-discounted anticipated ultimate recovery is
investments.
less than the value achievable on sale.
Net realized capital gains (losses) for the years ended December 31, 2007, 2006 and 2005 were as follows:
(in millions) 2007 2006 2005
Sales of fixed maturities $ (468) $(382) $ 372
Sales of equity securities 1,087 813 643
Sales of real estate and other assets 619 303 88
Other-than-temporary impairments (4,072) (944) (598)
Foreign exchange transactions (643) (382) 701
Derivative instruments (115) 698 (865)
Total $(3,592) $ 106 $ 341
AIGFP other-than-temporary impairments* $ (643) $— $—
* Reported as part of other income.
AIG 2007 Form 10-K 109