AIG 2008 Annual Report Download - page 127

Spread-Based Investment Business Results
2008 and 2007 Comparison
The Spread-Based Investment business reported increased operating losses in 2008 compared to 2007 due to
significantly higher net realized capital losses and lower partnership income. Net realized capital losses were
$8.6 billion in 2008 compared to $1.3 billion in 2007. The increase in net realized capital losses for 2008 primarily
consists of an increase of $6.4 billion in other-than-temporary impairment charges on fixed maturity securities for
both the GIC and MIP, higher net mark-to-market losses of $1.2 billion on interest rate and foreign exchange hedges
not qualifying for hedge accounting treatment for both the GIC and MIP and higher net mark-to-market losses of
$374 million on credit default swap investments held by the MIP due to the widening of corporate credit spreads.
The MIP credit default swaps are comprised of single-name investment grade corporate exposures. AIG enters into
derivative arrangements to hedge the effect of changes in currency and interest rates associated with the fixed and
floating rate and foreign currency denominated obligations issued under these programs. Some of these hedging
relationships qualify for hedge accounting treatment, while others do not, and although being effective economic
hedges, creates volatility in operating results. Partially offsetting these declines were increased net foreign
exchange gains on foreign denominated GIC reserves and MIP liabilities of $1.3 billion.
The increase in other-than-temporary impairment charges on fixed maturity securities held in the GIC and MIP
portfolios were $3.2 billion for the GIC and $3.2 billion for the MIP in 2008, primarily resulting from severity and
credit losses and the change in AIG’s intent to hold securities to recovery related to both the U.S. securities lending
portfolio and its general portfolios. See Investments — Portfolio Review — Other-Than-Temporary Impairments.
In the GIC program, income from partnership investments decreased $1.4 billion for 2008 compared to 2007
due to significantly higher returns in the 2007 period and weaker market conditions in 2008. GIC income was also
affected by higher net mark-to-market losses of $676 million on interest rate and foreign exchange hedges not
qualifying for hedge accounting treatment. Offsetting these declines were net foreign exchange gains on foreign-
denominated GIC reserves which increased by $1.2 billion in 2008 compared to 2007 as a result of the strengthening
of the U.S. dollar. As noted below, a significant portion of these GIC reserves mature in the next twelve months. The
derivative losses included net mark-to-market losses on interest rate and foreign exchange derivatives used to
economically hedge the effect of interest rate and foreign exchange rate movements on GIC reserves. Although
these economic hedges are partially effective in hedging the interest rate and foreign exchange risk, AIG has not
applied hedge accounting treatment.
The MIP recognized an operating loss, due to net realized capital losses, of $4.8 billion in 2008, and an
operating loss of $794 million in 2007.
AIG did not issue any additional debt to fund the MIP in 2008 and does not intend to issue any additional debt
for the foreseeable future. Through December 31, 2008, the MIP had cumulative debt issuances of $13.4 billion.
During 2007, AIG issued the equivalent of $8.1 billion of securities to fund the MIP in the Euromarkets and the
U.S. public and private markets. See Note 13 to the Consolidated Financial Statements for a schedule of maturities
of the MIP debt.
The GIC program is in runoff with no new GICs issued subsequent to 2005. The anticipated runoff of the
domestic GIC portfolio was as follows:
At December 31,
Less Than
One Year
1-3
Years
3+-5
Years
Over Five
Years Total
(In billions)
Domestic GICs............................ $6.0 $2.0 $3.0 $3.8 $14.8
2007 and 2006 Comparison
The Spread-Based Investment business reported an operating loss in 2007 compared to operating income in
2006 due to foreign exchange, interest rate and credit-related mark-to-market losses and other-than-temporary
impairment charges on fixed income investments, partially offset by increased partnership income. In 2007, the GIC
program incurred foreign exchange losses of $526 million on foreign-denominated GIC reserves. Partially
offsetting these losses were $269 million of net mark-to-market gains on derivative positions. These net gains
included mark-to-market gains on foreign exchange derivatives used to economically hedge the effect of foreign
AIG 2008 Form 10-K 121
American International Group, Inc., and Subsidiaries