FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2006 |
or |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission File Number
1-8787
American International Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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13-2592361 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
|
70 Pine Street, New York, New York
(Address of principal executive offices) |
|
10270
(Zip Code) |
Registrants telephone number, including area code:
(212) 770-7000
Former name, former address and former fiscal year, if
changed since last report: None
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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|
|
Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell
company (as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
Applicable only to corporate issuers
As of October 31, 2006, there were
2,599,721,215 shares outstanding of the issuers
common stock.
TABLE OF CONTENTS
American International Group, Inc. and Subsidiaries
Part I FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
CONSOLIDATED BALANCE SHEET
(in millions) (unaudited)
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September 30, | |
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December 31, | |
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2006 | |
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2005 | |
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Assets:
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|
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Investments and financial services assets: |
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Fixed maturities: |
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|
|
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|
|
|
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Bonds available for sale, at market value (amortized cost:
2006 $368,532; 2005 $349,612) (includes
hybrid financial instruments: 2006 $407)
|
|
$ |
376,036 |
|
|
$ |
359,516 |
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|
|
|
Bonds held to maturity, at amortized cost (market value:
2006 $22,148; 2005 $22,047)
|
|
|
21,484 |
|
|
|
21,528 |
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|
|
|
Bond trading securities, at market value
(cost: 2006 $7,267; 2005 $4,623)
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|
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7,238 |
|
|
|
4,636 |
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|
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Equity securities: |
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|
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|
|
|
|
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Common stocks available for sale, at market value
(cost: 2006 $10,125; 2005 $10,125)
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11,835 |
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12,227 |
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|
|
|
Common and preferred stocks trading, at market value
(cost: 2006 $10,098; 2005 $7,746)
|
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11,528 |
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|
8,959 |
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|
|
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Preferred stocks available for sale, at market value
(cost: 2006 $2,450; 2005 $2,282)
|
|
|
2,500 |
|
|
|
2,402 |
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Mortgage loans on real estate, net of allowance
(2006 $57; 2005 $54)
|
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|
16,842 |
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|
|
14,300 |
|
|
|
Policy loans
|
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|
7,385 |
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|
|
7,039 |
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Collateral and guaranteed loans, net of allowance
(2006 $7; 2005 $10)
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|
|
3,597 |
|
|
|
3,570 |
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|
Financial services assets: |
|
|
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|
|
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|
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Flight equipment primarily under operating leases, net of
accumulated depreciation (2006 $8,480;
2005 $7,419)
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39,460 |
|
|
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36,245 |
|
|
|
|
Securities available for sale, at market value
(cost: 2006 $40,501; 2005 $37,572)
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41,232 |
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|
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37,511 |
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Trading securities, at market value
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5,822 |
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6,499 |
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Spot commodities
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118 |
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92 |
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Unrealized gain on swaps, options and forward transactions
|
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20,235 |
|
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|
18,695 |
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Trading assets
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2,194 |
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|
|
1,204 |
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Securities purchased under agreements to resell, at contract
value
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27,041 |
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14,547 |
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Finance receivables, net of allowance (2006 $679;
2005 $670) (includes finance receivables held for
sale: 2006 $863; 2005 $1,110)
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28,634 |
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27,995 |
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Securities lending collateral, at market value (which
approximates cost) |
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71,388 |
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59,471 |
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Other invested assets |
|
|
32,777 |
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27,267 |
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Short-term investments, at cost (which approximates market value) |
|
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22,716 |
|
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|
15,342 |
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Total investments and financial services assets |
|
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750,062 |
|
|
|
679,045 |
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Cash |
|
|
1,425 |
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|
|
1,897 |
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|
Investment income due and accrued |
|
|
6,202 |
|
|
|
5,727 |
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|
Premiums and insurance balances receivable, net of allowance
(2006 $881; 2005 $1,011)
|
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17,540 |
|
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|
15,333 |
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Reinsurance assets, net of allowance (2006 $447;
2005 $992) |
|
|
24,364 |
|
|
|
24,978 |
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Deferred policy acquisition costs |
|
|
36,342 |
|
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33,248 |
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Investments in partially owned companies |
|
|
1,031 |
|
|
|
1,158 |
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|
Real estate and other fixed assets, net of accumulated
depreciation (2006 $5,424; 2005 $4,990)
|
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|
9,141 |
|
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|
7,446 |
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|
Separate and variable accounts |
|
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70,652 |
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|
63,797 |
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Goodwill |
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8,576 |
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8,093 |
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Other assets |
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16,209 |
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|
|
12,329 |
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Total assets
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$ |
941,544 |
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|
$ |
853,051 |
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|
See Accompanying Notes to Consolidated Financial
Statements.
1
American International Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE
SHEET (continued)
(in millions, except share
data) (unaudited)
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September 30, | |
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December 31, | |
|
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2006 | |
|
2005 | |
| |
Liabilities:
|
|
|
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|
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Reserve for losses and loss expenses
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|
$ |
79,863 |
|
|
$ |
77,169 |
|
|
Unearned premiums
|
|
|
26,068 |
|
|
|
24,243 |
|
|
Future policy benefits for life and accident and health
insurance contracts
|
|
|
118,273 |
|
|
|
108,807 |
|
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Policyholders contract deposits
|
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|
236,342 |
|
|
|
227,027 |
|
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Other policyholders funds
|
|
|
10,534 |
|
|
|
10,870 |
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|
Commissions, expenses and taxes payable
|
|
|
5,125 |
|
|
|
4,769 |
|
|
Insurance balances payable
|
|
|
4,722 |
|
|
|
3,564 |
|
|
Funds held by companies under reinsurance treaties
|
|
|
2,442 |
|
|
|
4,174 |
|
|
Income taxes payable
|
|
|
8,497 |
|
|
|
6,288 |
|
|
Financial services liabilities:
|
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|
|
|
|
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|
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|
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Borrowings under obligations of guaranteed investment agreements
|
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|
21,091 |
|
|
|
20,811 |
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Securities sold under agreements to repurchase, at contract value
|
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|
15,071 |
|
|
|
11,047 |
|
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Trading liabilities
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|
|
2,914 |
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|
2,546 |
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Hybrid financial instrument liabilities, at fair value
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8,150 |
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Securities and spot commodities sold but not yet purchased, at
market value
|
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|
5,645 |
|
|
|
5,975 |
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|
Unrealized loss on swaps, options and forward transactions
|
|
|
12,764 |
|
|
|
12,740 |
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|
Trust deposits and deposits due to banks and other depositors
|
|
|
4,813 |
|
|
|
4,877 |
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Commercial paper
|
|
|
8,814 |
|
|
|
6,514 |
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Notes, bonds, loans and mortgages payable
|
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|
79,834 |
|
|
|
71,313 |
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Commercial paper
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|
|
4,484 |
|
|
|
2,694 |
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Notes, bonds, loans and mortgages payable
|
|
|
13,350 |
|
|
|
7,126 |
|
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Liabilities connected to trust preferred stock
|
|
|
1,399 |
|
|
|
1,391 |
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|
Separate and variable accounts
|
|
|
70,652 |
|
|
|
63,797 |
|
|
Securities lending payable
|
|
|
72,264 |
|
|
|
60,409 |
|
|
Minority interest
|
|
|
6,290 |
|
|
|
5,124 |
|
|
Other liabilities (includes hybrid financial instruments:
2006 $70)
|
|
|
25,800 |
|
|
|
23,273 |
|
|
Total liabilities
|
|
|
845,201 |
|
|
|
766,548 |
|
|
Preferred shareholders equity in subsidiary
companies
|
|
|
189 |
|
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|
186 |
|
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|
Commitments and Contingent Liabilities (See Note 6)
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Shareholders equity:
|
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Common stock, $2.50 par value; 5,000,000,000 shares
authorized; shares issued 2006 and
2005 2,751,327,476
|
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|
6,878 |
|
|
|
6,878 |
|
|
Additional paid-in capital
|
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|
2,572 |
|
|
|
2,339 |
|
|
Retained earnings
|
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|
81,987 |
|
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|
72,330 |
|
|
Accumulated other comprehensive income (loss)
|
|
|
6,744 |
|
|
|
6,967 |
|
|
Treasury stock, at cost; 2006 152,107,902;
2005 154,680,704 shares of common stock
|
|
|
(2,027 |
) |
|
|
(2,197 |
) |
|
Total shareholders equity
|
|
|
96,154 |
|
|
|
86,317 |
|
|
Total liabilities, preferred shareholders equity in
subsidiary companies and shareholders equity
|
|
$ |
941,544 |
|
|
$ |
853,051 |
|
|
See Accompanying Notes to Consolidated Financial
Statements.
