2007 Annual Report - AIG.com

American International Group, Inc. and Subsidiaries
General Insurance
AIG’s General Insurance operations provide property and casualty
products and services throughout the world. Revenues in the
General Insurance segment represent net premiums earned, net
investment income and net realized capital gains (losses). The
increase in General Insurance operating income in 2007 compared
to 2006 was driven by strength in the Domestic Brokerage
Group (DBG), partially offset by operating losses from the
Mortgage Guaranty business and a decrease in Personal Lines
operating income.
Life Insurance & Retirement Services
AIG’s Asset Management operations include institutional and retail
asset management, broker-dealer services and spread-based
investment businesses. Revenues in the Asset Management
segment represent investment income with respect to spread-
based products and management, advisory and incentive fees.
Asset Management operating income decreased in 2007
compared to 2006, due to realized capital losses on interest rate
and foreign currency hedge positions not qualifying for hedge
accounting and other-than-temporary impairment charges on fixed
income investments due primarily to disruptions in the U.S. credit
markets. These decreases were partially offset by higher partner-
ship income from the Spread-Based Investment business, increased
gains on real estate investments and a gain on the sale
of a portion of AIG’s investment in Blackstone Group, L.P. in
connection with its initial public offering.
AIG’s Life Insurance & Retirement Services operations provide
insurance, financial and investment-oriented products throughout
the world. Revenues in the Life Insurance & Retirement Services
operations represent premiums and other considerations, net
investment income and net realized capital gains (losses). Foreign
operations contributed approximately 76 percent, 68 percent and
59 percent of AIG’s Life Insurance & Retirement Services
operating income in 2007, 2006 and 2005, respectively.
Life Insurance & Retirement Services operating income declined
in 2007 compared to 2006 primarily due to higher net
realized capital losses in 2007. In addition, operating income in
2007 was negatively affected by charges related to remediation
activity in Asia; an industry wide regulatory claims review in Japan;
the effect of Statement of Position 05-1, ‘‘Accounting by Insurance
Enterprises for Deferred Acquisition Costs in Connection with
Modifications or Exchanges of Insurance Contracts’’ (SOP 05-1),
which was adopted in 2007; and investment losses where a
FAS 115 trading election was made (trading account).
Financial Services
AIG’s Financial Services subsidiaries engage in diversified activities
including aircraft and equipment leasing, capital markets,
consumer finance and insurance premium finance. Revenues in
the Financial Services segment include interest, realized and
unrealized gains and losses, including the unrealized market
valuation losses on AIGFP’s super senior credit default swap
portfolio, lease and finance charges.
Financial Services reported an operating loss in 2007 com-
pared to operating income in 2006, primarily due to an unrealized
market valuation loss of $11.5 billion on AIGFP’s super senior
credit default swap portfolio, an other-than-temporary impairment
charge of $643 million on AIGFP’s investment portfolio of CDOs of
asset-backed securities (ABS) and a decline in operating income
for AGF. AGF’s operating income declined in 2007 compared to
2006 due to reduced residential mortgage origination volume,
lower revenues from its mortgage banking activities and increases
in the provision for finance receivable losses. In 2007, AGF’s
mortgage banking operations recorded a pre-tax charge of
$178 million, representing the estimated cost of implementing the
Supervisory Agreement entered into with the Office of Thrift
Supervision (OTS), which is discussed in the Consumer Finance
results of operations section.
Operating income for ILFC increased in 2007 compared to
2006, driven to a large extent by a larger aircraft fleet, higher
lease rates and higher utilization.
In 2007, AIGFP began applying hedge accounting under
FAS 133 to certain of its interest rate swaps and foreign currency
forward contracts that hedge its investments and borrowings and
AGF and ILFC began applying hedge accounting to most of their
derivatives that hedge floating rate and foreign currency denominated
borrowings. Prior to 2007, hedge accounting was not
applied to any of AIG’s derivatives and related assets and
liabilities. Accordingly, revenues and operating income were
exposed to volatility resulting from differences in the timing of
revenue recognition between the derivatives and the hedged
assets and liabilities.
Asset Management
Capital Resources
At December 31, 2007, AIG had total consolidated shareholders’
equity of $95.8 billion and total consolidated borrowings of
$176.0 billion. At that date, $67.9 billion of such borrowings were
subsidiary borrowings not guaranteed by AIG.
In 2007, AIG issued an aggregate of $5.6 billion of junior
subordinated debentures in five series of securities. Substantially
all of the proceeds from these sales, net of expenses, were used
to repurchase shares of AIG’s common stock. A total of
76,361,209 shares were repurchased during 2007.
In February 2007, AIG’s Board of Directors increased AIG’s
share repurchase program by authorizing the repurchase of shares
with an aggregate purchase price of $8 billion. In November 2007,
AIG’s Board of Directors authorized the repurchase of an addi-
tional $8 billion in common stock. At February 15, 2008,
$10.25 billion was available for repurchase under the aggregate
authorization. AIG did not purchase shares of its common stock
under its common stock repurchase authorization during 2006.
AIG does not expect to purchase additional shares under its share
repurchase program for the foreseeable future, other than pursuant
to commitments that existed at December 31, 2007.
AIG 2007 Form 10-K 37