2007 Annual Report - AIG.com

More documents

Recommendations

Info

American International Group, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations Continued interest rate and foreign currency exchange rate disruptions. Reported results may be volatile due to certain hedges not qualifying for hedge accounting treatment. In the Institutional Asset Management business, carried interest, computed in accordance with each fund’s governing agree- ment, is based on the investment’s performance over the life of each fund. Unrealized carried interest is recognized based on Consolidated Results each fund’s performance as of the balance sheet date. Future fund performance may negatively affect previously recognized carried interest. For a description of important factors that may affect the operations and initiatives described above, see Item 1A. Risk Factors. The following table summarizes AIG’s consolidated revenues, income before income taxes, minority interest and cumulative effect of accounting changes and net income for the years ended December 31, 2007, 2006 and 2005: Years Ended December 31, Percentage Increase/(Decrease) (in millions) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005 Total revenues $110,064 $113,387 $108,781 (3)% 4% Income before income taxes, minority interest and cumulative effect of accounting changes 8,943 21,687 15,213 (59) 43 Net income $ 6,200 $ 14,048 $ 10,477 (56)% 34% Income before income taxes, minority interest and cumulative effect of accounting changes declined in 2007 due to the losses described above, partially offset by the favorable effects in 2007 of the application of hedge accounting under Statement of Financial Accounting Standards No. 133, ‘‘Accounting for Deriva- tive Instruments and Hedging Activities’’ (FAS 133). In 2007, AIGFP applied hedge accounting to certain of its interest rate swaps and foreign currency forward contracts hedging its investments and borrowings. As a result, AIGFP recognized in earnings the change in the fair value of the hedged items attributable to the hedged risks, substantially offsetting the gains and losses on the derivatives designated as hedges. In 2006, AIGFP did not apply hedge accounting to any of its assets and liabilities. 2006 and 2005 Comparison The increase in revenues in 2006 compared to 2005 was primarily attributable to the growth in Premiums and other considerations and Net investment income in the General Insurance and Life Insurance & Retirement Services segments. Revenues in the Financial Services segment declined as a result of the effect of hedging activities for AIGFP that did not qualify for hedge accounting treatment under FAS 133, decreasing revenues by $1.8 billion in 2006 and increasing revenues by $2.0 billion in 2005. Income before income taxes, minority interest and cumulative effect of accounting changes increased in 2006 compared to 2005, reflecting higher General Insurance and Life Insurance & Retirement Services operating income. These increases were partially offset by lower Financial Services operating income reflecting the effects of hedging activities that did not qualify for hedge accounting treatment under FAS 133. Results in 2005 reflected the negative effect of $3.3 billion (pre-tax) in catastro- phe-related losses incurred that year. Net income in 2005 also reflected the charges related to regulatory settlements, as described in Item 3. Legal Proceedings, and the fourth quarter Effect of Credit Market Events in the Fourth Quarter of 2007 AIG reported a net loss of $8.4 billion before tax ($5.2 billion after tax) in the fourth quarter of 2007 as a result of severe credit market disruption. Contributing to this loss was an $11.5 billion pre-tax charge for the unrealized market valuation loss on AIGFP’s super senior credit default swap portfolio. Net realized capital losses totaled $2.6 billion before tax in the fourth quarter of 2007, arising primarily from other-than-temporary impairment charges in AIG’s investment portfolio, with an additional $643 million impairment charge related to Financial Ser- vices securities available for sale reported in other income. Also contributing to the operating loss for the fourth quarter was an operating loss of $348 million before tax from Mortgage Guaranty from continued deterioration in the U.S. residential housing market. 