AIG 2008 Annual Report Download - page 76

unwind its complex businesses. The total amount expected to be incurred related to these retention programs is
approximately $1.0 billion.
For the year ended December 31, 2008, $139 million, $68 million, $287 million and $69 million of the
restructuring and separation expenses have been recorded within the General Insurance, Life Insurance &
Retirement Services, Financial Services and Asset Management segments, respectively, while $195 million has
been recorded in Other operations.
Total restructuring and separation expenses could have a material affect on future results of operations and
cash flows.
Other Expenses
2008 and 2007 Comparison
Other Expenses increased in 2008 compared to 2007 primarily due to goodwill impairment charges of
$791 million in 2008 in the Financial Services segment related to the Consumer Finance and Capital Markets
businesses, which resulted from the downturn in the housing markets, the credit crisis and the intent to unwind
AIGFP’s businesses and portfolios. In addition, other expenses in 2008 increased compared to 2007 due to higher
AGF provisions for finance receivable losses of $674 million in response to the higher levels of delinquencies in
AGF’s finance receivable portfolio.
2007 and 2006 Comparison
Other Expenses increased in 2007 compared to 2006 primarily due to increases in MIP and compensation
related expenses in Asset Management, increases in depreciation expense on flight equipment in line with the
increase in the size of the aircraft fleet and an increase in AGF’s provision for finance receivable losses of
$206 million.
Income tax expense (benefit)
2008 and 2007 Comparison
The effective tax rate on the pre-tax loss for 2008 was 7.7 percent. The effective tax rate was lower than the
statutory rate of 35 percent due primarily to $26.1 billion of deferred tax expense recorded during 2008, comprising
$5.5 billion of deferred tax expense attributable to the potential sale of foreign businesses and a $20.6 billion
valuation allowance to reduce its deferred tax asset to an amount that AIG believes is more likely than not to be
realized.
Realization of the deferred tax asset depends on AIG’s ability to generate sufficient taxable income of the
appropriate character within the carryforward periods of the jurisdictions in which the net operating losses and
deductible temporary differences were incurred. AIG assessed its ability to realize its deferred tax asset of
$31.9 billion and concluded a $20.6 billion valuation allowance was required to reduce the deferred tax asset to an
amount AIG believes is more likely than not that to be realized. See Note 20 to Consolidated Financial Statements
for additional discussion regarding deferred tax asset realization.
2007 and 2006 Comparison
The effective tax rate declined from 30.1 percent in 2006 to 16.3 percent in 2007, primarily due to the
unrealized market valuation losses on AIGFP’s super senior credit default swap portfolio and other-than-temporary
impairment charges. These losses, which are taxed at a U.S. tax rate of 35 percent and are included in the calculation
of income tax expense, reduced AIG’s overall effective tax rate. In addition, other tax benefits, including tax exempt
interest and effects of foreign operations were proportionately larger in 2007 than in 2006 due to the decline in pre-
tax income in 2007. Furthermore, tax deductions taken in 2007 for SICO compensation plans for which the expense
had been recognized in prior years also reduced the effective tax rate in 2007.
70 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries