2007 Annual Report - AIG.com
2007 Annual Report - AIG.com
2007 Annual Report - AIG.com
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American International Group, Inc. and Subsidiaries<br />
Financial Services Operations<br />
<strong>AIG</strong>’s Financial Services subsidiaries engage in diversified activities including aircraft and equipment leasing, capital markets, consumer<br />
finance and insurance premium finance.<br />
Financial Services Results<br />
Financial Services results were as follows:<br />
Percentage Increase/(Decrease)<br />
(in millions) <strong>2007</strong> 2006 2005 <strong>2007</strong> vs. 2006 2006 vs. 2005<br />
Revenues:<br />
Aircraft Leasing (a) $ 4,694 $4,082 $ 3,668 15% 11%<br />
Capital Markets (b) (9,979) (186) 3,260 — —<br />
Consumer Finance (c) 3,655 3,587 3,563 2 1<br />
Other, including inter<strong>com</strong>pany adjustments 321 294 186 9 58<br />
Total $ (1,309) $7,777 $10,677 —% (27)%<br />
Operating in<strong>com</strong>e (loss):<br />
Aircraft Leasing (a) $ 873 $ 578 $ 769 51% (25)%<br />
Capital Markets (b) (10,557) (873) 2,661 — —<br />
Consumer Finance (c) 171 668 922 (74) (28)<br />
Other, including inter<strong>com</strong>pany adjustments (2) 10 72 — (86)<br />
Total $ (9,515) $ 383 $ 4,424 —% (91)%<br />
(a) Both revenues and operating in<strong>com</strong>e include gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133,<br />
including the related foreign exchange gains and losses. In <strong>2007</strong>, 2006 and 2005, the effect was $(37) million, $(73) million and $93 million,<br />
respectively. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of borrowings. In the<br />
second quarter of <strong>2007</strong>, ILFC began applying hedge accounting to most of its derivatives hedging interest rate and foreign exchange risks associated<br />
with its floating rate and foreign currency denominated borrowings.<br />
(b) Revenues, shown net of interest expense of $4.6 billion, $3.2 billion and $3.0 billion in <strong>2007</strong>, 2006 and 2005, respectively, were primarily from<br />
hedged financial positions entered into in connection with counterparty transactions. Both revenues and operating in<strong>com</strong>e include gains (losses) from<br />
hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. In <strong>2007</strong>,<br />
2006 and 2005, the effect was $211 million, $(1.8) billion and $2.0 billion, respectively. The year ended December 31, <strong>2007</strong> includes a $380 million<br />
out of period charge to reverse net gains recognized on transfers of available for sale securities among legal entities consolidated within <strong>AIG</strong>FP. The<br />
year ended December 31, 2006 includes an out of period charge of $223 million related to the remediation of the material weakness in internal<br />
control over the accounting for certain derivative transactions under FAS 133. In the first quarter of <strong>2007</strong>, <strong>AIG</strong>FP began applying hedge accounting for<br />
certain of its interest rate swaps and foreign currency forward contracts hedging its investments and borrowings. In <strong>2007</strong>, both revenues and operating<br />
in<strong>com</strong>e (loss) include an unrealized market valuation loss of $11.5 billion on <strong>AIG</strong>FP’s super senior credit default swap portfolio and an other-thantemporary<br />
impairment charge of $643 million on <strong>AIG</strong>FP’s available for sale investment securities recorded in other in<strong>com</strong>e.<br />
(c) Both revenues and operating in<strong>com</strong>e include gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133,<br />
including the related foreign exchange gains and losses. In <strong>2007</strong>, 2006 and 2005, the effect was $(20) million, $(94) million and $75 million,<br />
respectively. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of borrowings. In the<br />
second quarter of <strong>2007</strong>, AGF began applying hedge accounting to most of its derivatives hedging interest rate and foreign exchange risks associated<br />
with its floating rate and foreign currency denominated borrowings. In <strong>2007</strong>, includes a pre-tax charge of $178 million in connection with domestic<br />
consumer finance’s mortgage banking activities.<br />
<strong>2007</strong> and 2006 Comparison In <strong>2007</strong>, <strong>AIG</strong>FP began applying hedge accounting under<br />
FAS 133 to certain of its interest rate swaps and foreign currency<br />
Financial Services reported an operating loss in <strong>2007</strong> <strong>com</strong>pared<br />
forward contracts that hedge its investments and borrowings and<br />
to operating in<strong>com</strong>e in 2006 primarily due to an unrealized market<br />
AGF and ILFC began applying hedge accounting to most of their<br />
valuation loss of $11.5 billion on <strong>AIG</strong>FP’s super senior credit<br />
derivatives that hedge floating rate and foreign currency denomidefault<br />
swap portfolio, an other-than-temporary impairment charge<br />
nated borrowings. Prior to <strong>2007</strong>, hedge accounting was not<br />
on <strong>AIG</strong>FP’s available for sale investment securities recorded in<br />
applied to any of <strong>AIG</strong>’s derivatives and related assets and<br />
other in<strong>com</strong>e, and a decline in operating in<strong>com</strong>e for AGF. AGF’s<br />
liabilities. Accordingly, revenues and operating in<strong>com</strong>e were<br />
operating in<strong>com</strong>e declined in <strong>2007</strong> <strong>com</strong>pared to 2006, due to<br />
exposed to volatility resulting from differences in the timing of<br />
reduced residential mortgage origination volumes, lower revenues<br />
revenue recognition between the derivatives and the hedged<br />
from its mortgage banking activities and increases in the<br />
assets and liabilities.<br />
provision for finance receivable losses. In <strong>2007</strong>, AGF’s mortgage<br />
The year ended December 31, <strong>2007</strong> included an out of period<br />
banking operations also recorded a pre-tax charge of $178 milcharge<br />
of $380 million to reverse net gains recognized on<br />
lion, representing the estimated cost of implementing the Supervitransfers<br />
of available for sale securities among legal entities<br />
sory Agreement entered into with the OTS.<br />
consolidated within <strong>AIG</strong>FP. The year ended December 31, 2006<br />
ILFC generated strong operating in<strong>com</strong>e growth in <strong>2007</strong><br />
included out of period charges of $223 million related to the<br />
<strong>com</strong>pared to 2006, driven to a large extent by a larger aircraft<br />
remediation of the material weakness in internal control over<br />
fleet, higher lease rates and higher utilization.<br />
accounting for certain derivative transactions under FAS 133.<br />
<strong>AIG</strong> <strong>2007</strong> Form 10-K 81