AIG 2009 Annual Report Download - page 128

American International Group, Inc., and Subsidiaries
carried interest is recognized based on each fund’s performance as of the balance sheet date. Future fund
performance may negatively affect previously recognized carried interest.
MIP Results
2009 and 2008 Comparison
The MIP reported a lower pre-tax loss in 2009 compared to 2008 due to significantly lower other-than-temporary
impairments on fixed maturity investments due primarily to the improved credit environment and the adoption of the
new accounting standard on other-than-temporary impairments. Also contributing to the improvement were fair value
gains on single name credit default swap investments offset by increased net fair value losses on foreign exchange and
interest rate derivatives not qualifying for hedge accounting treatment.
AIG enters into derivative arrangements to hedge the effect of changes in currency and interest rates associated
with the fixed and floating rate and foreign currency denominated obligations issued under these programs. Some of
these hedging relationships do not qualify for hedge accounting treatment and therefore create volatility in operating
results despite being effective economic hedges. Further, the MIP invests in short single name credit default swaps in
order to obtain unfunded credit exposure.
2008 and 2007 Comparison
The MIP reported increased pre-tax losses in 2008 compared to 2007 due to significantly higher Net realized capital
losses. The increase in Net realized capital losses for 2008 primarily consists of:
• an increase in other-than-temporary impairment charges on fixed maturity securities;
• higher net mark-to-market losses on interest rate and foreign exchange hedges not qualifying for hedge
accounting treatment; and
• higher net mark-to-market losses on credit default swap investments held by the MIP due to the widening of
corporate credit spreads.
Partially offsetting these declines were increased net foreign exchange gains on foreign denominated MIP liabilities.
Institutional Asset Management Results
2009 and 2008 Comparison
Institutional Asset Management recognized an increased pre-tax loss in 2009 compared to 2008, primarily resulting
from:
• goodwill impairments in 2009 as substantially all of the operating unit’s goodwill was impaired in the third
quarter of 2009. The third quarter 2009 assessment of the segment was negatively affected by a significant
decline in the fair value of certain consolidated warehoused investments as well as the consideration of recent
transaction activity. A total of $609 million in goodwill impairments was recorded in 2009, with $287 million
offset in noncontrolling interests, which is not part of pre-tax income (loss);
• impairments on proprietary real estate. Real estate impairments of $1.2 billion during 2009 were incurred in the
direct investment portfolio as well as through real estate joint ventures as the global credit crisis has continued
to put pressure on real estate values, occupancy rates and leasing activity. Approximately $182 million was
included in noncontrolling interests, which is not part of pre-tax income (loss). This downward pressure has
caused impairments across the portfolio. The availability of refinancing and required capital has caused
management to reduce the estimated time period before sale for certain investments, resulting in impairments;
• impairments on investments. Impairments of private equity investments originally acquired for warehouse
purposes were driven by asset specific valuation considerations which were deemed to be other-than-temporary;
AIG 2009 Form 10-K 120