2
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
|
|
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|
|
|
|
|
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|
|
|
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(in millions, except per share data) (unaudited) | |
| |
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Three Months | |
|
Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
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| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other considerations
|
|
$ |
18,856 |
|
|
$ |
17,243 |
|
|
$ |
55,401 |
|
|
$ |
52,459 |
|
|
Net investment income
|
|
|
6,263 |
|
|
|
5,654 |
|
|
|
18,002 |
|
|
|
16,213 |
|
|
Realized capital gains (losses)
|
|
|
(87 |
) |
|
|
77 |
|
|
|
(132 |
) |
|
|
89 |
|
|
Other income
|
|
|
4,167 |
|
|
|
3,434 |
|
|
|
9,930 |
|
|
|
12,752 |
|
|
|
Total revenues
|
|
|
29,199 |
|
|
|
26,408 |
|
|
|
83,201 |
|
|
|
81,513 |
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred policy losses and benefits
|
|
|
14,737 |
|
|
|
16,501 |
|
|
|
43,725 |
|
|
|
45,657 |
|
|
Insurance acquisition and other operating expenses
|
|
|
8,161 |
|
|
|
7,360 |
|
|
|
23,141 |
|
|
|
20,959 |
|
|
|
Total benefits and expenses
|
|
|
22,898 |
|
|
|
23,861 |
|
|
|
66,866 |
|
|
|
66,616 |
|
|
Income before income taxes, minority interest and cumulative
effect of an accounting change
|
|
|
6,301 |
|
|
|
2,547 |
|
|
|
16,335 |
|
|
|
14,897 |
|
|
Income taxes
|
|
|
1,943 |
|
|
|
748 |
|
|
|
5,066 |
|
|
|
4,537 |
|
|
Income before minority interest and cumulative effect of an
accounting change
|
|
|
4,358 |
|
|
|
1,799 |
|
|
|
11,269 |
|
|
|
10,360 |
|
|
Minority interest
|
|
|
(134 |
) |
|
|
(54 |
) |
|
|
(694 |
) |
|
|
(327 |
) |
|
Income before cumulative effect of an accounting change
|
|
|
4,224 |
|
|
|
1,745 |
|
|
|
10,575 |
|
|
|
10,033 |
|
|
Cumulative effect of an accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
Net income
|
|
$ |
4,224 |
|
|
$ |
1,745 |
|
|
$ |
10,609 |
|
|
$ |
10,033 |
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of an accounting change
|
|
$ |
1.62 |
|
|
$ |
0.67 |
|
|
$ |
4.06 |
|
|
$ |
3.86 |
|
|
|
Cumulative effect of an accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.62 |
|
|
$ |
0.67 |
|
|
$ |
4.07 |
|
|
$ |
3.86 |
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of an accounting change
|
|
$ |
1.61 |
|
|
$ |
0.66 |
|
|
$ |
4.03 |
|
|
$ |
3.82 |
|
|
|
Cumulative effect of an accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.61 |
|
|
$ |
0.66 |
|
|
$ |
4.04 |
|
|
$ |
3.82 |
|
|
Dividends declared per common share
|
|
$ |
0.165 |
|
|
$ |
0.175 |
|
|
$ |
0.48 |
|
|
$ |
0.475 |
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,607 |
|
|
|
2,597 |
|
|
|
2,607 |
|
|
|
2,597 |
|
|
Diluted
|
|
|
2,626 |
|
|
|
2,624 |
|
|
|
2,625 |
|
|
|
2,624 |
|
|
See Accompanying Notes to Consolidated Financial
Statements.
3
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) (unaudited) | |
| |
Nine Months Ended September 30, | |
|
2006 | |
|
2005 | |
| |
Summary:
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$ |
6,004 |
|
|
$ |
20,190 |
|
|
Net cash used in investing activities
|
|
|
(51,400 |
) |
|
|
(52,577 |
) |
|
Net cash provided by financing activities
|
|
|
44,865 |
|
|
|
32,576 |
|
|
Effect of exchange rate changes on cash
|
|
|
59 |
|
|
|
(90 |
) |
|
|
Change in cash
|
|
|
(472 |
) |
|
|
99 |
|
|
Cash at beginning of period
|
|
|
1,897 |
|
|
|
2,009 |
|
|
|
Cash at end of period
|
|
$ |
1,425 |
|
|
$ |
2,108 |
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
10,609 |
|
|
$ |
10,033 |
|
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Noncash revenues, expenses, gains and losses included in
income:
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital (gains) losses
|
|
|
394 |
|
|
|
296 |
|
|
|
|
Foreign exchange transaction (gains) losses
|
|
|
845 |
|
|
|
(2,889 |
) |
|
|
|
Equity in income of partially owned companies and other invested
assets
|
|
|
(2,655 |
) |
|
|
(1,217 |
) |
|
|
|
Amortization of premium and discount on securities
|
|
|
100 |
|
|
|
357 |
|
|
|
|
Depreciation expenses, principally flight equipment
|
|
|
1,743 |
|
|
|
1,311 |
|
|
|
|
Provision for finance receivable losses
|
|
|
329 |
|
|
|
315 |
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
General and life insurance reserves
|
|
|
10,507 |
|
|
|
17,257 |
|
|
|
|
Premiums and insurance balances receivable and
payable net
|
|
|
(173 |
) |
|
|
89 |
|
|
|
|
Reinsurance assets
|
|
|
614 |
|
|
|
(2,163 |
) |
|
|
|
Deferred policy acquisition costs
|
|
|
(3,210 |
) |
|
|
(2,351 |
) |
|
|
|
Investment income due and accrued
|
|
|
(475 |
) |
|
|
(399 |
) |
|
|
|
Funds held under reinsurance treaties
|
|
|
(1,732 |
) |
|
|
544 |
|
|
|
|
Other policyholders funds
|
|
|
(510 |
) |
|
|
613 |
|
|
|
|
Income taxes payable
|
|
|
1,905 |
|
|
|
2,532 |
|
|
|
|
Commissions, expenses and taxes payable
|
|
|
356 |
|
|
|
516 |
|
|
|
|
Other assets and liabilities net
|
|
|
(120 |
) |
|
|
1,233 |
|
|
|
|
Bonds, common and preferred stocks trading, at market value
|
|
|
(4,410 |
) |
|
|
(3,532 |
) |
|
|
|
Trading assets and liabilities net
|
|
|
(622 |
) |
|
|
1,711 |
|
|
|
|
Trading securities, at market value
|
|
|
677 |
|
|
|
(3,532 |
) |
|
|
|
Spot commodities
|
|
|
(26 |
) |
|
|
82 |
|
|
|
|
Net unrealized (gain) loss on swaps, options and forward
transactions
|
|
|
(966 |
) |
|
|
694 |
|
|
|
|
Securities purchased under agreements to resell
|
|
|
(12,494 |
) |
|
|
14,143 |
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
4,024 |
|
|
|
(12,887 |
) |
|
|
|
Securities and spot commodities sold but not yet purchased, at
market value
|
|
|
(330 |
) |
|
|
249 |
|
|
|
|
Finance receivables held for sale originations and
purchases
|
|
|
(7,965 |
) |
|
|
(9,111 |
) |
|
|
|
Sales of finance receivables held for sale
|
|
|
7,888 |
|
|
|
8,409 |
|
|
|
|
Other net
|
|
|
1,701 |
|
|
|
(2,113 |
) |
|
|
|
|
Total adjustments
|
|
|
(4,605 |
) |
|
|
10,157 |
|
|
Net cash provided by (used in) operating activities
|
|
$ |
6,004 |
|
|
$ |
20,190 |
|
|
See Accompanying Notes to Consolidated Financial
Statements.
4
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH
FLOWS (continued)
|
|
|
|
|
|
|
|
|
|
(in millions) (unaudited) | |
| |
Nine Months Ended September 30, |
|
2006 | |
|
2005 | |
| |
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Cost of bonds, at market sold
|
|
$ |
70,737 |
|
|
$ |
93,690 |
|
Cost of bonds, at market matured or
redeemed
|
|
|
11,794 |
|
|
|
12,553 |
|
Cost of equity securities sold
|
|
|
8,891 |
|
|
|
9,271 |
|
Realized capital gains (losses)
|
|
|
(325 |
) |
|
|
24 |
|
Sales of securities available for sale
|
|
|
4,300 |
|
|
|
4,913 |
|
Maturities of securities available for
sale
|
|
|
974 |
|
|
|
2,190 |
|
Sales of flight equipment
|
|
|
380 |
|
|
|
376 |
|
Sales or distributions of other invested
assets
|
|
|
11,591 |
|
|
|
7,480 |
|
Finance receivable principal payments
received
|
|
|
9,131 |
|
|
|
8,842 |
|
Mortgage, policy, collateral and
guaranteed loans payments received
|
|
|
3,081 |
|
|
|
2,715 |
|
Purchases of fixed maturity securities
|
|
|
(98,852 |
) |
|
|
(130,547 |
) |
Purchases of equity securities
|
|
|
(11,032 |
) |
|
|
(10,947 |
) |
Purchases of securities available for
sale
|
|
|
(8,162 |
) |
|
|
(12,992 |
) |
Purchases of flight equipment
|
|
|
(4,860 |
) |
|
|
(5,482 |
) |
Purchases of other invested assets
|
|
|
(11,935 |
) |
|
|
(8,874 |
) |
Net additions to real estate and other
assets
|
|
|
(1,405 |
) |
|
|
(1,398 |
) |
Finance receivables held for
investment originations and purchases
|
|
|
(9,947 |
) |
|
|
(13,021 |
) |
Mortgage, policy, collateral and
guaranteed loans granted
|
|
|
(5,793 |
) |
|
|
(3,941 |
) |
Change in securities lending collateral
|
|
|
(11,917 |
) |
|
|
(8,458 |
) |
Change in short-term investments
|
|
|
(8,051 |
) |
|
|
1,029 |
|
|
Net cash used in investing activities
|
|
$ |
(51,400 |
) |
|
$ |
(52,577 |
) |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Policyholders contract deposits
|
|
|
37,998 |
|
|
|
39,254 |
|
Policyholders contract withdrawals
|
|
|
(30,475 |
) |
|
|
(26,562 |
) |
Change in trust deposits and deposits
due to banks and other depositors
|
|
|
(64 |
) |
|
|
7 |
|
Change in commercial paper
|
|
|
3,216 |
|
|
|
21 |
|
Proceeds from notes, bonds, loans and
mortgages payable, and
hybrid financial instrument
liabilities
|
|
|
40,345 |
|
|
|
43,791 |
|
Repayments on notes, bonds, loans and
mortgages payable, and
hybrid financial instrument
liabilities
|
|
|
(16,851 |
) |
|
|
(32,929 |
) |
Proceeds from issuance of guaranteed
investment agreements
|
|
|
9,411 |
|
|
|
9,743 |
|
Maturities of guaranteed investment
agreements
|
|
|
(9,480 |
) |
|
|
(8,059 |
) |
Change in securities lending payable
|
|
|
11,855 |
|
|
|
8,458 |
|
Proceeds from issuance of common stock
|
|
|
94 |
|
|
|
44 |
|
Cash dividends paid to shareholders
|
|
|
(1,209 |
) |
|
|
(1,031 |
) |
Acquisition of treasury stock
|
|
|
(7 |
) |
|
|
(170 |
) |
Other net
|
|
|
32 |
|
|
|
9 |
|
|
Net cash provided by financing activities
|
|
$ |
44,865 |
|
|
$ |
32,576 |
|
|
Supplementary disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
4,254 |
|
|
$ |
3,587 |
|
|
Taxes
|
|
$ |
3,252 |
|
|
$ |
2,031 |
|
Non-cash activity:
|
|
|
|
|
|
|
|
|
|
Interest credited to policyholder accounts included in financing
activities
|
|
$ |
7,253 |
|
|
$ |
7,074 |
|
|
See Accompanying Notes to Consolidated Financial
Statements.
