2007 Annual Report - AIG.com

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
operating income has trailed the growth in revenues due to the from increased borrowings, higher unallocated corporate expenses
additional costs associated with warehousing activities as well as and foreign exchange losses on foreign-denominated debt, a
the costs associated with sales and infrastructure enhancements. portion of which was economically hedged but did not qualify for
The sales and infrastructure enhancements are associated with hedge accounting treatment under FAS 133. In addition, Net
AIG’s planned expansion of marketing and distribution capabilities, realized capital gains (losses) in 2007 included an other-thancombined
with technology and operational infrastructure-related temporary impairment charge of $144 million related to an
improvements.
investment in a partially owned company and foreign exchange
losses of $221 million on unhedged debt.
2006 and 2005 Comparison
The operating loss in 2006 for AIG’s Other category included
an out of period charge of $61 million related to the SICO Plans
Operating income related to Institutional Asset Management
and a one-time charge related to the Starr tender offer of
increased in 2006 compared to 2005, primarily due to realized
$54 million. For a further discussion of these items, see Note 19
gains on real estate transactions as well as increased manageto
Consolidated Financial Statements.
ment fees. AIG’s unaffiliated client assets under management,
In 2007, no compensation cost was recognized, and compenincluding
both retail mutual funds and institutional accounts,
sation cost recognized in 2006 was reversed, with respect to
increased 21 percent from year-end 2005 to $75 billion, resulting
awards under the Partners Plan because the performance
in higher management fee income. Partially offsetting this growth
threshold was not met. The amounts earned under the AIG
were lower carried interest on private equity investments, and
Partners Plan will be determined by the Compensation Committee
higher expenses related to the planned expansion of marketing
in the first quarter of 2008.
and distribution capabilities, combined with technology and opera-
In order to better align financial reporting with the manner in
tional infrastructure-related enhancements.
which AIG’s chief operating decision makers manage their businesses,
beginning in 2007, derivative gains and losses and
Other Operations
foreign exchange transaction gains and losses for Asset Management
The operating loss of AIG’s Other category for the years
and Financial Services entities (other than AIGFP) are now
ended December 31, 2007, 2006 and 2005 was as
included in Asset Management and Financial Services revenues
follows:
and operating income. These amounts were previously reported
(in millions) 2007 2006 2005
as part of AIG’s Other category. Prior period amounts have been
revised to conform to the current presentation.
Other Operating Income (Loss):
Equity earnings in partially
2006 and 2005 Comparison
owned companies $ 157 $ 193 $ (124)
Operating loss for AIG’s Other category declined in 2006 com-
Interest expense (1,223) (859) (541)
Unallocated corporate
pared to 2005, reflecting the regulatory settlement costs of
expenses* (560) (517) (413) $1.6 billion in 2005, as described under Item 3. Legal Proceed-
Compensation expense —
ings, offset by increased interest expense in 2006 as a result of
SICO Plans (39) (108) (205) increased borrowings by the parent holding company and realized
Compensation expense —
capital losses of $37 million. These declines were partially offset
Starr tender offer — (54) —
by increased equity earnings in certain partially owned companies.
Net realized capital gains
(losses) (409) (37) 269
Regulatory settlement costs — — (1,644) Capital Resources and Liquidity
Other miscellaneous, net (66) (53) (107)
At December 31, 2007, AIG had total consolidated shareholders’
Total Other $(2,140) $(1,435) $(2,765)
equity of $95.8 billion and total consolidated borrowings of
* Includes expenses of corporate staff not attributable to specific $176.0 billion. At that date, $67.9 billion of such borrowings were
business segments, expenses related to efforts to improve internal
subsidiary borrowings not guaranteed by AIG.
controls, corporate initiatives and certain compensation plan expenses.
In 2007, AIG issued an aggregate of $5.6 billion of junior
2007 and 2006 Comparison
subordinated debentures in five series of securities. Substantially
all of the proceeds from these sales, net of expenses, are being
The operating loss of AIG’s Other category increased in 2007 used to purchase shares of AIG’s common stock. A total of
compared to 2006 reflecting higher interest expense that resulted 76,361,209 shares were purchased during 2007.
88 AIG 2007 Form 10-K