2008 - AIG 10k - For the fiscal year ended December 31

  • 2008 - AIG 10k, For the fiscal year ended December 31 - SEC-link-345p
  • 2008 - AIG 10k, For the fiscal year ended December 31 - 344p-AIG
  • 2008 - AIG 10k, For the fiscal year ended December 31 - 412p-SEC
  • (p3) - AIG’s primary activities include both General Insurance and Life Insurance & Retirement Services
    operations.

    • Other significant activities include Financial Services and Asset Management.
  • Financial Services
    • International Lease Finance Corporation (ILFC)
    • AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries
    • American General Finance, Inc. (AGF)
    • AIG Consumer Finance Group, Inc. (AIGCFG)\
    • Imperial A.I. Credit Companies (A.I. Credit)

 

  • Asset Management
    • AIG SunAmerica Asset Management Corp. (SAAMCo)
    • AIG Global Asset Management Holdings Corp. and its subsidiaries and affiliated companies (collectively, AIG Investments)
    • AIG Private Bank Ltd. (AIG Private Bank)2
    • AIG Global Real Estate Investment Corp. (AIG Global Real Estate)
  • 2008 - AIG 10k, For the fiscal year ended December 31 - SEC-link-345p
  • (p3) - Liquidity Entering the Third Quarter of 2008 -
    • AIG parent entered the third quarter of 2008 with $17.6 billion of cash and cash equivalents, including the remaining proceeds from the issuance of $20 billion of common stock, equity units, and junior subordinated debt securities in May 2008
    • In addition, AIG’s securities lending collateral pool held $10.4 billion of cash and other short-term investments.
  • (p3) - From mid-July and throughout August 2008, AIG’s then Chief Executive Officer, Robert Willumstad, was engaged in a strategic review of AIG’s businesses.
    • During this time period, AIG was engaged in a review of measures to address the liquidity concerns in AIG’s securities lending portfolio and to address the ongoing collateral calls with respect to the AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP) super senior multi-sector credit default swap portfolio, which at July 31, 2008 totaled $16.1 billion.
  • (p3) - Continuing Liquidity Pressures
    • Historically, under AIG’s securities lending program, cash collateral was received from borrowers and invested by AIG primarily in fixed maturity securities to earn a spread.
    • AIG had received cash collateral from borrowers of 100 to 102 percent of the value of the loaned securities.
    • In light of more favorable terms offered by other lenders of securities, AIG accepted cash advanced by borrowers of less than the 102 percent historically required by insurance regulators.
    • Under an agreement with its insurance company subsidiaries participating in the securities lending program, AIG parent deposited collateral in an amount sufficient to address the deficit.
    • AIG parent also deposited amounts into the collateral pool to offset losses realized by the pool in connection with sales of impaired securities.
    • Aggregate deposits by AIG parent to or for the benefit of the securities lending collateral pool through August 31, 2008 totaled $3.3 billion.
  • (p3-4) - Rating Agencies
    In early September 2008, AIG met with the representatives of the principal rating agencies to discuss Mr. Willumstad’s strategic review as well as the liquidity issues arising from AIG’s securities lending program and AIGFP’s super senior multi-sector CDO credit default swap portfolio.

    • On Friday, September 12, 2008, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (S&P), placed AIG on CreditWatch with negative AIG 2008 Form 10-K American International Group, Inc., and Subsidiaries implications and noted that upon completion of its review, the agency could affirm AIG parent’s current rating of AA- or lower the rating by one to three notches. AIG understood that both S&P and Moody’s Investors Service (Moody’s) would re-evaluate AIG’s ratings early in the week of September 15, 2008.
    • Also on Friday, September 12, 2008, AIG’s subsidiaries, International Lease Finance Corporation (ILFC) and American General Finance, Inc. (AGF), were unable to replace all of their maturing commercial paper with new issuances of commercial paper.
      • As a result, AIG advanced loans to these subsidiaries to meet their commercial paper obligations.
  • (p4) - On Monday, September 15, 2008, AIG was again unable to access the commercial paper market for its primary commercial paper programs, AIG Funding, ILFC and AGF.
    • Payments under the programs totaled $2.2 billion for the day, and AIG advanced loans to ILFC and AGF to meet their funding obligations.
    • In addition, AIG experienced returns under its securities lending programs which led to cash payments of $5.2 billion to securities lending counterparts on that day.
  • (p4) - The Rating Agencies Downgrade AIG’s Long-Term Debt Rating
    • In the late afternoon of September 15, 2008, S&P downgraded AIG’s long-term debt rating by three notches, Moody’s downgraded AIG’s long-term debt rating by two notches and Fitch Ratings (Fitch) downgraded AIG’s long-term debt rating by two notches.
    • As a consequence of the rating actions, AIGFP estimated that it would need in excess of $20 billion in order to fund additional collateral demands and transaction termination payments in a short period of time.
    • Subsequently, in a period of approximately 15 days following the rating actions, AIGFP was required to fund approximately $32 billion, reflecting not only the effect of the rating actions but also changes in market values and other factors.
  • (p4) - Also, on September 16, 2008, AIG was notified by its insurance regulators that it would no longer be permitted to borrow funds from its insurance company subsidiaries under a revolving credit facility that AIG maintained with certain of its insurance subsidiaries acting as lenders. Subsequently, the insurance regulators required AIG to repay any outstanding loans under that facility and to terminate it. The intercompany facility was terminated effective September 22, 2008.
  • Financial Services Operations
    • (p14) - AIG’s Financial Services subsidiaries engage in diversified activities including aircraft leasing, capital markets, consumer finance and insurance premium finance.
    • Together, the Aircraft Leasing, Capital Markets and Consumer Finance operations generate the majority of the revenues produced by the Financial Services operations
    • (p14) - A.I. Credit also contributes to Financial Services results principally by providing insurance premium financing for both AIG’s policyholders and those of other insurers.
  • (p14) - Capital Markets
    • Capital Markets is comprised of the operations of AIGFP...
    • engages in borrowing activities that involve issuing standard and structured notes and other securities and entering into guaranteed investment agreements (GIAs).
  • Asset Management Operations
    • (p) - AIG’s Asset Management operations comprise a wide variety of investment-related services and investment products.
      • These services and products are offered to individuals, pension funds and institutions (including AIG subsidiaries) globally through AIG’s Spread-Based Investment business, Institutional Asset Management, and Brokerage Services and Mutual Funds business. Also included in Asset Management operations are the results of certain SunAmerica sponsored partnership investments.
  • (p40) - The two principal causes of the liquidity strain were demands for the return of cash collateral under the U.S. securities lending program and collateral calls on AIGFP’s super senior multi-sector CDO credit default swap portfolio.
    • (p40) - Both of these liquidity strains were significantly exacerbated by the downgrades of AIG’s long-term debt ratings by S&P, Moody’s and Fitch on September 15, 2008.