5
American International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share data) (unaudited) | |
| |
|
|
Three Months | |
|
Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Net income
|
|
$ |
4,224 |
|
|
$ |
1,745 |
|
|
$ |
10,609 |
|
|
$ |
10,033 |
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation (depreciation) of
investments net of reclassification adjustments
|
|
|
7,200 |
|
|
|
(2,493 |
) |
|
|
(1,133 |
) |
|
|
(211 |
) |
|
|
Deferred income tax benefit (expense) on above changes
|
|
|
(2,562 |
) |
|
|
993 |
|
|
|
281 |
|
|
|
490 |
|
|
Foreign currency translation adjustments
|
|
|
(115 |
) |
|
|
222 |
|
|
|
955 |
|
|
|
(604 |
) |
|
|
Deferred income tax benefit (expense) on above changes
|
|
|
17 |
|
|
|
(379 |
) |
|
|
(332 |
) |
|
|
122 |
|
|
Net derivative gains (losses) arising from cash flow hedging
activities
|
|
|
4 |
|
|
|
(63 |
) |
|
|
12 |
|
|
|
7 |
|
|
|
Deferred income tax (expense) benefit on above changes
|
|
|
(1 |
) |
|
|
90 |
|
|
|
(4 |
) |
|
|
19 |
|
|
Retirement plan liabilities adjustment, net of tax
|
|
|
|
|
|
|
(42 |
) |
|
|
(2 |
) |
|
|
(70 |
) |
|
Other comprehensive income (loss)
|
|
|
4,543 |
|
|
|
(1,672 |
) |
|
|
(223 |
) |
|
|
(247 |
) |
|
Comprehensive income (loss)
|
|
$ |
8,767 |
|
|
$ |
73 |
|
|
$ |
10,386 |
|
|
$ |
9,786 |
|
|
See Accompanying Notes to Consolidated Financial
Statements.
6
American International Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
|
|
1. |
Financial Statement Presentation |
These unaudited condensed consolidated financial statements do
not include certain financial information required by
U.S. generally accepted accounting principles (GAAP) for
complete financial statements and should be read in conjunction
with the audited consolidated financial statements and the
related notes included in the Annual Report on
Form 10-K/A of
American International Group, Inc. (AIG) for the year ended
December 31, 2005 (2005 Annual Report on
Form 10-K/A).
In the opinion of management, these consolidated financial
statements contain the normal recurring adjustments necessary
for a fair statement of the results presented herein. All
material intercompany accounts and transactions have been
eliminated. Certain accounts have been reclassified in the 2005
financial statements to conform to their 2006 presentation. See
also Note 11 herein.
Information with respect to the three and nine months ended
September 30, 2005 includes the effects of corrections and
reclassifications made in conjunction with the Second
Restatement. See also AIGs 2005 Annual Report on
Form 10-K/A.
AIG identifies its reportable segments by product line
consistent with its management structure. AIGs major
product and service groupings are general insurance, life
insurance & retirement services, financial services and
asset management. The following table summarizes the
operations by major operating segment for the three and
nine-month periods ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
Operating Segments |
|
| |
|
| |
(in millions) | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Revenues(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Insurance(b)(h)
|
|
$ |
12,615 |
|
|
$ |
11,192 |
|
|
$ |
36,438 |
|
|
$ |
33,816 |
|
|
Life Insurance & Retirement
Services(c)(h)
|
|
|
12,356 |
|
|
|
11,760 |
|
|
|
36,819 |
|
|
|
35,086 |
|
|
Financial
Services(d)
|
|
|
3,187 |
|
|
|
1,926 |
|
|
|
6,028 |
|
|
|
8,140 |
|
|
Asset
Management(e)
|
|
|
1,238 |
|
|
|
1,355 |
|
|
|
4,098 |
|
|
|
3,951 |
|
|
Other
|
|
|
(197 |
) |
|
|
175 |
|
|
|
(182 |
) |
|
|
520 |
|
|
Consolidated
|
|
$ |
29,199 |
|
|
$ |
26,408 |
|
|
$ |
83,201 |
|
|
$ |
81,513 |
|
|
Operating income
(loss)(a)(f)(i)(j):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Insurance(h)
|
|
$ |
2,625 |
|
|
$ |
(137 |
) |
|
$ |
7,819 |
|
|
$ |
3,390 |
|
|
Life Insurance & Retirement
Services(g)(h)
|
|
|
2,448 |
|
|
|
2,248 |
|
|
|
7,424 |
|
|
|
6,787 |
|
|
Financial
Services(g)
|
|
|
1,357 |
|
|
|
224 |
|
|
|
650 |
|
|
|
3,483 |
|
|
Asset Management
|
|
|
341 |
|
|
|
568 |
|
|
|
1,613 |
|
|
|
1,682 |
|
|
Other(k)
|
|
|
(470 |
) |
|
|
(356 |
) |
|
|
(1,171 |
) |
|
|
(445 |
) |
|
Consolidated
|
|
$ |
6,301 |
|
|
$ |
2,547 |
|
|
$ |
16,335 |
|
|
$ |
14,897 |
|
|
|
|
(a) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133, including the
related foreign exchange gains and losses. For the three-month
periods ended September 30, 2006 and 2005, the effect was
$165 million and $(353) million, respectively, in
revenues and $165 million and $(345) million,
respectively, in operating income. For the nine-month periods
ended September 30, 2006 and 2005, the effect was
$(1.13) billion and $2.21 billion, respectively, in
revenues and $(1.13) billion and $2.28 billion,
respectively, in operating income. These amounts result
primarily from interest rate and foreign currency derivatives
which are hedging available for sale securities and
borrowings. |
|
|
(b) |
Represents the sum of General Insurance net premiums earned,
net investment income and realized capital gains (losses). |
|
|
(c) |
Represents the sum of Life Insurance & Retirement
Services GAAP premiums, net investment income and realized
capital gains (losses). Included in realized capital gains
(losses) is the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133 and foreign
exchange gains (losses) of $(190) million and
$(264) million in the three-month periods ended
September 30, 2006 and 2005, respectively, and
$145 million and $(447) million in the nine-month
periods ended September 30, 2006 and 2005, respectively. |
|
|
(d) |
Represents interest, lease and finance charges. |
|
|
(e) |
Represents net investment income with respect to Guaranteed
Investment Contracts (GICs) and management and advisory fees. |
|
|
(f) |
Represents income before income taxes, minority interest and
cumulative effect of an accounting change. |
|
|
(g) |
Results of operations of AIG Credit Card Company (Taiwan) are
shared equally by the Life Insurance & Retirement
Services segment and the Financial Services segment. Additional
allowances of $44 million were recorded in the first
quarter of 2006, by each segment, for losses in these credit
card operations. |
(h) |
Includes the effect of out of period adjustments related to
the accounting for certain interests in unit investment trusts
and other mutual funds (unit investment trusts). For the three
and nine-month periods ended September 30, 2006 the effect
was an increase of $92 million and $524 million,
respectively, in both revenues and operating income for General
Insurance and an increase of $24 million in both revenues
and operating income for the three-month period ended
September 30, 2006 and $245 million and
$168 million in revenues and operating income,
respectively, for the nine-month period ended September 30,
2006, for Life Insurance & Retirement Services. |
|
|
(i) |
Includes current year catastrophe related losses of
$2.44 billion in both the third quarter and first nine
months of 2005. There were no significant catastrophe related
losses in the third quarter and first nine months of 2006. |
(j) |
Includes additional losses incurred and net reinstatement
premiums related to prior year catastrophes of $28 million
and $39 million in the three-month periods ended
September 30, 2006 and 2005, respectively. Such losses and
premiums were $87 million and $252 million in the
nine-month periods ended September 30, 2006 and 2005,
respectively. |
7
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
2. |
Segment
Information (continued) |
|
|
(k) |
The operating loss for the Other category is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity earnings in unconsolidated subsidiaries*
|
|
$ |
48 |
|
|
$ |
(205 |
) |
|
$ |
178 |
|
|
$ |
(109 |
) |
|
Compensation expense SICO Plans
|
|
|
(14 |
) |
|
|
(63 |
) |
|
|
(104 |
) |
|
|
(130 |
) |
|
Compensation expense C.V. Starr tender offer
|
|
|
|
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
Interest expense
|
|
|
(227 |
) |
|
|
(131 |
) |
|
|
(633 |
) |
|
|
(382 |
) |
|
Unallocated corporate expenses
|
|
|
(95 |
) |
|
|
(92 |
) |
|
|
(356 |
) |
|
|
(287 |
) |
|
Realized capital gains (losses)
|
|
|
(197 |
) |
|
|
175 |
|
|
|
(182 |
) |
|
|
520 |
|
|
Other miscellaneous, net
|
|
|
15 |
|
|
|
(40 |
) |
|
|
(20 |
) |
|
|
(57 |
) |
|
Total Other
|
|
$ |
(470 |
) |
|
$ |
(356 |
) |
|
$ |
(1,171 |
) |
|
$ |
(445 |
) |
|
|
|
* |
Includes current year catastrophe related losses from
unconsolidated subsidiaries of $246 million for both the
third quarter and first nine months of 2005. There were no
significant catastrophe related losses in the third quarter and
first nine months of 2006. Also includes unfavorable development
from unconsolidated subsidiaries related to prior year
catastrophe related losses of $1 million and
$15 million for the first nine months of 2006 and 2005,
respectively. |
Each of the General Insurance sub-segments is comprised of
groupings of major products and services as follows: Domestic
Brokerage Group is comprised of domestic commercial insurance
products and services; Transatlantic is comprised of reinsurance
products and services sold to other general insurance and
reinsurance companies; Personal Lines are comprised of general
insurance products and services sold to individuals; Mortgage
Guaranty is comprised of products insuring against losses
arising under certain loan agreements; and Foreign General is
comprised of general insurance products sold overseas.