2007 and 2006 Comparison AIG’s consolidated revenues decreased in 2007 compared to 2006 as growth in Premiums and other considerations and Net investment income in the General Insurance and Life Insurance & Retirement Services segments were more than offset by higher Net realized capital losses compared to 2006 and an unrealized market valuation loss of $11.5 billion on AIGFP’s super senior credit default swap portfolio recorded in other income. Net realized capital losses of $3.6 billion in 2007 included other-thantemporary impairment charges of the fair value of investments of $4.1 billion, primarily related to the significant disruption in the residential mortgage and credit markets, and foreign currency related losses of $500 million. Similarly, AIG recorded in other income, other-than-temporary impairment charges of $643 million related to its Financial Services securities available for sale reported in other income. Total other-than-temporary impairment charges in 2006 were $944 million. See Invested Assets — Other- than-temporary impairments herein. 34 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries charge resulting from the annual review of General Insurance loss and loss adjustment reserves. Remediation Throughout 2007 and 2006, as part of its continuing remediation efforts, AIG recorded out of period adjustments which are detailed below. In addition, certain revisions were made to the Consoli- dated Statement of Cash Flows. tax) of expenses related to deferred advertising costs; and $125 million ($116 million after tax) of additional expense, primarily related to other remediation activities. Results in 2006 were also negatively affected by a one-time charge relating to the C.V. Starr & Co., Inc. (Starr) tender offer ($54 million before and after tax) and an additional allowance for losses in AIG Credit Card Company (Taiwan) ($88 million before and after tax), both of which were recorded in first quarter of 2006. 2007 Adjustments Cash Flows During 2007, out of period adjustments collectively decreased pre- As part of its ongoing remediation activities, AIG has made tax operating income by $372 million ($399 million after tax). The certain revisions to the Consolidated Statement of Cash Flows, adjustments were comprised of a charge of $380 million primarily relating to the effect of reclassifying certain policyhold- ($247 million after tax) to reverse net gains on transfers of ers’ account balances, the elimination of certain intercompany investment securities among legal entities consolidated within balances and revisions related to separate account assets. AIGFP and a corresponding increase to accumulated other compre- Accordingly, AIG revised the previous periods presented to hensive income (loss); $156 million of additional income tax conform to the revised presentation. See Note 24 to Consolidated expense related to the successful remediation of the material Financial Statements for further information. weakness in internal control over income tax accounting; $142 million ($92 million after tax) of additional expense related to insurance reserves and DAC in connection with improvements Income Taxes in internal control over financial reporting and consolidation The effective tax rate declined from 30.1 percent in 2006 to processes; $42 million ($29 million after tax) of additional 16.3 percent in 2007, primarily due to the unrealized market expense, primarily related to other remediation activities; and valuation losses on AIGFP’s super senior credit default swap $192 million ($125 million after tax) of net realized capital gains portfolio and other-than-temporary impairment charges. These related to foreign exchange. losses, which are taxed at a U.S. tax rate of 35 percent and are included in the calculation of income tax expense, reduced AIG’s 2006 Adjustments overall effective tax rate. In addition, other tax benefits, including tax exempt interest and effects of foreign operations are propor- During 2006, out of period adjustments collectively increased pretionately larger in 2007 than in 2006 due to the decline in pre-tax tax operating income by $313 million ($65 million after tax). The