  • (p63) - Results of Operations - Consolidated Results - Fourth quarter 2008 net loss
    • Due to continued severe market deterioration and charges related to ongoing restructuring activities, AIG incurred a substantial net loss of $61.7 billion in the fourth quarter of 2008. This loss resulted primarily from the following:
      • net realized capital losses arising from other-than-temporary impairment charges of $18.6 billion ($13.0 billion after tax) reflecting severity losses primarily related to CMBS, other structured securities and securities of financial institutions due to rapid and severe market valuation declines where the impairment period was not deemed temporary; losses related to the change in AIG’s intent and ability to hold to recovery certain securities; and issuer-specific credit events, including charges associated with  investments in financial institutions;
      • net realized capital losses of $2.4 billion ($1.7 billion after tax) related to certain securities lending activities which were deemed to be sales due to reduced levels of collateral provided by counterparties; AIG 2008 Form 10-K 63 American International Group, Inc., and Subsidiaries
      • net realized capital losses of $2.3 billion ($1.6 billion after tax) related to declines in fair values of RMBS for the month of October prior to the sale of these securities to ML II;
      • net realized capital losses of $1.7 billion ($1.2 billion after tax) primarily related to foreign exchange transactions and derivatives activity;
      • unrealized market valuation losses on AIGFP’s super senior credit default swap portfolio totaling $6.9 billion ($4.5 billion after tax); a credit valuation loss of $7.8 billion ($5.1 billion after tax) representing the effect of changes in credit spreads on the valuation of AIGFP’s assets and liabilities; and losses primarily from winding down of AIGFP’s businesses and portfolios of $1.5 billion ($1.0 billion after tax);
      • losses on hedges not qualifying for hedge accounting treatment under FAS 133 of $3.3 billion ($2.2 billion after tax) largely due to the significant decline in U.S. interest rates, resulting in a decrease in the fair value of the derivatives, which primarily economically hedge AIG’s debt. To a lesser extent, the strengthening of the U.S. dollar, mainly against the British Pound and Euro decreased the fair value of the foreign currency derivatives economically hedging AIG’s non-U.S. dollar denominated debt and foreign exchange transactions;
      • interest expense associated with the Fed Facility of $10.6 billion ($6.9 billion after tax), including accelerated amortization of the prepaid commitment fee of $6.6 billion ($4.3 billion after tax);
      • goodwill impairment charges of $3.6 billion, principally related to the General Insurance and Domestic Life Insurance and Domestic Retirement Services businesses; and
      • the inability to obtain a tax benefit for a significant amount of the losses incurred during the quarter as reflected in the addition to the valuation allowance of $17.6 billion, and other discrete items of $3.4 billion
  • (p127) - Fair Value Measurements of Certain Financial Assets and Liabilities: Overview
    • AIG measures at fair value on a recurring basis financial instruments in its trading and available for sale securities portfolios, certain mortgage and other loans receivable, certain spot commodities, derivative assets and liabilities, securities purchased (sold) under agreements to resell (repurchase), securities lending invested collateral, non-marketable equity investments included in other invested assets, certain policyholder contract deposits, securities and spot commodities sold but not yet purchased, certain trust deposits and deposits due to banks and other depositors, certain long-term debt, and certain hybrid financial instruments included in other liabilities.
    • The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date.
    • The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability.
  • (p161) - AIG’s operations, other than AIGFP, held investments in RMBS with an estimated fair value of $29.8 billion at December 31, 2008, or approximately 5 percent of AIG’s total invested assets.
    • On December 12, 2008, RMBS with an estimated fair value of $20.8 billion were sold to ML II in connection with AIG’s termination of the U.S. securities lending program.
    • In addition, AIG’s insurance operations held investments with a fair value totaling $6.1 billion in CDOs/ABS, of which $14 million included some level of subprime exposure.
  • (p166) - Securities Lending Activities
    • (p ) - At September 30, 2008, AIG had borrowed approximately $11.5 billion under the Fed Facility to provide liquidity to the securities lending program.
    • On October 8, 2008, AIG announced that certain of its domestic life insurance subsidiaries had entered into a securities lending agreement with the NY Fed pursuant to which the NY Fed agreed to borrow, on an overnight basis, up to $37.8 billion in investment grade fixed income securities from these AIG subsidiaries in return for cash collateral. The Securities Lending Agreement assisted AIG in meeting its obligations to borrowers requesting the return of their cash collateral.
    • On December 12, 2008, AIG, certain of AIG’s wholly owned U.S. life insurance subsidiaries, and AIG Securities Lending Corp. (the AIG Agent), another AIG subsidiary, entered into the ML II Agreement with ML II.
    • (p167) - At December 31, 2008, total securities lending collateral held by AIG of $3.8 billion represents the foreign securities lending program, which is expected to wind down in 2009. Securities lending payables amounted to $2.9 billion at December 31, 2008.
    • The recognition of other-than-temporary impairment charges for the securities lending collateral investments placed significant stress on the statutory surplus of the participating insurance companies.
    • During 2008, AIG recognized other-than-temporary impairment charges of $18.2 billion related to these investments, including $6.9 billion of charges related to AIG’s change in intent to hold these securities to maturity as it winds this program down. During 2008, AIG contributed $21.5 billion to certain of its Domestic Life Insurance and Domestic Retirement Services subsidiaries, largely related to these charges.
  • (p167) - Portfolio Review - Other-Than-Temporary Impairments
    • See Critical Accounting Estimates — Other-Than-Temporary Impairments herein for further information. 
    • Once a security has been identified as other-than-temporarily impaired, the amount of such impairment is determined by reference to that security’s contemporaneous fair value and recorded as a charge to earnings.
    • As a result of AIG’s periodic evaluation of its securities for other-than-temporary impairments in value, AIG recorded other-than-temporary impairment charges of $50.8 billion, $4.7 billion (including $643 million related to AIGFP recorded on other income) and $944 million in 2008, 2007 and 2006, respectively.
      • In light of the recent significant disruption in the U.S. residential mortgage and credit markets, AIG has recognized an other-than-temporary impairment charge (severity loss) of $29.1 billion in 2008, primarily related to mortgage-backed, asset-backed and collaterized securities and securities of financial institutions
  • (p168) - Other-than-temporary impairment charges by segment were as follows:
    • General Insurance - 4.5 Billion
    • Life Insurance & Retirement Services - 38.7 Billion
    • Financial Services - 127 Million
    • Asset Management - 7.2 Billion
  • (p170) - An aging of the pre-tax unrealized losses of fixed maturity and equity securities, distributed as a percentage of cost relative to unrealized loss (the extent by which the fair value is less than amortized cost or cost), including the number of respective items was as follows:
  • (p308) - Plan Assets
    • The investment strategy with respect to assets relating to AIG’s U.S. pension plans is designed to achieve investment returns that will fully fund the pension plans over the long term, while limiting the risk of under funding over shorter time periods and defray plan expenses.
    • Accordingly, the asset allocation is targeted to maximize the investment rate of return while managing various risk factors, including the risk and rewards profile indigenous to each asset class.
    • Plan assets are periodically monitored by both the investment committee of AIG’s Retirement Board and the investment managers, which can entail rebalancing the plans’ assets within pre-approved ranges, as deemed appropriate.
    • For example, as a result of the disruption in the financial markets, AIG opted to terminate the pension plans’ securities lending activities in 2008, to mitigate losses.
    • The expected long-term rates of return for AIG’s U.S. pension plans were 7.75 and 8.00 percent for the years ended December 31, 2008 and 2007, respectively.
    • These rates of return are an aggregation of expected returns within each asset category that, when combined with AIG’s contribution to the plan, are expected to maintain the plan’s ability to meet all required benefit obligations.
    • The return with respect to each asset class was developed based on a building block approach that considers both historical returns, current market conditions, asset volatility and the expectations for future market returns.
    • While the assessment of the expected rate of return is long-term and thus not expected to change annually, significant changes in investment strategy or economic conditions may warrant such a change.
  • (p309) - The related party group annuity is with US Life, an AIG affiliate, and totaled approximately $36 million and $38 million at December 31, 2008 and 2007, respectively.
  • (p321) - During the second quarter of 2008, AIG made certain revisions to the American International Group, Inc. (as Guarantor) Condensed Statement of Cash Flows, primarily relating to the effect of reclassifying certain intercompany and securities lending balances.
    • Accordingly, AIG revised the previous periods presented to conform to the revised presentation.
    • There was no effect on the Consolidated Statement of Cash Flows or ending cash balances.
  • (p321) - 23. Subsequent Events - March 2009 Agreements in Principle
    • On March 2, 2009, AIG, the NY Fed and the United States Department of the Treasury announced agreements in principle to modify the terms of the Fed Credit Agreement and the Series D Preferred Stock and to provide a $30 billion equity capital commitment facility.