AIG 2007 Annual Report Download - page 179

American International Group, Inc. and Subsidiaries
The following table presents the year-end, average, high, and low VaRs* on a diversified basis and of each component of market risk
for Capital Markets operations for the years 2007 and 2006. The diversified VaR is usually smaller than the sum of its components
due to correlation effects.
For the Year Ended For the Year Ended
December 31, 2007 December 31, 2006
(in millions) As of December 31 Average High Low As of December 31 Average High Low
Total AIG trading market risk:
Diversified $5 $5 $8 $4 $4 $4 $7 $3
Interest rate 3232 2231
Currency 1121 1131
Equity 3352 3342
Commodity 3372 5352
* The VaR calculation has been changed from a 3-year time series to a 5-year time series. The December 31, 2006 VaR reflects this change.
Aircraft Leasing or 2005. ILFC has been able to re-lease the aircraft without
diminution in lease rates that would result in an impairment under
AIG’s Aircraft Leasing operations represent the operations of ILFC, FAS 144.
which generates its revenues primarily from leasing new and used
commercial jet aircraft to foreign and domestic airlines and Consumer Finance
companies associated with the airline industry. Risks inherent in
this business, and which are managed at the business unit level, AIG’s Consumer Finance operations provide a wide variety of
include the following: consumer finance products, including real estate and other
(the risk that there will be no market for the aircraft acquired; consumer loans, credit card loans, retail sales finance and credit-
(the risk that aircraft cannot be placed with lessees; related insurance to customers both domestically and overseas,
(the risk of nonperformance by lessees; and particularly in emerging markets. Consumer Finance operations
(the risk that aircraft and related assets cannot be disposed of include AGF as well as AIGCFG. AGF provides a wide variety of
at the time and in a manner desired. consumer finance products, including real estate loans, non-real
The airline industry is sensitive to changes in economic estate loans, retail sales finance and credit-related insurance to
conditions and is cyclical and highly competitive. Airlines and customers in the United States, the U.K., Puerto Rico and the
related companies may be affected by political or economic U.S. Virgin Islands. AIGCFG, through its subsidiaries, is engaged
instability, terrorist activities, changes in national policy, competi- in developing a multi-product consumer finance business with an
tive pressures on certain air carriers, fuel prices and shortages, emphasis on emerging markets.
labor stoppages, insurance costs, recessions, world health issues Many of AGF’s borrowers are non-prime or subprime. The real
and other political or economic events adversely affecting world or estate loans are comprised principally of first-lien mortgages on
regional trading markets. residential real estate generally having a maximum term of
ILFC’s revenues and operating income may be adversely 360 months, and are considered non-conforming. The real estate
affected by the volatile competitive environment in which its loans may be closed-end accounts or open-end home equity lines
customers operate. ILFC is exposed to operating loss and liquidity of credit and are principally fixed rate products. AGF does not
strain through nonper formance of aircraft lessees, through owning offer mortgage products with borrower payment options that allow
aircraft which it is unable to sell or re-lease at acceptable rates at for negative amortization of the principal balance. The secured
lease expiration and, in part, through committing to purchase non-real estate loans are secured by consumer goods, automo-
aircraft which it is unable to lease. biles or other personal property. Both secured and unsecured non-
ILFC manages the risk of nonperformance by its lessees with real estate loans and retail sales finance receivables generally
security deposit requirements, repossession rights, overhaul re- have a maximum term of 60 months.
quirements and close monitoring of industry conditions through its Current economic conditions, such as interest rate and
marketing force. Approximately 90 percent of ILFC’s fleet is leased employment levels, can have a direct effect on the borrowers’
to non-U.S. carriers, and the fleet, comprised of the most efficient ability to repay these loans. AGF manages the credit risk inherent
aircraft in the airline industry, continues to be in high demand in its portfolio by using credit scoring models at the time of credit
from such carriers. applications, established underwriting criteria, and, in certain
Management formally reviews regularly, and no less frequently cases, individual loan reviews. AGF monitors the quality of the
than quarterly, issues affecting ILFC’s fleet, including events and finance receivables portfolio and determines the appropriate level
circumstances that may cause impairment of aircraft values. of the allowance for losses through its Credit Strategy and Policy
Management evaluates aircraft in the fleet as necessary based on Committee. This Committee bases its conclusions on quantitative
these events and circumstances in accordance with Statement of analyses, qualitative factors, current economic conditions and
Financial Accounting Standards No. 144, ‘‘Accounting for the trends, and each Committee member’s experience in the con-
Impairment or Disposal of Long-Lived Assets’’ (FAS 144). ILFC has sumer finance industry.
not recognized any impairment related to its fleet in 2007, 2006
AIG 2007 Form 10-K 125