AIG 2007 Annual Report Download - page 166

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
($8.9 billion after tax). Additional information about these securi- (Market risk — the potential loss arising from adverse fluctua-
ties is as follows: tions in interest rates, foreign currencies, equity and commod-
(These securities were valued, in the aggregate, at approxi- ity prices, and their levels of volatility.
mately 95 percent of their current amortized cost. (Operational risk — the potential loss resulting from inadequate
(Less than three percent of these securities were valued at less or failed internal processes, people, and systems, or from
than 20 percent of their current cost, or amortized cost. external events.
(Less than four percent of the fixed income securities had (Liquidity risk — the potential inability to meet all payment
issuer credit ratings which were below investment grade. obligations when they become due.
AIG did not consider these securities in an unrealized loss (General insurance risk — the potential loss resulting from
position to be other-than-temporarily impaired at December 31, inadequate premiums, insufficient reserves and catastrophic
2007, as management has the intent and ability to hold these exposures.
investments until they recover their cost basis. AIG believes the (Life insurance risk — the potential loss resulting from experi-
securities will generally continue to perform in accordance with ence deviating from expectations for mortality, morbidity and
the original terms, notwithstanding the present price declines. termination rates in the insurance-oriented products and insuffi-
At December 31, 2007, unrealized losses for fixed maturity cient cash flows to cover contract liabilities in the retirement
securities and equity securities did not reflect any significant savings products.
industry concentrations. AIG senior management establishes the framework, principles
In 2007, unrealized losses related to investment grade bonds and guidelines for risk management. The primary focus of risk
increased $9.3 billion ($6.1 billion after tax), reflecting the management is to assess the risk of AIG incurring economic
widening of credit spreads, partially offset by the effects of a losses from the risk categories outlined above. The business
decline in risk-free interest rates. executives are responsible for establishing and implementing risk
management processes and responding to the individual needs
The amortized cost and fair value of fixed maturity and issues within their business, including risk concentrations
securities available for sale in an unrealized loss position within their respective businesses with appropriate oversight by
at December 31, 2007, by contractual maturity, is shown Enterprise Risk Management (ERM).
below:
(in millions) Amortized Cost Fair Value Corporate Risk Management
Due in one year or less $ 9,408 $ 9,300 AIG’s major risks are addressed at the corporate level through
Due after one year through five years 36,032 35,267
ERM, which is headed by AIG’s Chief Risk Officer (CRO). ERM is
Due after five years through ten years 54,198 52,394
Due after ten years 56,557 53,578 responsible for assisting AIG’s business leaders, executive man-
Mortgage-backed, asset-backed and agement and the Board of Directors to identify, assess, quantify,
collateralized 99,751 92,246 manage and mitigate the risks incurred by AIG. Through the CRO,
Total $255,946 $242,785 ERM reports to AIG’s Chief Financial Officer, various senior
For the year ended December 31, 2007, the pre-tax realized management committees and the Board of Directors through the
losses incurred with respect to the sale of fixed maturities and Finance and Audit Committees.
equity securities were $1.3 billion. The aggregate fair value of An important goal of ERM is to ensure that once appropriate
securities sold was $38.0 billion, which was approximately governance, authorities, procedures and policies have been
94 percent of amortized cost. The average period of time that established, aggregated risks do not result in inappropriate
securities sold at a loss during 2007 were trading continuously at concentrations. Senior management defines the policies, has
a price below book value was approximately five months. See Risk established general operating parameters for its global busi-
Management — Investments herein for an additional discussion of nesses and has established various oversight committees to
investment risks associated with AIG’s investment portfolio. monitor the risks attendant to its businesses:
(The Financial Risk Committee (FRC) oversees AIG’s market risk
Risk Management exposures to interest rates, foreign exchange and fair values of
shares, partnership interests, real estate and other equity
Overview
investments and provides strategic direction for AIG’s asset-
AIG believes that strong risk management practices and a sound liability management. The FRC meets monthly and acts as a
internal control environment are fundamental to its continued central mechanism for AIG senior management to review
success and profitable growth. Failure to manage risk properly comprehensive information on AIG’s financial exposures and to
exposes AIG to significant losses, regulatory issues and a exercise broad control over these exposures. There are two
damaged reputation. subcommittees of the FRC.
The major risks to which AIG is exposed include the following: (The Foreign Exchange Committee monitors trends in foreign
(Credit risk — the potential loss arising from an obligor’s exchange rates, reviews AIG’s foreign exchange exposures,
inability or unwillingness to meet its obligations to AIG. and provides recommendations on foreign currency asset
allocation and remittance hedging.
112 AIG 2007 Form 10-K