The following table summarizes AIGs General Insurance
operations by major internal reporting unit for the three and
nine-month periods ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
General Insurance |
|
| |
|
| |
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Revenues(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Brokerage Group
|
|
$ |
7,196 |
|
|
$ |
6,282 |
|
|
$ |
20,356 |
|
|
$ |
18,812 |
|
|
Transatlantic
|
|
|
1,004 |
|
|
|
944 |
|
|
|
3,035 |
|
|
|
2,874 |
|
|
Personal Lines
|
|
|
1,214 |
|
|
|
1,235 |
|
|
|
3,652 |
|
|
|
3,615 |
|
|
Mortgage Guaranty
|
|
|
226 |
|
|
|
146 |
|
|
|
636 |
|
|
|
488 |
|
|
Foreign General
|
|
|
2,975 |
|
|
|
2,580 |
|
|
|
8,757 |
|
|
|
8,017 |
|
|
Reclassifications and eliminations
|
|
|
|
|
|
|
5 |
|
|
|
2 |
|
|
|
10 |
|
|
Total General Insurance
|
|
$ |
12,615 |
|
|
$ |
11,192 |
|
|
$ |
36,438 |
|
|
$ |
33,816 |
|
|
Operating income
(loss)(b)(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Brokerage Group
|
|
$ |
1,557 |
|
|
|
(283 |
) |
|
$ |
4,448 |
|
|
$ |
1,235 |
|
|
Transatlantic
|
|
|
143 |
|
|
|
(275 |
) |
|
|
427 |
|
|
|
(62 |
) |
|
Personal Lines
|
|
|
133 |
|
|
|
18 |
|
|
|
352 |
|
|
|
229 |
|
|
Mortgage Guaranty
|
|
|
85 |
|
|
|
72 |
|
|
|
301 |
|
|
|
285 |
|
|
Foreign
General(a)
|
|
|
707 |
|
|
|
326 |
|
|
|
2,289 |
|
|
|
1,693 |
|
|
Reclassifications and eliminations
|
|
|
|
|
|
|
5 |
|
|
|
2 |
|
|
|
10 |
|
|
Total General Insurance
|
|
$ |
2,625 |
|
|
$ |
(137 |
) |
|
$ |
7,819 |
|
|
$ |
3,390 |
|
|
|
|
(a) |
Includes the effect of out of period adjustments related to
the accounting for certain interests in unit investment trusts.
For the three and nine-month periods ended September 30,
2006 the effect was an increase of $92 million and $524 million,
respectively, in both revenues and operating income. |
|
(b) |
Includes current year catastrophe related losses of
$2.11 billion for both the three and nine-month periods
ended September 30, 2005. There were no significant
catastrophe related losses in the third quarter and first nine
months of 2006. |
|
(c) |
Includes additional losses incurred and net reinstatement
premiums related to prior year catastrophes of $50 million
and $39 million in the three-month periods ended
September 30, 2006 and 2005, respectively. Such losses and
premiums were $108 million and $237 million in the
nine-month periods ended September 30, 2006 and 2005,
respectively. |
8
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
2. |
Segment
Information (continued) |
Life Insurance & Retirement Services is comprised of two
major groupings of products and services: insurance-oriented
products and services and retirement savings products and
services. Substantially all of the retirement savings products
are reported in the VALIC, AIG Annuity and
AIG SunAmerica sub-segment.
The following table summarizes AIGs Life
Insurance & Retirement Services operations by major
internal reporting unit for the three and nine-month periods
ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
Life Insurance & Retirement Services |
|
| |
|
| |
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIA, AIRCO and Nan
Shan(a) (e)
|
|
$ |
3,998 |
|
|
$ |
3,640 |
|
|
$ |
12,515 |
|
|
$ |
11,564 |
|
|
|
ALICO, AIG Star Life and AIG Edison
Life(b) (f)
|
|
|
4,137 |
|
|
|
3,955 |
|
|
|
11,884 |
|
|
|
11,083 |
|
|
|
Philamlife and Other
|
|
|
127 |
|
|
|
133 |
|
|
|
404 |
|
|
|
390 |
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGLA and AG
Life(c)
|
|
|
2,259 |
|
|
|
2,291 |
|
|
|
6,848 |
|
|
|
6,793 |
|
|
|
VALIC, AIG Annuity and AIG
SunAmerica(d)
|
|
|
1,835 |
|
|
|
1,741 |
|
|
|
5,168 |
|
|
|
5,256 |
|
|
Total Life Insurance & Retirement Services
|
|
$ |
12,356 |
|
|
$ |
11,760 |
|
|
$ |
36,819 |
|
|
$ |
35,086 |
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIA, AIRCO and Nan
Shan(a) (e)
|
|
$ |
605 |
|
|
$ |
556 |
|
|
$ |
2,041 |
|
|
$ |
1,793 |
|
|
|
ALICO, AIG Star Life and AIG Edison
Life(b) (f)
|
|
|
969 |
|
|
|
800 |
|
|
|
2,882 |
|
|
|
2,194 |
|
|
|
Philamlife and Other
|
|
|
10 |
|
|
|
14 |
|
|
|
51 |
|
|
|
47 |
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGLA and AG
Life(c)
|
|
|
261 |
|
|
|
352 |
|
|
|
862 |
|
|
|
1,058 |
|
|
|
VALIC, AIG Annuity and AIG
SunAmerica(d)
|
|
|
603 |
|
|
|
526 |
|
|
|
1,588 |
|
|
|
1,695 |
|
|
Total Life Insurance & Retirement Services
|
|
$ |
2,448 |
|
|
$ |
2,248 |
|
|
$ |
7,424 |
|
|
$ |
6,787 |
|
|
|
|
(a) |
Represents the operations of American International Assurance
Company, Limited together with American International Assurance
Company (Bermuda) Limited (AIA), American International
Reinsurance Company, Ltd. (AIRCO), and Nan Shan Life Insurance
Company, Ltd. (Nan Shan). Revenues and operating income include
realized capital gains (losses) of $(87) million and
$(23) million for the three-month periods ended
September 30, 2006 and 2005, respectively, and
$111 million and $154 million for the nine-month
periods ended September 30, 2006 and 2005, respectively.
The effects of hedging activities that do not qualify for hedge
accounting treatment under FAS 133, including the related
foreign exchange gains and losses included in realized capital
gains (losses) are losses of $102 million and
$174 million for the three-month periods ended
September 30, 2006 and 2005, respectively, and gains of
$11 million and losses of $113 million for the
nine-month periods ended September 30, 2006 and 2005,
respectively. Includes $44 million in additional allowances
for losses recorded in the first quarter of 2006 from AIG Credit
Card Company (Taiwan). |
|
|
(b) |
Represents the operations of American Life Insurance Company
(ALICO), AIG Star Life Insurance Co., Ltd. (AIG Star Life), and
AIG Edison Life Insurance Company (AIG Edison Life). Revenues
and operating income include realized capital gains of
$65 million and $44 million for the three-month
periods ended September 30, 2006 and 2005, respectively,
and gains of $376 million and losses of $85 million
for the nine-month periods ended September 30, 2006 and
2005, respectively. The effects of hedging activities that do
not qualify for hedge accounting treatment under FAS 133,
including the related foreign exchange gains and losses included
in realized capital gains (losses) are gains of $28 million
and losses of $102 million for the three-month periods
ended September 30, 2006 and 2005, respectively, and gains
of $184 million and losses of $365 million for the
nine-month periods ended September 30, 2006 and 2005,
respectively. |
|
|
(c) |
Includes the life operations of American General Life
Insurance Company (AG Life), AIG Life Insurance Company and
American International Life Assurance Company of New York. Also
includes the operations of American General Life and Accident
Insurance Company (AGLA). Revenues and operating income include
realized capital gains (losses) of $(123) million and
$41 million for the three-month periods ended
September 30, 2006 and 2005, respectively, and losses of
$190 million and $22 million for the nine-month
periods ended September 30, 2006 and 2005, respectively.
The effects of hedging activities that do not qualify for hedge
accounting treatment under FAS 133, including the related
foreign exchange gains and losses included in realized capital
gains (losses) are losses of $104 million and gains of
$122 million for the three-month periods ended
September 30, 2006 and 2005, respectively, and gains of
$11 million and $56 million for the nine-month periods
ended September 30, 2006 and 2005, respectively. |
|
|
(d) |
AIG SunAmerica represents the annuity operations
of AIG SunAmerica Life Assurance Company, as well as those of
First SunAmerica Life Insurance Company and SunAmerica Life
Insurance Company. Also includes the operations of The Variable
Annuity Life Insurance Company (VALIC) and AIG Annuity Insurance
Company (AIG Annuity). Revenues and operating income include
realized capital losses of $24 million and $83 million
for the three-month periods ended September 30, 2006 and
2005, respectively, and losses of $414 million and
$71 million for the nine- month periods ended
September 30, 2006 and 2005, respectively. The effects of
hedging activities that do not qualify for hedge accounting
treatment under FAS 133, including the related foreign
exchange gains and losses included in realized capital gains
(losses) are $0 and losses of $110 million for the three
month periods ended September 30, 2006 and 2005,
respectively, and losses of $36 million and
$25 million for the nine-month periods ended
September 30, 2006 and 2005, respectively. |
|
|
(e) |
Includes the effect of out of period adjustments related to
the accounting for certain interests in unit investment trusts.