income in 2007. Furthermore, tax deductions taken in 2007 for adjustments were comprised of $773 million ($428 million after SICO compensation plans for which the expense had been tax) of additional investment income related to the accounting for recognized in prior years also reduced the effective tax rate in certain interests in unit investment trusts (UCITS); $300 million 2007. AIG has now completed its claims for tax refunds ($145 million after tax) of charges primarily related to the attributable to adjustments made for 2004 and prior financial remediation of the material weakness in internal control over the statements. Refund claims for tax years 1991-1996 were filed accounting for certain derivative transactions under FAS 133; with the Internal Revenue Service in June 2007. Claims for tax $58 million of additional income tax expense related to the years 1997-2004 will be filed before September 2008. remediation of the material weakness in internal control over AIG expects to receive cash tax benefits in 2008 as a result of income tax accounting; $85 million ($55 million after tax) of the unrealized market valuation losses on AIGFP’s super senior interest income related to interest earned on deposit contracts; credit default swap portfolio, whether AIG is in a regular or $61 million (before and after tax) of expenses related to the Starr alternative minimum tax position. International Company, Inc. (SICO) Deferred Compensation Profit Participation Plans (SICO Plans); $59 million ($38 million after AIG 2007 Form 10-K 35
Page 1 and 2:
AMERICAN INTERNATIONAL GROUP, INC.
Page 3 and 4:
FINANCIAL HIGHLIGHTS (in millions,
Page 5 and 6:
overall financial condition, althou
Page 7 and 8:
Group Executive Committee We are ad
Page 9 and 10:
AIG’s life insurance network is t
Page 11 and 12:
We have also begun to address the e
Page 13 and 14:
WHAT WE SEE The ability to see and
Page 15 and 16:
The Major Accounts Practice within
Page 17 and 18:
Around the world, the middle class
Page 19 and 20:
WE SEE GROWTH OPPORTUNITIES IN EMER
Page 21 and 22:
To grow the strength of the AIG glo
Page 23 and 24:
Since 2003, the AIG Disaster Relief
Page 25 and 26:
RESPECT Respect encompasses how we
Page 27 and 28:
Life Insurance & Retirement Service
Page 29 and 30:
Domestic Brokerage Group— Gross P
Page 31 and 32:
In the summer of 2007, widespread f
Page 33 and 34:
in gross premiums written. It launc
Page 35 and 36:
It grew new business premiums from
Page 37 and 38: emerging markets for its services,
Page 39 and 40: ILFC—Revenues by Region Total = $
Page 41 and 42: AIG Investments acquired a 94 perce
Page 43 and 44: and changing interest rates, as wel
Page 45 and 46: American International Group, Inc.
Page 55 and 56: UNITED STATES SECURITIES AND EXCHAN
Page 87: American International Group, Inc.
Page 139 and 140:
American International Group, Inc.
Page 141 and 142:
Page 143 and 144:
Page 145 and 146:
Page 147 and 148:
Page 149 and 150:
Page 151 and 152:
Page 153 and 154:
Page 155 and 156:
Page 157 and 158:
Page 159 and 160:
Page 161 and 162:
Page 163 and 164:
Page 165 and 166:
Page 167 and 168:
Page 169 and 170:
Page 171 and 172:
Page 173 and 174:
Page 175 and 176:
Page 177 and 178:
Page 179 and 180:
Page 181 and 182:
Page 183 and 184:
Page 185 and 186:
Page 187 and 188:
Page 189 and 190:
Page 191 and 192:
Index of Notes to Consolidated Fina
Page 193 and 194:
Page 195 and 196:
Page 197 and 198:
Page 199 and 200:
Page 201 and 202:
Page 203 and 204:
Page 205 and 206:
Page 207 and 208:
Page 209 and 210:
Page 211 and 212:
Page 213 and 214:
Page 215 and 216:
Page 217 and 218:
Page 219 and 220:
Page 221 and 222:
Page 223 and 224:
Page 225 and 226:
Page 227 and 228:
Page 229 and 230:
Page 231 and 232:
Page 233 and 234:
Page 235 and 236:
Page 237 and 238:
Page 239 and 240:
Page 241 and 242:
Page 243 and 244:
Page 245 and 246:
Page 247 and 248:
Page 249 and 250:
Page 251 and 252:
Page 253 and 254:
Page 255 and 256:
Page 257 and 258:
Page 259 and 260:
Page 261 and 262:
Page 263 and 264:
Page 265 and 266:
Page 267 and 268:
Page 269 and 270:
Page 271 and 272:
Page 273 and 274:
Page 275 and 276:
SHAREHOLDER INFORMATION Corporate H
show all

2007 Annual Report - AIG.com

Create successful ePaper yourself

Delete template?

Save as template?