AIG 2008 Annual Report Download - page 195

periodic reviews by the CRC. In addition, transactions are referred to the Asset Management investment committees
for approval of investment decisions.
The majority of the credit and market risk exposures within Asset Management results from the Spread-Based
Investment business and the investment activities of AIG Global Real Estate and to a lesser extent, assets originally
acquired for warehouse purposes.
In the Spread-Based Investment business, the primary risk is investment risk, which represents the exposure to
loss resulting from the cash flows from the invested assets being less than the cash flows required to meet the
obligations of the liabilities and the necessary return on investments. Credit risk is also a significant component of
the investment strategy for these businesses. Market risk is taken in the form of duration and convexity risk. While
AIG generally maintains a matched asset-liability relationship, it may occasionally determine that it is econom-
ically advantageous to be in an unmatched duration position. The risks in the Spread-Based Investment business are
managed through exposure limitations, active management of the investment portfolios and close oversight of the
asset-liability relationship.
AIG Global Real Estate is exposed to the general conditions in global real estate markets and the credit
markets. Such exposure can subject Asset Management to delays in real estate property development and sales,
additional carrying costs and in turn affect operating results within the segment. Also negatively affecting current
market conditions is the lack of available funding for development, repositioning and refinancing. These risks are
mitigated through the underwriting process, transaction and contract terms and conditions and portfolio diversi-
fication by type of project, sponsor, real estate market and country. AIG’s exposure to real estate investments is
monitored on an ongoing basis by the Asset Management Real Estate Investment Committee.
Asset Management is also exposed to market and liquidity risk with respect to the warehoused investing
activities of AIG Investments. During the warehousing period, AIG bears the cost and risks associated with carrying
these investments and may consolidate them on its balance sheet and records the operating results until the
investments are transferred, sold or otherwise divested. Changes in market conditions may negatively affect the fair
value of these warehoused investments. As a result of AIG’s restructuring initiatives, AIG Investments’ intended
launch of new products and funds for which these warehouse investments were targeted have been indefinitely
postponed. Accordingly, AIG will retain all current warehouse investments with a net asset value of $1.1 billion at
December 31, 2008 as permanent balance sheet investments until such time that they can be divested. Further,
certain of these warehoused investments include unfunded investment commitments of $720 million at Decem-
ber 31, 2008 which are to be funded over the next three to five years.
Recent Accounting Standards
Accounting Changes
In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements.”
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities.”
In April 2007, the FASB issued FSP FIN 39-1, which modifies FASB Interpretation (FIN) No. 39, “Offsetting
of Amounts Related to Certain Contracts.”
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.”
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.”
In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF
Issue No. 99-20” (FSP EITF 99-20-1).
Future Application of Accounting Standards
In December 2007, the FASB issued FAS 141 (revised 2007), “Business Combinations.”
AIG 2008 Form 10-K 189
American International Group, Inc., and Subsidiaries