AIG 2008 Annual Report Download - page 182

The following table presents AIG’s largest credit exposures to the global financial institution sector as a
percentage of total consolidated shareholders’ equity:
At December 31, 2008
Credit Exposure
as a Percentage of
Consolidated
Shareholders’ Equity
Industry Category:
Money Center / Global Bank Groups ............................... 160.0%
Global Life Insurance Companies.................................. 30.8
European Regional Financial Institutions ............................ 28.2
Global Reinsurance Companies ................................... 21.2
Global Securities Companies ..................................... 18.8
Asian Regional Financial Institutions ............................... 15.8
North American-Based Regional Financial Institutions . . ................ 15.7
Government-Sponsored Entities ................................... 12.8
Non-Life Insurance Companies ................................... 12.5
AIG’s exposure to its five largest money center/global bank group institutions was 65.6 percent of share-
holders’ equity at December 31, 2008.
AIG’s exposure to global financial institutions includes $6.6 billion of preferred stock and Tier 1 securities,
$1.4 billion of upper Tier 2 securities and $7.5 billion of lower Tier 2 securities. These securities can be subject to a
higher risk of dividend or interest deferral and principal non-payment or non-redemption because they provide
various levels of capital support to these institutions, and may be subject to regulatory and contractual restrictions.
These securities are held by various AIG subsidiaries and are diversified by obligor and country. In addition, AIG’s
financial institution exposures include other subordinated securities totaling $20.0 billion.
AIG’s other industry credit concentrations in excess of 20 percent of total consolidated shareholders’ equity
are in the following industries (in descending order by approximate size):
• oil and gas companies;
• electric and water utilities; and
• global telecommunications companies.
Some of AIG’s exposures are insured (“wrapped”) by financial guarantor insurance companies, also known as
“monoline insurers”, which at December 31, 2008, provided AIG over $36 billion (carrying value) in financial
support. The monoline insurers, many of which now have non-investment grade credit ratings, provide support
predominantly in the United States. AIG does not rely on the monoline insurance as its principal source of
repayment when evaluating securities for purchase. All investment securities are evaluated primarily based on the
underlying cash flow generation capacities of the issuer or cash flow characteristics of the security.
The CRC reviews quarterly concentration reports in all categories listed above as well as credit trends by risk
ratings. The CRC may adjust limits to provide reasonable assurance that AIG does not incur excessive levels of
credit risk and that AIG’s credit risk profile is properly calibrated across business units.
Market Risk Management
AIG is exposed to market risks, primarily within its insurance and capital markets businesses (see Overview —
Outlook — Financial Services on Capital Markets regarding its market risk issues and management as transactions
in that business are wound down). For AIG’s insurance operations, the asset-liability exposures are predominantly
structural in nature, and not the result of speculative positioning to take advantage of short-term market oppor-
tunities. For example, the business model of life insurance and retirement savings is to collect premiums or deposits
from policyholders and invest the proceeds in predominantly long-term, credit based assets. A spread is earned over
time between the asset yield and the funding cost payable to policyholders. The asset and liability profiles are
managed so that the cash flows resulting from invested assets are sufficient to meet policyholder obligations when
176 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries