2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations Continued Life Insurance & Retirement Services total revenues in 2007 enhancements and conversions, resulted in a net increase to reflect growth in premiums and other considerations compared to operating income of $19 million during 2007. However, this net 2006 due principally to strong life insurance production in the increase resulted from a number of items that had varying effects Foreign Life Insurance & Retirement Services operations, a on the results of operations of certain operating units and lines of growing block of U.K. single premium investment-oriented products business. These adjustments resulted in an increase of $183 miland higher policyholder charges related to universal life and sales lion in operating income for Foreign Life Insurance & Retirement of payout annuities in the Domestic Life Insurance operations. Services and decreases in operating income of $52 million and Overall growth in premiums and other considerations was damp- $112 million for Domestic Life Insurance and Domestic Retireened by a continuing shift to interest sensitive products and the ment Services, respectively. In addition, the related adjustments suspension of new sales on certain products in Japan resulting significantly affected both acquisition costs and incurred policy from an industry wide review by the tax authorities. Net invest- losses and benefits in the Consolidated Statement of Income. ment income increased in 2007 compared to 2006 due to higher Operating income in 2006 included an increase of $169 milpartnership and mutual fund income as well as higher policyholder lion for an out of period adjustment related to the accounting for investment income and trading gains and losses (together, UCITS and an increase of $163 million for an out-of-period policyholder trading gains). Policyholder trading gains are offset by adjustment related to corrections of par policyholder dividend a charge to incurred policy losses and benefits expense. Policy- reserves and allocations between participating and non-participatholder trading gains increased due to higher levels of assets and ing accounts, both of which were related to remediation efforts. In generally reflect the trend in equity markets. Policyholder trading addition, operating income in 2006 included charges to Domestic gains were $2.9 billion in 2007 compared to $2.0 billion in 2006. Life Insurance operations of $125 million for the adverse Superior Net investment income in 2006 included an increase of $240 mil- National arbitration ruling, $66 million related to the exit of the lion for an out of period adjustment related to the accounting for domestic financial institutions credit life business and $55 million UCITS. related to other litigation. Operating income in 2007 was significantly adversely affected by net realized capital losses which totaled $2.4 billion, net of an 2006 and 2005 Comparison out-of-period adjustment of $158 million related to foreign ex- Life Insurance & Retirement Services revenues in 2006 increased change remediation activities, compared to net realized capital compared to 2005. Growth in premiums and other considerations gains of $88 million in 2006. Other factors affecting operating was dampened by the effect of foreign exchange, most notably by income include trading account losses of $150 million in the U.K. the weakening Japanese Yen. Net investment income was higher associated with certain investment-linked products, the adverse in 2006 compared to 2005 due to higher partnership and mutual effect of $108 million related to SOP 05-1, which was adopted in fund income, which in 2006 included a positive out-of-period 2007, additional claim expense of $67 million relating to an adjustment of $240 million related to the accounting for UCITS. industry wide regulatory review of claims in Japan (compared to Operating income grew by $1.2 billion from 2005, reflecting higher additional claim expense of $26 million in 2006) and a $118 milrevenues, including net realized capital gains, and out-of-period lion charge related to remediation activities in Asia. Incurred reductions of policy benefits expense of $163 million in 2006 policyholder benefits increased $36 million in 2007 related to a resulting from corrections of par policyholder dividend reserves closed block of Japanese business with guaranteed benefits. and allocations between participating and non-participating ac- Partially offsetting these factors was a $52 million recovery in counts, both of which were related to remediation efforts. In 2007 related to the Superior National arbitration. SOP 05-1 addition, operating income in 2006 included charges for Domestic generally requires DAC related to group contracts to be amortized Life Insurance of $125 million for the adverse Superior National over a shorter duration than in prior periods and also requires arbitration ruling, $66 million related to the exit of the domestic that DAC be expensed at the time an individual policy is financial institutions credit life business and $55 million related to terminated or lapses, even if reinstated shortly