For the three-month period ended September 30, 2006 the
effect was an increase of $9 million in both revenues and
operating income. For the nine-month period ended
September 30, 2006 the effect was an increase of
$230 million in revenues and $153 million in operating
income. |
|
|
(f) |
Includes the effect of out of period adjustments related to
the accounting for certain interests in unit investment trusts.
For the three and nine-month periods ended September 30,
2006 the effect was an increase of $15 million in both
revenues and operating income. |
9
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
2. |
Segment
Information (continued) |
The following table summarizes AIGs Financial Services
operations by major internal reporting unit for the three and
nine-month periods ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
Financial Services |
|
| |
|
| |
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Revenues(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
Finance(b)
|
|
$ |
1,060 |
|
|
$ |
943 |
|
|
$ |
3,067 |
|
|
$ |
2,661 |
|
|
Capital
Markets(c)(d)
|
|
|
1,118 |
|
|
|
23 |
|
|
|
30 |
|
|
|
2,754 |
|
|
Consumer
Finance(e)
|
|
|
970 |
|
|
|
940 |
|
|
|
2,833 |
|
|
|
2,664 |
|
|
Other
|
|
|
39 |
|
|
|
20 |
|
|
|
98 |
|
|
|
61 |
|
|
Total Financial Services
|
|
$ |
3,187 |
|
|
$ |
1,926 |
|
|
$ |
6,028 |
|
|
$ |
8,140 |
|
|
Operating income
(loss)(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Finance
|
|
$ |
157 |
|
|
$ |
165 |
|
|
$ |
475 |
|
|
$ |
476 |
|
|
Capital
Markets(d)
|
|
|
965 |
|
|
|
(150 |
) |
|
|
(457 |
) |
|
|
2,306 |
|
|
Consumer
Finance(f)(g)
|
|
|
220 |
|
|
|
190 |
|
|
|
594 |
|
|
|
649 |
|
|
Other
|
|
|
15 |
|
|
|
19 |
|
|
|
38 |
|
|
|
52 |
|
|
Total Financial Services
|
|
$ |
1,357 |
|
|
$ |
224 |
|
|
$ |
650 |
|
|
$ |
3,483 |
|
|
|
|
(a) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133, including the
related foreign exchange gains and losses. For the three and
nine-month periods ended September 30, 2005, the effect was
$(10) million and $(59) million, respectively, in
operating income for Aircraft Finance. During 2006, Aircraft
Finance derivative gains and losses are reported as part of the
Other category and not reported in Aircraft Finance operating
income. For the three-month periods ended September 30,
2006 and 2005, the effect was $783 million and
$(365) million in both revenues and operating income,
respectively, for Capital Markets. For the nine-month periods
ended September 30, 2006 and 2005, the effect was
$(1.06) billion and $1.80 billion in both revenues and
operating income, respectively, for Capital Markets. These
amounts result primarily from interest rate and foreign currency
derivatives which are hedging available for sale securities and
borrowings. |
(b) |
Revenues are primarily aircraft lease rentals from
International Lease Finance Corporation (ILFC). |
(c) |
Revenues, shown net of interest expense, are primarily from
hedged financial positions entered into in connection with
counterparty transactions and the effect of hedging activities
that do not qualify for hedge accounting treatment under
FAS 133 described in (a) above. |
(d) |
Certain transactions entered into by AIGFP generate tax
credits and benefits which are included in income taxes in the
consolidated statement of income. The amount of such tax credits
and benefits for the three-month periods ended
September 30, 2006 and 2005 are $3 million and
$23 million, respectively. The amount of such tax credits
and benefits for the nine-month periods ended September 30,
2006 and 2005 are $29 million and $63 million,
respectively. |
(e) |
Revenues are primarily finance charges. |
|
|
(f) |
Includes $44 million in additional allowances for losses
recorded in the first quarter of 2006 from AIG Credit Card
Company (Taiwan). |
|
|
(g) |
Includes catastrophe related losses of $62 million
recorded in the third quarter of 2005 resulting from hurricane
Katrina, which were reduced by $22 million in the third
quarter of 2006. |
10
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
2. |
Segment
Information (continued) |
The following table summarizes AIGs Asset Management
revenues and operating income for the three and nine-month
periods ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
Asset Management |
|
| |
|
| |
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed Investment Contracts
|
|
$ |
845 |
|
|
$ |
908 |
|
|
$ |
2,517 |
|
|
$ |
2,707 |
|
|
Institutional Asset Management
|
|
|
265 |
|
|
|
279 |
|
|
|
1,163 |
|
|
|
776 |
|
|
Brokerage Services and Mutual Funds
|
|
|
71 |
|
|
|
67 |
|
|
|
217 |
|
|
|
192 |
|
|
Other
|
|
|
57 |
|
|
|
101 |
|
|
|
201 |
|
|
|
276 |
|
|
Total Asset Management
|
|
$ |
1,238 |
|
|
$ |
1,355 |
|
|
$ |
4,098 |
|
|
$ |
3,951 |
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed Investment
Contracts(a)
|
|
$ |
175 |
|
|
$ |
294 |
|
|
$ |
635 |
|
|
$ |
939 |
|
|
Institutional Asset
Management(b)(c)
|
|
|
89 |
|
|
|
155 |
|
|
|
721 |
|
|
|
424 |
|
|
Brokerage Services and Mutual Funds
|
|
|
23 |
|
|
|
20 |
|
|
|
67 |
|
|
|
50 |
|
|
Other
|
|
|
54 |
|
|
|
99 |
|
|
|
190 |
|
|
|
269 |
|
|
Total Asset Management
|
|
$ |
341 |
|
|
$ |
568 |
|
|
$ |
1,613 |
|
|
$ |
1,682 |
|
|
|
|
(a) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133, including the
related foreign exchange gains and losses. For the three and
nine-month periods ended September 30, 2005, the effect was
$18 million and $127 million, respectively, in
operating income. During 2006, these derivative gains and losses
are reported as part of the Other category, and not reported in
Asset Management operating income. |
(b) |
Includes the full results of certain AIG managed private
equity and real estate funds that are consolidated pursuant to
FIN 46(R), Consolidation of Variable Interest
Entities. Also includes $(3) million and
$77 million for the three-month periods ended
September 30, 2006 and 2005, respectively, and
$207 million and $189 million for the nine-month
periods ended September 30, 2006 and 2005, respectively, of
third-party limited partner earnings offset in minority interest
expense, which is not a component of operating income. |
|
|
(c) |
Includes the full results of certain AIG managed partnerships
that are consolidated effective January 1, 2006 pursuant to
EITF 04-5,
Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights. For
the three and nine-month periods ended September 30, 2006,
operating income includes $47 million and
$203 million, respectively, of third-party limited partner
earnings offset in minority interest expense, which is not a
component of operating income. |
Earnings per share of AIG are based on the weighted average
number of common shares outstanding during the period. See also
Note 10 herein.
Computation of Earnings Per Share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
(in millions, except per share data) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Numerator for earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of an accounting change
|
|
$ |
4,224 |
|
|
$ |
1,745 |
|
|
$ |
10,575 |
|
|
$ |
10,033 |
|
Cumulative effect of an accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
Net income applicable to common stock for basic EPS
|
|
$ |
4,224 |
|
|
$ |
1,745 |
|
|
$ |
10,609 |
|
|
$ |
10,033 |
|
Interest on contingently convertible bonds, net of tax
(a)
|
|
|
2 |
|
|
|
3 |
|
|
|
8 |
|
|
|
8 |
|
|
Net income applicable to common stock for diluted EPS
|
|
$ |
4,226 |
|
|
$ |
1,748 |
|
|
$ |
10,617 |
|
|
$ |
10,041 |
|
Cumulative effect of an accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
Income before cumulative effect of an accounting change
applicable to common stock for diluted EPS
|
|
$ |
4,226 |
|
|
$ |
1,748 |
|
|
$ |
10,583 |
|
|
$ |
10,041 |
|
|
Denominator for earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding used in the computation of
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
2,751 |
|
|
|
2,751 |
|
|
|
2,751 |
|
|
|
2,751 |
|
|
|
Common stock in treasury
|
|
|
(153 |
) |
|
|
(155 |
) |
|
|
(153 |
) |
|
|
(155 |
) |
|
|
Deferred shares
|
|
|
9 |
|
|
|
1 |
|
|
|
9 |
|
|
|
1 |
|
|
11
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
3. |
Earnings Per
Share (continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
(in millions, except per share data) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Weighted-average shares outstanding basic
|
|
|
2,607 |
|
|
|
2,597 |
|
|
|
2,607 |
|
|
|
2,597 |
|
Incremental shares from potential common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares arising from outstanding
employee stock plans (treasury stock
method)(b)
|
|
|
10 |
|
|
|
18 |
|
|
|
9 |
|
|
|
18 |
|
Contingently convertible
bonds(a)
|
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
|
Weighted-adjusted average shares outstanding diluted
(b)
|
|
|
2,626 |
|
|
|
2,624 |
|
|
|
2,625 |
|
|
|
2,624 |
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of an accounting change
|
|
$ |
1.62 |
|
|
$ |
0.67 |
|
|
$ |
4.06 |
|
|
$ |
3.86 |
|
Cumulative effect of an accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
Net Income
|
|
$ |
1.62 |
|
|
$ |
0.67 |
|
|
$ |
4.07 |
|
|
$ |
3.86 |
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of an accounting change
|
|
$ |
1.61 |
|
|
$ |
0.66 |
|
|
$ |
4.03 |
|
|
$ |
3.82 |
|
Cumulative effect on an accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
|
|
|
Net income
|
|
$ |
1.61 |
|
|
$ |
0.66 |
|
|
$ |
4.04 |
|
|
$ |
3.82 |
|
|
|
|
(a) |
Assumes conversion of contingently convertible bonds due to
the adoption of EITF Issue No. 04-8 Accounting Issues
Related to Certain Features of Contingently Convertible Debt and
the Effect on Diluted Earnings per Share. |
(b) |
Certain share equivalents arising from employee stock plans
were not included in the computation of diluted earnings per
share where the exercise price of the options exceeded the
average market price and would have been antidilutive. The
number of share equivalents excluded were 14 million and
21 million for the first nine months of 2006 and 2005,
respectively. |
From time to time, AIG may buy shares of its common stock in the
open market for general corporate purposes, including to satisfy
its obligations under various employee benefit plans. At
September 30, 2006 and December 31, 2005, an
additional 36,542,700 shares could be purchased under the
then current authorization by AIGs Board of Directors.
