AIG 2008 Annual Report Download - page 121

DAC, VOBA and SIA for insurance-oriented, investment-oriented and retirement services products are
reviewed for recoverability, which involves estimating the future profitability of current business. This review
involves significant management judgment. If actual future profitability is substantially lower than estimated,
AIG’s DAC, VOBA and SIA may be subject to an impairment charge and AIG’s results of operations could be
significantly affected in future periods.
Taiwan
Beginning in 2000, the yield available on Taiwanese 10-year government bonds dropped from approximately
6 percent to 1.5 percent at December 31, 2008. Yields on most other invested assets have correspondingly dropped
over the same period. Current sales are focused on products such as:
• variable separate account products which do not contain interest rate guarantees,
• participating products which contain very low implied interest rate guarantees, and
• accident and health policies and riders.
In developing the reserve adequacy analysis for Nan Shan, several key best estimate assumptions have been
made:
• Observed historical mortality improvement trends have been projected to 2014;
• Morbidity, expense and termination rates have been updated to reflect recent experience;
• Taiwan government bond rates are expected to remain at current levels for 10 years and gradually increase to
best estimate assumptions of a market consensus view of long-term interest rate expectations;
• Foreign assets are assumed to comprise 35 percent of invested assets, resulting in a composite long-term
investment assumption of approximately 4.9 percent; and
• The current practice permitted in Taiwan of offsetting positive mortality experience with negative interest
margins, thus eliminating the need for mortality dividends, will continue.
Future results of the reserve adequacy tests will involve significant management judgment as to mortality,
morbidity, expense and termination rates and investment yields. Adverse changes in these assumptions could
accelerate DAC amortization and necessitate reserve strengthening. Future results of the reserve adequacy tests will
be affected by the nature, timing and duration of any potential change in investment strategy implemented for Nan
Shan.
Financial Services Operations
AIG’s Financial Services subsidiaries engage in diversified activities including aircraft leasing, capital
markets, and consumer finance and insurance premium finance. Together, the Aircraft Leasing, Capital Markets
and Consumer Finance operations generate the majority of the revenues produced by the Financial Services
operations. A.I. Credit also contributes to Financial Services income principally by providing insurance premium
financing for both AIG’s policyholders and those of other insurers.
Capital Markets represents the operations of AIGFP, which engaged as principal in a wide variety of financial
transactions, including standard and customized financial products involving commodities, credit, currencies,
energy, equities and interest rates. AIGFP also invests in a diversified portfolio of securities and engages in
borrowing activities that involve issuing standard and structured notes and other securities and entering into GIAs.
Given the extreme market conditions experienced in 2008, downgrades of AIG’s credit ratings by the rating
agencies, as well as AIG’s intent to refocus on its core businesses, AIGFP has begun to unwind its businesses and
portfolios including those associated with credit protection written through credit default swaps on super senior risk
tranches of diversified pools of loans and debt securities.
Historically, AIG’s Capital Markets operations derived a significant portion of their revenues from hedged
financial positions entered into in connection with counterparty transactions. AIGFP has also participated as a
dealer in a wide variety of financial derivatives transactions. Revenues and operating income of the Capital Markets
operations and the percentage change in these amounts for any given period are significantly affected by changes in
AIG 2008 Form 10-K 115
American International Group, Inc., and Subsidiaries