thereafter. The other litigation. effect of SOP 05-1 was most significant to the group products line in the Domestic Life Insurance operations. Changes in actuarial estimates, including DAC unlockings and refinements to estimates resulting from actuarial valuation system 64 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries Foreign Life Insurance & Retirement Services Results Foreign Life Insurance & Retirement Services results on a sub-product basis for 2007, 2006 and 2005 were as follows: Premiums and Net Net Realized Other Investment Capital Gains Total Operating (in millions) Considerations Income (Losses) Revenues Income 2007 Life insurance $ 16,630 $ 7,473 $ 85 $24,188 $ 3,898 Personal accident 6,094 354 (3) 6,445 1,457 Group products 2,979 753 (76) 3,656 263 Individual fixed annuities 438 2,283 (171) 2,550 548 Individual variable annuities 460 986 (22) 1,424 31 Total $ 26,601 $ 11,849 $ (187) $38,263 $ 6,197 2006 Life insurance (a) $ 15,732 $ 5,937 $ 574 $22,243 $ 4,247 Personal accident 5,518 285 55 5,858 1,459 Group products 2,226 648 47 2,921 450 Individual fixed annuities 400 2,027 31 2,458 580 Individual variable annuities 290 861 — 1,151 145 Total $ 24,166 $ 9,758 $ 707 $34,631 $ 6,881 2005 Life insurance $ 15,643 $ 4,884 $ 94 $20,621 $ 3,195 Personal accident 5,002 255 (30) 5,227 1,292 Group products 1,925 613 (9) 2,529 322 Individual fixed annuities 361 1,728 29 2,118 398 Individual variable annuities 186 1,238 — 1,424 99 Total $ 23,117 $ 8,718 $ 84 $31,919 $ 5,306 Percentage Increase/(Decrease) 2007 vs. 2006: Life insurance 6% 26% (85)% 9% (8)% Personal accident 10 24 — 10 — Group products 34 16 — 25 (42) Individual fixed annuities 10 13 — 4 (6) Individual variable annuities 59 15 — 24 (79) Total 10% 21% —% 10% (10)% Percentage Increase/(Decrease) 2006 vs. 2005: Life insurance 1% 22% —% 8% 33% Personal accident 10 12 — 12 13 Group products 16 6 — 16 40 Individual fixed annuities 11 17 7 16 46 Individual variable annuities 56 (30) — (19) 46 Total 5% 12% —% 8% 30% (a) Includes the effect of an out of period UCITS adjustment in 2006, which increased net investment income by $237 million and operating income by $166 million. AIG transacts business in most major foreign currencies and considerations for the years ended December 31, 2007 and therefore premiums and other considerations reported in 2006: U.S. dollars vary by volume and from changes in foreign currency translation rates. The following table summarizes the effect of 2007 2006 changes in foreign currency exchange rates on the growth of the Growth in original currency* 7.6% 6.5% Foreign Life Insurance & Retirement Services premiums and other Foreign exchange effect 2.5 (2.0) Growth as reported in U.S. dollars 10.1% 4.5% * Computed using a constant exchange rate each period. AIG 2007 Form 10-K 65
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AMERICAN INTERNATIONAL GROUP, INC.
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FINANCIAL HIGHLIGHTS (in millions,
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overall financial condition, althou
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Group Executive Committee We are ad
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AIG’s life insurance network is t
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We have also begun to address the e
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WHAT WE SEE The ability to see and
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The Major Accounts Practice within
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Around the world, the middle class
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WE SEE GROWTH OPPORTUNITIES IN EMER
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To grow the strength of the AIG glo
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Since 2003, the AIG Disaster Relief
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RESPECT Respect encompasses how we
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Life Insurance & Retirement Service
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Domestic Brokerage Group— Gross P
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In the summer of 2007, widespread f
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in gross premiums written. It launc
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It grew new business premiums from
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emerging markets for its services,
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ILFC—Revenues by Region Total = $
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AIG Investments acquired a 94 perce
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and changing interest rates, as wel
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American International Group, Inc.
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UNITED STATES SECURITIES AND EXCHAN
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Index of Notes to Consolidated Fina
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SHAREHOLDER INFORMATION Corporate H
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