Although AIG has authorization to purchase additional shares,
AIG has not repurchased shares in 2006. During the nine months
ended September 30, 2005, AIG purchased in the open market
2,477,100 shares of its common stock, all of which were
acquired in the first quarter.
The quarterly dividend rate per common share, commencing with
the dividend declared in May 2006 and paid on September 15,
2006, is $0.165. The declared dividend amount of $0.175 for the
three months ended September 30, 2005 includes a $0.025
increase to the amount previously declared in the second quarter
of 2005 for payment in September 2005 as well as the $0.125
dividend declared in May 2005 for payment in September 2005.
|
|
4. |
Benefits Provided by Starr International Company, Inc. and
C.V. Starr & Co., Inc. |
Starr International Company, Inc. (SICO) has provided a series
of two-year Deferred Compensation Profit Participation Plans
(SICO Plans) to certain AIG employees. The SICO Plans came into
being in 1975 when the voting shareholders and Board of
Directors of SICO, a private holding company whose principal
asset is AIG common stock, decided that a portion of the capital
value of SICO should be used to provide an incentive plan for
the current and succeeding managements of all American
International companies, including AIG.
None of the costs of the various benefits provided under the
SICO Plans has been paid by AIG, although AIG has recorded a
charge to reported earnings for the deferred compensation
amounts paid to AIG employees by SICO, with an offsetting amount
credited to additional paid-in capital reflecting amounts deemed
contributed by SICO. The SICO Plans provide that shares
currently owned by SICO are set aside by SICO for the benefit of
the participant and distributed upon retirement. The SICO Board
of Directors currently may permit an early payout of units under
certain circumstances. Prior to payout, the participant is not
entitled to vote, dispose of or receive dividends with respect
to such shares, and shares are subject to forfeiture under
certain conditions, including but not limited to the
participants voluntary termination of employment with AIG
prior to normal retirement age. Under the SICO Plans,
SICOs Board of Directors may elect to pay a participant
cash in lieu of shares of AIG common stock. Following
notification from SICO to participants in the SICO Plans that it
will settle specific future awards under the SICO Plans with
shares rather than cash, AIG modified its accounting for the
SICO Plans from variable to fixed measurement accounting,
although variable accounting will continue to be applied where
SICO makes cash pay-
12
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
4. |
Benefits Provided by Starr International Company,
Inc. (continued) |
ments pursuant to elections made prior to March 2005. AIG gave
effect to this change in settlement method beginning on
December 9, 2005, the date of SICOs notice to
participants in the SICO Plans. See also Note 6(b)
Commitments herein.
Compensation expense with respect to the SICO Plans aggregated
$14 million and $62 million for the three-month
periods ended September 30, 2006 and 2005, respectively,
and $104 million and $129 million for the nine-month
periods ended September 30, 2006 and 2005, respectively.
Compensation expense in the first quarter of 2006 included
various out of period adjustments totaling $61 million,
primarily relating to stock-splits and other miscellaneous
items. See also Note 10 herein.
In January 2006, C.V. Starr & Co., Inc. (Starr)
completed its tender offer to purchase Starr interests from AIG
employees. In conjunction with AIGs adoption of
FAS 123R, Starr is considered to be an economic
interest holder in AIG. As a result, compensation expense
of $54 million recorded in the first quarter with respect
to the Starr offer, was included in the first nine months of
2006.
As a result of its changing relationship with Starr and SICO,
AIG has established new executive compensation plans to replace
the SICO plans and investment opportunities previously provided
by Starr. The replacement plans include both share-based plans
and cash-based plans. In addition, these replacement plans
generally include performance as well as service conditions. See
also Note 10 herein.
|
|
5. |
Ownership and Transactions With Related Parties |
(a) Ownership: According to the
Schedule 13D filed on May 26, 2006 by Starr, SICO,
Edward E. Matthews, Maurice R. Greenberg, the
Maurice R. and Corinne P. Greenberg Family Foundation,
Inc., the Universal Foundation, Inc. and the Maurice R. and
Corinne P. Greenberg Joint Tenancy Company, LLC, these reporting
persons could be deemed to beneficially own
393,157,543 shares of common stock at that date. Based on
the shares of common stock outstanding as of October 31,
2006, this ownership would represent approximately
15 percent of the voting stock of AIG. Although these
reporting persons have made filings under Section 16 of the
Securities Exchange Act of 1934, as amended (the Exchange Act),
reporting sales of shares of common stock, no amendment to the
Schedule 13D has been filed to report a change in ownership.
(b) Transactions with Related Parties: In the
ordinary course of business during the first nine months of
2006, AIG and its subsidiaries paid commissions to Starr and its
subsidiaries for the production and management of insurance
business. As of July 25, 2006, none of the Starr agencies
serve as agents for AIG companies. There were no significant
receivables from/payables to related parties at
September 30, 2006.
|
|
6. |
Commitments, Contingencies and Guarantees |
In the normal course of business, various commitments and
contingent liabilities are entered into by AIG and certain of
its subsidiaries. In addition, AIG guarantees various
obligations of certain subsidiaries.
Litigation and Investigations
(a) AIG and its subsidiaries, in common with the
insurance industry in general, are subject to litigation,
including claims for punitive damages, in the normal course of
their business. The trend of increasing jury awards and
settlements makes it difficult to assess the ultimate outcome of
such litigation.
Although AIG regularly reviews the adequacy of the established
reserve for losses and loss expenses, there can be no assurance
that AIGs ultimate loss reserves will not develop
adversely and materially exceed AIGs current loss
reserves. Estimation of ultimate net losses, loss expenses and
loss reserves is a complex process for long-tail casualty lines
of business, which include excess and umbrella liability,
directors and officers liability (D&O), professional
liability, medical malpractice, workers compensation, general
liability, products liability and related classes, as well as
for asbestos and environmental exposures. Generally, actual
historical loss development factors are used to project future
loss development. However, there can be no assurance that future
loss development patterns will be the same as in the past.
Moreover, any deviation in loss cost trends or in loss
development factors might not be discernible for an extended
period of time subsequent to the recording of the initial loss
reserve estimates for any accident year. Thus, there is the
potential for reserves with respect to a number of years to be
significantly affected by changes in loss cost trends or loss
development factors that were relied upon in setting the
reserves. These changes in loss trends or loss development
factors could be attributable to changes in inflation, in labor
and material costs or in the judicial environment, or in other
social or economic phenomena affecting claims.
(b) AIG and certain of its subsidiaries have been
named defendants in two putative class actions in state court in
Alabama that arise out of the 1999 settlement of class and
derivative litigation involving Caremark Rx, Inc. (Caremark). An
excess policy issued by a subsidiary of AIG with respect to the
1999 litigation was expressly stated to be without limit of
liability. In the current actions, plaintiffs allege that the
judge approving the 1999 settlement was misled as to the extent
of
13
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
6. |
Commitments, Contingencies and
Guarantees (continued) |
available insurance coverage and would not have approved the
settlement had he known of the existence and/or unlimited nature
of the excess policy. They further allege that AIG, its
subsidiaries, and Caremark are liable for fraud and suppression
for misrepresenting and/or concealing the nature and extent of
coverage. In their complaint, plaintiffs request compensatory
damages for the 1999 class in the amount of $3.2 billion,
plus punitive damages. AIG and its subsidiaries deny the
allegations of fraud and suppression and have asserted, inter
alia, that information concerning the excess policy was
publicly disclosed months prior to the approval of the
settlement. AIG and its subsidiaries further assert that the
current claims are barred by the statute of limitations and that
plaintiffs assertions that the statute was tolled cannot
stand against the public disclosure of the excess coverage.
Plaintiffs, in turn, have asserted that the disclosure was
insufficient to inform them of the nature of the coverage and
did not start the running of the statute of limitations. On
January 28, 2005, the Alabama trial court determined that
one of the current actions may proceed as a class action on
behalf of the 1999 classes that were allegedly defrauded by the
settlement. AIG, its subsidiaries, and Caremark sought appellate
relief from the Alabama Supreme Court, which was granted in
substantial part in August 2006. The matter is in the process of
being remanded to the trial court to proceed with a class
certification determination under the standards set by the
Alabama Supreme Court. AIG cannot now estimate either the
likelihood of its prevailing in these actions or the potential
damages in the event liability is determined.
(c) Regulators from several states have commenced
investigations into insurance brokerage practices related to
contingent commissions and other broker-related conduct, such as
alleged bid rigging. Various parties, including insureds and
shareholders, have also asserted putative class action and other
claims against AIG or its subsidiaries alleging, among other
things, violations of the antitrust and federal securities laws,
and AIG expects that additional claims may be made.
