AIG 2008 Annual Report Download - page 248

Asia, the election more effectively aligns changes in the fair value of assets with a commensurate change in the
fair value of policyholders’ liabilities. For the single premium life products in Japan, the fair value option
election allows AIG to economically hedge the inherent market risks associated with this business in an efficient
and effective manner through the use of derivative instruments. The hedging program, which was completely
implemented in the third quarter of 2008, results in an accounting presentation for this business that more
closely reflects the underlying economics and the way the business is managed, with the change in the fair value
of derivatives and underlying assets largely offsetting the change in fair value of the policy liabilities. AIG did
not elect the fair value option for other liabilities classified in policyholder contract deposits because other
contracts do not share the same contract features that created the disparity between the accounting presen-
tation and the economic performance.
(c) Not included in the table above were losses of $44.6 billion for the year ended December 31, 2008, that were
primarily due to changes in the fair value of derivatives, trading securities and certain other invested assets for
which the fair value option under FAS 159 was not elected. Included in this amount were unrealized market
valuation losses of $28.6 billion for the year ended December 31, 2008, related to AIGFP’s super senior credit
default swap portfolio.
Interest income and expense and dividend income on assets and liabilities elected under the fair value option
are recognized and classified in the consolidated statement of income (loss) depending on the nature of the
instrument and related market conventions. For AIGFP related activity, interest, dividend income, and interest
expense are included in other income. Otherwise, interest and dividend income are included in net investment
income in the consolidated statement of income (loss). See Note 1(a) herein for additional information about AIG’s
policies for recognition, measurement, and disclosure of interest and dividend income and interest expense.
During 2008, AIG recognized a gain of $84 million, attributable to the observable effect of changes in credit
spreads on AIG’s own liabilities for which the fair value option was elected. AIG calculates the effect of these credit
spread changes using discounted cash flow techniques that incorporate current market interest rates, AIG’s
observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as
collateral posted.
The following table presents the difference between fair values and the aggregate contractual principal
amounts of mortgage and other loans receivable and long-term debt, for which the fair value option was
elected:
Fair Value at
December 31,
2008
Principal Amount
Due Upon Maturity Difference
(In millions)
Assets:
Mortgage and other loans receivable ............ $ 131 $ 244 $(113)
Liabilities:
Long-term debt ........................... $21,285 $16,827 $4,458
At December 31, 2008, there were no mortgage and other loans receivable for which the fair value option was
elected, that were 90 days or more past due and in non-accrual status.
Fair Value Information about Financial Instruments Not Measured at Fair Value
FAS 107, “Disclosures about Fair Value of Financial Instruments” (FAS 107), requires disclosure of fair value
information about financial instruments for which it is practicable to estimate such fair value. FAS 107 excludes
certain financial instruments, including those related to insurance contracts and lease contracts.
Information regarding the estimation of fair value for financial instruments not carried at fair value is discussed
below:
•Mortgage and other loans receivable: Fair values of loans on real estate and collateral loans were
estimated for disclosure purposes using discounted cash flow calculations based upon discount rates that
242 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)