AIG 2009 Annual Report Download - page 198

American International Group, Inc., and Subsidiaries
Noncore Asset Management Operations
AIG’s Noncore Asset Management operations are exposed to various forms of credit, market and operational risks.
Noncore Asset Management complies with AIG’s corporate risk management guidelines and framework and is
subject to periodic reviews by the CRC. Investment decisions and recommendations made on behalf of AIG
subsidiaries are referred to the applicable investment committee for approval. The majority of the credit and market
risk exposures within Noncore Asset Management results from the MIP and the investment activities of AIG Global
Real Estate and to a lesser extent, assets originally acquired for warehouse purposes.
In the MIP, 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 economically advantageous to be in an unmatched
duration position. The risks in the MIP 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 credit markets. Such
exposure can subject AIG Global Real Estate to delays in real estate property development, stabilization and sales,
thereby resulting in additional carrying costs and, in turn, adversely affecting operating results. The lack of available
funding for development, repositioning and refinancing is also negatively affecting current market conditions. The
focus of AIG Global Real Estate is on managing existing investments. No platform growth initiatives are being actively
pursued. Periodically, AIG assesses whether there are any indicators which suggest that the value of AIG Global Real
Estate’s real estate investments may be impaired, including but not limited to declines in property operating
performance, general market conditions, and changes to asset plans or strategies. Increases in capitalization rates,
discount rates, and vacancies along with adverse changes in local market conditions contributed to valuation declines.
As a result, AIG recorded impairment charges of $1.2 billion to reflect the declines in market value during 2009.
AIG’s exposure to real estate investments is monitored on an ongoing basis by the Asset Management Real Estate
Investment Committee. In addition, a Real Estate Steering Committee was established with responsibility for
oversight of AIG Global Real Estate’s restructuring efforts, including, but not limited to, making recommendations
with regard to restructuring alternatives, capital optimization, evaluating and approving decisions for AIG Global
Real Estate’s investments and periodically assessing ongoing changes to the underlying conditions of AIG Global Real
Estate’s investments.
Noncore Asset Management is also exposed to market and liquidity risk with respect to proprietary direct private
equity and fund investments originally acquired for warehouse purposes. As a result of AIG’s restructuring initiatives,
AIG Investments’ intended launch of new products and funds for which these warehoused investments were targeted
have been abandoned. Further, these investments will not be included in the announced sale of AIG’s third party asset
management business. Accordingly, AIG will retain all current warehoused investments with a carrying value of
$455 million at December 31, 2009 as permanent balance sheet investments until such time that they can be divested.
Further, certain of these warehoused investments include unfunded investment commitments of $155 million at
December 31, 2009 which are to be funded over the next three to five years. AIG accounts for these investments based
on the attributes of the investment using consolidation, equity or cost accounting methods, as appropriate. AIG has
worked to divest these warehouse investments and related unfunded investment commitments through secondary
market sales and to transfer of such assets and investment commitments to AIG operating companies where
appropriate. During the fourth quarter of 2009, AIG divested more than $335 million in unfunded investment
commitments related to warehoused investments with approximately $90 million divested in early 2010. AIG
continues to manage the warehouse assets and unfunded investment commitments.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
AIG 2009 Form 10-K 190