In February 2006, AIG reached a resolution of claims and matters
under investigation with the United States Department of Justice
(DOJ), the Securities and Exchange Commission (SEC), the Office
of the New York Attorney General (NYAG) and the New York State
Department of Insurance (DOI). The settlements resolved
outstanding litigation filed by the SEC, NYAG and DOI against
AIG and concluded negotiations with these authorities and the
DOJ in connection with the accounting, financial reporting and
insurance brokerage practices of AIG and its subsidiaries, as
well as claims relating to the underpayment of certain workers
compensation premium taxes and other assessments. In the fourth
quarter of 2005 AIG recorded an after-tax charge of
$1.15 billion for the settlements.
As a result of these settlements, AIG made payments or placed
amounts in escrow in the first nine months of 2006 totaling
approximately $1.64 billion, $225 million of which
represented fines and penalties. Amounts held in escrow totaling
$692 million, including interest thereon, are included in other
assets and other liabilities at September 30, 2006. A
substantial portion of the money will be available to resolve
claims asserted in various regulatory and civil proceedings,
including shareholder lawsuits.
Also, as part of the settlements, AIG has agreed to retain for a
period of three years an independent consultant who will conduct
a review that will include the adequacy of AIGs internal
control over financial reporting and the remediation plan that
AIG has implemented as a result of its own internal review.
Various federal and state regulatory agencies are reviewing
certain transactions and practices of AIG and its subsidiaries
in connection with industry-wide and other inquiries. AIG has
cooperated, and will continue to cooperate, in producing
documents and other information in response to the subpoenas.
A number of lawsuits have been filed regarding the subject
matter of the investigations of insurance brokerage practices,
including derivative actions, individual actions and class
actions under the federal securities laws, Racketeer Influenced
and Corrupt Organizations Act (RICO), Employee Retirement Income
Security Act (ERISA) and state common and corporate laws in both
federal and state courts, including the United States District
Court for the Southern District of New York (Southern District
of New York), in the Commonwealth of Massachusetts Superior
Court and in Delaware Chancery Court. All of these actions
generally allege that AIG and its subsidiaries violated the law
by allegedly concealing a scheme to rig bids and
steer business between insurance companies and
insurance brokers.
Since October 19, 2004, AIG or its subsidiaries have been
named as a defendant in eighteen complaints that were filed in
federal court and two that were originally filed in state court
(Massachusetts and Florida) and removed to federal court. These
cases generally allege that AIG and its subsidiaries violated
federal and various state antitrust laws, as well as federal
RICO laws, various state deceptive and unfair practice laws and
certain state laws governing fiduciary duties. The alleged basis
of these claims is that there was a conspiracy between insurance
companies and insurance brokers with regard to the use of
contingent commission agreements, bidding practices, and other
broker-related conduct concerning coverage in certain sectors of
the insurance industry. The Judicial Panel on Multidistrict
Litigation entered an
14
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
6. |
Commitments, Contingencies and
Guarantees (continued) |
order on February 17, 2005, consolidating most of these
cases and transferring them to the United States District Court
for the District of New Jersey (District of New Jersey). The
remainder of these cases have been transferred to the District
of New Jersey. On August 15, 2005, the plaintiffs in the
multidistrict litigation filed a Corrected First Consolidated
Amended Commercial Class Action Complaint, which, in
addition to the previously named AIG defendants, names new AIG
subsidiaries as defendants. Also on August 15, 2005, AIG
and two subsidiaries were named as defendants in a Corrected
First Consolidated Amended Employee Benefits Class Action
Complaint filed in the District of New Jersey, which asserts
similar claims with respect to employee benefits insurance and a
claim under ERISA on behalf of putative classes of employers and
employees.
On November 29, 2005, the AIG defendants, along with other
insurer defendants and the broker defendants filed motions to
dismiss both the Commercial and Employee Benefits Complaints. On
October 3, 2006, the Court reserved in part and denied in
part the motions to dismiss. The Court denied the motions to
dismiss the ERISA claims, but ordered an expedited discovery
schedule, and the Court reserved on the state law claims.
Plaintiffs have filed a motion for class certification in the
consolidated action, in response to which defendants have filed
an opposition. In addition, complaints were filed against AIG
and several of its subsidiaries in Massachusetts and Florida
state courts, which have both been stayed. In the Florida
action, the plaintiff filed a petition for a writ of certiorari
with the District Court of Appeals of the State of Florida,
Fourth District with respect to the stay order which was granted
on August 16, 2006. The Fourth District Court remanded to
the trial court to reconsider whether a stay should be granted.
On February 9, 2006, a complaint against AIG and several of
its subsidiaries was filed in Texas state court, making claims
similar to those in the federal cases above. On October 17,
2006, the court stayed the case until January 31, 2007.
In April and May 2005, amended complaints were filed in the
consolidated derivative and securities cases, as well as in one
of the ERISA lawsuits, pending in the Southern District of New
York adding allegations concerning AIGs accounting
treatment for non-traditional insurance products.
In September 2005, a second amended complaint was filed in the
consolidated securities cases adding allegations concerning
AIGs first restatement of its financial statements
described in the 2005 Annual Report on
Form 10-K (the
First Restatement), and a new securities action
complaint was filed in the Southern District of New York,
asserting claims premised on the same allegations made in the
consolidated cases. In April 2006, motions to dismiss were
denied in the securities actions. AIG filed answers in both
securities actions in June 2006, as did other defendants.
Also in September 2005, a class action complaint was filed to
consolidate the ERISA cases pending in the Southern District of
New York. Motions to dismiss in the consolidated action were
filed in January 2006.
In April 2005, new derivative actions were filed in Delaware
Chancery Court, and in July and August 2005, two new derivative
actions were filed in the Southern District of New York
asserting claims duplicative of the claims made in the
consolidated derivative action.
In July 2005, a second amended complaint was filed in the
consolidated derivative case in the Southern District of New
York, expanding upon accounting-related allegations, based upon
the First Restatement. In June 2005, the derivative cases in
Delaware were consolidated and, in August 2005, an amended
consolidated complaint was filed. AIGs Board of Directors
has appointed a special committee of independent directors to
review the matters asserted in the derivative complaints. The
courts have approved agreements staying the derivative cases
pending in the Southern District of New York and in Delaware
Chancery Court while the special committee of independent
directors performs its work. In September 2005, a shareholder
filed suit in Delaware Chancery Court seeking documents relating
to some of the allegations made in the derivative suits. The
court approved a stipulation dismissing that action on
May 15, 2006.
On June 20, 2006, SICO filed suit in Delaware Chancery
Court seeking the inspection of certain books and records of
AIG. The Chancery court has dismissed the action with prejudice
by agreement of the parties.
In late 2002, a derivative action was filed in Delaware Chancery
Court in connection with AIGs transactions with certain
entities affiliated with Starr and SICO. In May 2005, the
plaintiff filed an amended complaint which adds additional
claims premised on allegations relating to insurance brokerage
practices and AIGs non-traditional insurance products. On
February 16, 2006, the Delaware Chancery Court entered an
order dismissing the litigation with prejudice with respect to
AIGs outside directors and dismissing the claims against
the remaining AIG defendants without prejudice. In response to
an order, dated July 5, 2006, dismissing certain of its
claims, the plaintiff filed a second amended complaint on
July 21, 2006, which adds additional claims against Starr.
Defendants filed answers in September 2006.
AIG cannot predict the outcome of the matters described above or
estimate the potential costs related to these matters and,
accordingly, no reserve is being established in AIGs
financial statements at this time. In the opinion of AIG man-
15
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
6. |
Commitments, Contingencies and
Guarantees (continued) |
agement, AIGs ultimate liability for the matters referred
to above is not likely to have a material adverse effect on
AIGs consolidated financial condition, although it is
possible that the effect would be material to AIGs
consolidated results of operations for an individual reporting
period.
(d) On July 8, 2005, SICO filed a complaint
against AIG in the Southern District of New York. The complaint
alleges that AIG is in the possession of items, including
artwork, which SICO claims it owns, and seeks an order causing
AIG to release those items as well as actual, consequential,
punitive and exemplary damages. On September 27, 2005, AIG
filed its answer to SICOs complaint denying SICOs
allegations and asserting counter-claims for breach of contract,
unjust enrichment, conversion and breach of fiduciary duty
relating to SICOs breach of its commitment to use its AIG
shares for the benefit of AIG and its employees. On
October 17, 2005, SICO replied to AIGs counter-claims
and additionally sought a judgment declaring that SICO is
neither a control person nor an affiliate of AIG for purposes of
Schedule 13D under the Exchange Act, or Rule 144
under the Securities Act of 1933, as amended (the Securities
Act), respectively. AIG responded to the SICO claims on
November 7, 2005.
(e) AIG understands that some of its employees
have received Wells notices in connection with previously
disclosed SEC investigations of certain of AIGs
transactions or accounting practices. Under SEC procedures, a
Wells notice is an indication that the SEC staff has made a
preliminary decision to recommend enforcement action that
provides recipients with an opportunity to respond to the SEC
staff before a formal recommendation is finalized. AIG
anticipates that additional current and former employees could
receive similar notices in the future as the regulatory
investigations proceed.
Commitments
(a) At September 30, 2006, ILFC had committed
to purchase 268 new aircraft deliverable from 2006 through
2015 at an estimated aggregate purchase price of
$19.2 billion and had options to purchase three new
aircraft at an estimated aggregate purchase price of
$453 million. ILFC will be required to find customers for
any aircraft acquired, and it must arrange financing for
portions of the purchase price of such equipment.
(b) On June 27, 2005, AIG entered into an
agreement pursuant to which AIG agrees, subject to certain
conditions, to make any payment that is not promptly paid with
respect to the benefits accrued by certain employees of AIG and
its subsidiaries under the SICO Plans (as defined in
Note 4).
