AIG 2008 Annual Report Download - page 128

exchange rate movements on foreign-denominated GIC reserves and mark-to-market losses on interest rate hedges
that did not qualify for hedge accounting treatment.
The MIP experienced mark-to-market losses of $193 million due to interest rate and foreign exchange
derivative positions that, while partially effective in hedging interest rate and foreign exchange risk, did not qualify
for hedge accounting treatment and an additional $98 million due to credit default swap losses. The mark-to-market
losses for 2007 were driven primarily by a decline in short-term interest rates, the decline in the value of the
U.S. dollar and widening credit spreads.
Also contributing to the operating loss were other-than-temporary impairment charges on various fixed
maturity investments held in the GIC and MIP portfolios of approximately $836 million as a result of movements in
credit spreads and decreased market liquidity. See Investments — Portfolio Review — Other-Than-Temporary
Impairments. These losses were partially offset by an increase in partnership income associated with the GIC.
Institutional Asset Management Results
2008 and 2007 Comparison
Institutional Asset Management recognized an operating loss in 2008 compared to operating income in 2007,
primarily resulting from the difficult market conditions in 2008 in the private equity, hedge fund and real estate
environments. The operating loss reflects higher net equity losses and impairment charges of $330 million and
lower net realized capital gains of $211 million on real estate investments, and lower carried interest of $209 million.
Due to the current global real estate market conditions, several of AIG Global Real Estate’s investments were
deemed to be impaired, and several equity investments were written off during 2008. These impairments and write-
offs totaled $269 million. The reduction in carried interest revenues was driven by lower net unrealized carry due to
higher fund performance in 2007 and significantly lower fund performance in 2008.
Increased losses from warehoused investments of $92 million were incurred as such investments were not able
to be sold or otherwise divested as originally contemplated. Such assets are now considered proprietary investments
of the Institutional Asset Management business. Total operating losses including funding costs from these
investments for 2008 and 2007 were $257 million and $165 million, respectively, with 2008 reflecting a full-
year of such losses compared to a partial year in 2007. Of these operating losses, $142 million and $35 million for
2008 and 2007, respectively, are offset in minority interest expense, which is not a component of operating income
(loss).
Additional losses resulted from a decrease in securities lending fees of $60 million as the U.S. securities
lending program was terminated and restructuring-related expenses of $43 million primarily related to employee-
related costs associated with the intended divestment of various asset management businesses, including AIG
Private Bank. Included in the 2007 results was a $398 million gain related to the sale of a portion of AIG’s
investment in Blackstone.
AIG’s unaffiliated client assets under management, including retail mutual funds and institutional accounts,
were $68.9 billion and $97.6 billion at December 31, 2008 and December 31, 2007, respectively. The decline from
December 31, 2007 reflects lower asset values due to the significant deterioration in the credit and equity markets
during 2008 as well as the effect of net client outflows. Although there was a significant decline in end of period
unaffiliated client assets under management, average assets under management decreased nominally in 2008
compared to 2007 and resulted in slightly lower base management fees.
2007 and 2006 Comparison
Operating income for Institutional Asset Management increased in 2007 compared to 2006 reflecting
increased carried interest revenues driven by higher valuations of portfolio investments that are generally associated
with improved performance in the equity markets. The increase also reflects the $398 million gain from the sale of a
portion of AIG’s investment in Blackstone in connection with its initial public offering. Also contributing to this
increase were higher base management fees driven by higher levels of third-party assets under management.
Partially offsetting these increases were the operating losses from warehousing activities. The consolidated
warehoused private equity investments are not wholly owned by AIG and thus, a significant portion of the effect
of consolidating these operating losses is offset in minority interest, which is not a component of operating income.
122 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries