AIG 2007 Annual Report Download - page 43

AIG 2007 Annual Report 41
and changing interest rates, as well as the potential for superior
long-term performance in funding liabilities for which there are no,
or very limited, fixed income alternatives.
Financial Services cash and invested assets amounted to
$181.77 billion at year end, of which $102.10 billion, or
56.2 percent, related to Capital Markets operations. The majority
of Capital Markets assets represent the investment of proceeds from
the issuance of guaranteed investment agreements, notes and other
bonds in short- and medium-term securities of high credit quality.
Aircraft owned by ILFC for lease to commercial airlines around the
world is the other principal component of Financial Services cash
and invested assets. At year end, the net book value of the fleet
totaled $41.98 billion.
Within the fixed income credit portfolios, AIG Investments
conducts rigorous and thorough independent credit analyses, and
follows policies of extensive diversification and active management.
Portfolios of mortgage-backed securities and related asset classes are
actively managed to mitigate prepayment risk. In addition, in some
circumstances, derivatives are used to mitigate “tail” risk associated
with very rapid interest rate shifts.
The global appetite for risk assets changed significantly in 2007,
compared with the three preceding years, as growing concern about
the U.S. housing market’s valuation led to a sharp reduction in risk
appetite among investors for non-agency housing-related debt.
This risk aversion, in turn, pressured credit spreads generally, with
particular impact on financial institutions. Thus, while default levels
remained near historic lows, credit-oriented fixed income investments
generally underperformed treasury securities with similar durations.
Dislocation followed through into the equity markets, which
ended the year substantially lower than their October 2007 highs.
As 2008 began, the global sell-off in equities continued, and a
growing global perception of a slowdown in the U.S. economy led
to weaknesses in most global equity markets. In addition, transaction
volume fell sharply in private equity in the latter half of 2007, as both
risk appetites and availability of financing shrank dramatically.
Taxable Fixed Maturities 43%
Other Financial Services Assets 14%
Tax-exempt Fixed Maturities 7%
Cash and Other Short-Term Securities 6%
Flight Equipment 5%
Equity Securities 5%
Mortgage and Other Loans Receivable,
and Real Estate 4%
Other Investments 16%
Composition of Consolidated Cash and Invested Assets
at December 31, 2007
Total = $862.5 billion
Life Insurance Percent
(in millions) General & Retirement Financial Asset of
December 31, 2007 Insurance Services Services Management Other Total Total
Cash and Invested Assets:
Fixed maturities $ 95,412 $304,111 $ 1,400 $28,012 $ — $ 428,935 49.7%
Equity securities 7,805 33,119 8 638 76 41,646 4.8
Mortgage and other loans receivable 13 24,851 1,365 7,442 56 33,727 3.9
Securities lending invested collateral 5,031 57,471 148 13,012 75,662 8.8
Other invested assets 11,895 19,015 3,663 17,261 6,989 58,823 6.8
Flight equipment — — 41,984 — — 41,984 4.9
Finance receivables — 5 31,229 — — 31,234 3.6
Trade receivables — — 6,467 — — 6,467 0.8
Unrealized gain (loss) on swaps, options and
forward transactions — — 17,134 — (692) 16,442 1.9
Securities available for sale — — 40,305 — — 40,305 4.7
Trading securities — — 4,197 — — 4,197 0.5
Securities purchased under agreements to resell — — 20,950 — — 20,950 2.4
Investment income due and accrued 1,431 4,728 29 401 (2) 6,587 0.8
Real estate 349 976 17 89 231 1,662 0.2
Other, including short-term investments,
cash and spot commodities 7,853 26,236 12,876 5,188 1,720 53,873 6.2
Total $129,789 $470,512 $181,772 $72,043 $8,378 $ 862,494 100.0%