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 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
American International Group, Inc. and Subsidiaries Borrowings Total borrowings at December 31, 2007 and 2006 were as follows: (in millions) 2007 2006 Borrowings issued by AIG: Notes and bonds payable $ 14,588 $ 8,915 Junior subordinated debt 5,809 — Loans and mortgages payable 729 841 MIP matched notes and bonds payable 14,267 5,468 Series AIGFP matched notes and bonds payable 874 72 Total AIG borrowings 36,267 15,296 Borrowings guaranteed by AIG: AIGFP GIAs 19,908 20,664 Notes and bonds payable 36,676 37,528 Loans and mortgages payable 1,384 — Hybrid financial instrument liabilities (a) 7,479 8,856 Total AIGFP borrowings 65,447 67,048 AIG Funding, Inc. commercial paper 4,222 4,821 AIGLH notes and bonds payable 797 797 Liabilities connected to trust preferred stock 1,435 1,440 Total borrowings issued or guaranteed by AIG 108,168 89,402 Borrowings not guaranteed by AIG: ILFC Commercial paper 4,483 2,747 Junior subordinated debt 999 999 Notes and bonds payable (b) 25,737 25,592 Total ILFC borrowings 31,219 29,338 AGF Commercial paper and extendible commercial notes 3,801 4,662 Junior subordinated debt 349 — Notes and bonds payable 22,369 19,261 Total AGF borrowings 26,519 23,923 AIGCFG Commercial paper 287 227 Loans and mortgages payable 1,839 1,453 Total AIGCFG borrowings 2,126 1,680 AIG Finance Taiwan Limited commercial paper — 26 Other subsidiaries 775 672 Borrowings of consolidated investments: A.I. Credit (c) 321 880 AIG Investments (d) 1,636 193 AIG Global Real Estate Investment (d) 5,096 2,307 AIG SunAmerica 186 203 ALICO 3 55 Total borrowings of consolidated investments 7,242 3,638 Total borrowings not guaranteed by AIG 67,881 59,277 Consolidated: Total commercial paper and extendible commercial notes $ 13,114 $ 13,363 Total long-term borrowings 162,935 135,316 Total borrowings $176,049 $148,679 (a) Represents structured notes issued by AIGFP that are accounted for using the fair value option. (b) Includes borrowings under Export Credit Facility of $2.5 billion and $2.7 billion at December 31, 2007 and 2006, respectively. (c) Represents commercial paper issued by a variable interest entity secured by receivables of A.I. Credit. (d) In 2007, increases in borrowings compared to 2006 were principally attributable to warehousing activities. AIG 2007 Form 10-K 89
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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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SHAREHOLDER INFORMATION Corporate H
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