Contingencies
(a) On December 30, 2004, an arbitration
panel issued its ruling in connection with a 1998 workers
compensation quota share reinsurance agreement under which
Superior National Insurance Company, among others, was reinsured
by The United States Life Insurance Company in the City of New
York (USLIFE), a subsidiary of American General Corporation. In
its 2-1 ruling, the
arbitration panel refused to rescind the contract as requested
by USLIFE. Instead, the panel reformed the contract to reduce
USLIFEs participation by ten percent. USLIFE is pursuing
certain reinsurance recoverables in connection with the
contract. Further, the arbitration ruling established a second
phase of arbitration for USLIFE to present its challenges to
certain cessions to the contract. AIG holds a reserve of
approximately $379 million related to this matter as of
September 30, 2006.
(b) AIG generates income tax credits as a result
of investing in synthetic fuel production. Tax credits generated
from the production and sale of synthetic fuel under the
Internal Revenue Code are subject to an annual phase-out
provision that is based on the average wellhead price of
domestic crude oil. The price range within which the tax credits
are phased-out was originally established in 1980 and is
adjusted annually for inflation. Depending on the price of
domestic crude oil for a particular year, all or a portion of
the tax credits generated in that year might be eliminated. Tax
credits reflected in the income tax provision for the first nine
months of 2006 have been reduced to reflect an estimated
phase-out of the tax credits from 2006 synthetic fuel production
based on the observed price of domestic crude oil. Since the
phase-out of tax credits from 2006 synthetic fuel production
will depend on the average wellhead price of domestic crude oil
for the entire 2006 calendar year, it is not possible to
determine the extent to which the 2006 tax credits actually will
be phased-out. As a result, the actual level of tax credits from
2006 synthetic fuel production may be higher or lower than the
current estimate. AIG evaluates the production levels of its
synthetic fuel production facilities in light of the risk of
phase-out of the associated tax credits. As a result of
fluctuating domestic crude oil prices, AIG intends to evaluate
and possibly adjust production levels in light of this risk for
the remainder of 2006. Regardless of oil prices, the tax credits
expire after 2007.
Guarantees
(a) AIG and certain of its subsidiaries become
parties to derivative financial instruments with market risk
resulting from both dealer and end user activities and to reduce
currency, interest rate, equity and commodity exposures. These
instruments are carried at their estimated fair values in the
consolidated balance sheet. The vast majority of AIGs
derivative activity is transacted by AIGFP. (See also
Note 20 of Notes to
16
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
6. |
Commitments, Contingencies and
Guarantees (continued) |
Consolidated Financial Statements in AIGs 2005 Annual
Report on
Form 10-K/A.)
(b) AIG has issued unconditional guarantees with
respect to the prompt payment, when due, of all present and
future payment obligations and liabilities of AIGFP arising from
transactions entered into by AIGFP.
(c) SAI Deferred Compensation Holdings, Inc., a
wholly-owned subsidiary of AIG, has established a deferred
compensation plan for registered representatives of certain AIG
subsidiaries, pursuant to which participants have the
opportunity to invest deferred commissions and fees on a
notional basis. The value of the deferred compensation
fluctuates with the value of the deferred investment
alternatives chosen. AIG has provided a full and unconditional
guarantee of the obligations of SAI Deferred Compensation
Holdings, Inc. to pay the deferred compensation under the plan.
The following table presents the components of the net
periodic benefit costs with respect to pensions and
postretirement benefits for the three and nine-month periods
ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions | |
|
Postretirement | |
|
|
| |
|
| |
|
|
Non-U.S. | |
|
U.S. | |
|
|
|
Non-U.S. | |
|
U.S. | |
|
|
(in millions) |
|
Plans | |
|
Plans | |
|
Total | |
|
Plans | |
|
Plans | |
|
Total | |
| |
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net period benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
18 |
|
|
$ |
32 |
|
|
$ |
50 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
Interest cost
|
|
|
9 |
|
|
|
41 |
|
|
|
50 |
|
|
|
1 |
|
|
|
3 |
|
|
|
4 |
|
|
Expected return on assets
|
|
|
(7 |
) |
|
|
(48 |
) |
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
|
Amortization of transitional liability
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
|
|
4 |
|
|
|
18 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net period benefit cost
|
|
$ |
22 |
|
|
$ |
42 |
|
|
$ |
64 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
4 |
|
|
Three Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net period benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
19 |
|
|
$ |
26 |
|
|
$ |
45 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
3 |
|
|
Interest cost
|
|
|
8 |
|
|
|
37 |
|
|
|
45 |
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
Expected return on assets
|
|
|
(5 |
) |
|
|
(41 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
|
Loss due to settlements
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
|
|
6 |
|
|
|
16 |
|
|
|
22 |
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
Net period benefit cost
|
|
$ |
26 |
|
|
$ |
38 |
|
|
$ |
64 |
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net period benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
55 |
|
|
$ |
94 |
|
|
$ |
149 |
|
|
$ |
3 |
|
|
$ |
4 |
|
|
$ |
7 |
|
|
Interest cost
|
|
|
26 |
|
|
|
122 |
|
|
|
148 |
|
|
|
2 |
|
|
|
8 |
|
|
|
10 |
|
|
Expected return on assets
|
|
|
(21 |
) |
|
|
(145 |
) |
|
|
(166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(7 |
) |
|
|
(2 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
(5 |
) |
|
Amortization of transitional liability
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
|
|
12 |
|
|
|
56 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net period benefit cost
|
|
$ |
66 |
|
|
$ |
125 |
|
|
$ |
191 |
|
|
$ |
5 |
|
|
$ |
7 |
|
|
$ |
12 |
|
|
Nine Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net period benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
56 |
|
|
$ |
78 |
|
|
$ |
134 |
|
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
8 |
|
|
Interest cost
|
|
|
24 |
|
|
|
111 |
|
|
|
135 |
|
|
|
1 |
|
|
|
11 |
|
|
|
12 |
|
|
Expected return on assets
|
|
|
(16 |
) |
|
|
(123 |
) |
|
|
(139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(8 |
) |
|
|
(2 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
(5 |
) |
|
Loss due to settlements
|
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transition liability
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized actuarial loss
|
|
|
17 |
|
|
|
49 |
|
|
|
66 |
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
|
Net period benefit cost
|
|
$ |
78 |
|
|
$ |
113 |
|
|
$ |
191 |
|
|
$ |
4 |
|
|
$ |
13 |
|
|
$ |
17 |
|
|
17
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
8. |
Recent Accounting Standards |
Accounting Changes
At the March 2004 meeting, the Emerging Issue Task Force (EITF)
reached a consensus with respect to Issue
No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. On September 30,
2004, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP) EITF
No. 03-1-1,
Effective Date of
Paragraphs 10-20
of EITF Issue
No. 03-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments delaying the effective
date of this guidance until the FASB has resolved certain
implementation issues with respect to this guidance, but the
disclosures remain effective. This FSP, retitled FSP
FAS 115-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, replaces the
measurement and recognition guidance set forth in Issue
No. 03-1 and
codifies certain existing guidance on impairment and accretion
of income. AIGs adoption of FSP
FAS 115-1 on
January 1, 2006 did not have a material effect on
AIGs consolidated financial condition or results of
operations.
In December 2004, the FASB issued Statement No. 123
(revised 2004), Share-Based Payment (FAS 123R).
FAS 123R and its related interpretive guidance replaces FAS
No. 123, Accounting for Stock-Based
Compensation (FAS 123), supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and amends FAS 95,
Statement of Cash Flows. FAS 123, as originally
issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with
employees. On January 1, 2003, AIG adopted the recognition
provisions of FAS 123. See also Note 10 herein. AIG
adopted the provisions of the revised FAS 123R and its
related interpretive guidance on January 1, 2006.
For its service-based awards under the 1999 Stock Option Plan,
2002 Stock Incentive Plan and 1996 Employee Stock Purchase Plan,
AIG recognizes compensation on a straight-line basis over the
scheduled vesting period. Unrecognized unvested compensation
expense for stock option awards granted under APB 25 (i.e.,
before January 1, 2003) will be recognized from
January 1, 2006 to the vesting date. However, for the SICO
Plans, the AIG Deferred Compensation Profit Participant Plan and
the AIG Partners Plan, which contain both performance and
service conditions, AIG recognizes compensation utilizing a
graded vesting expense attribution method. The effect of this
approach is to recognize compensation cost over the requisite
service period for each separately vesting tranche of the award.
AIGs share-based plans generally provide for accelerated
vesting after the participant turns 65 and retires. For awards
granted after January 1, 2006, compensation expense is
recognized ratably from the date of grant through the shorter of
age 65 or the vesting period. The effect of this change is not
material to AIGs consolidated financial position or
results of operations. Awards granted prior to January 1,
2006 will continue to be recognized over the vesting period with
accelerated expense recognition upon an actual retirement. SICO
compensation expense for participants retiring after age 65 had
been reflected in prior years results consistent with
vested status under the SICO Plans.
On June 1, 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections
(FAS 154). FAS 154 replaces APB Opinion No. 20,
Accounting Changes and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial
Statements. FAS 154 requires that a voluntary change
in accounting principles be applied retrospectively with all
prior period financial statements presented based on the new
accounting principle, unless it is impracticable to do so.
FAS 154 also provides that a correction of errors in
previously issued financial statements should be termed a
restatement. The new standard was effective for
accounting changes and correction of errors beginning
January 1, 2006.
At the June 2005 meeting, the EITF reached a consensus with
respect to Issue
No. 04-5,
Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights. The
Issue addresses what rights held by the limited partner(s)
preclude consolidation in circumstances in which the sole
general partner would consolidate the limited partnership in
accordance with generally accepted accounting principles absent
the existence of the rights held by the limited partner(s).
Based on that consensus, the EITF also agreed to amend the
consensus in Issue
No. 96-16,
Investors Accounting for an Investee When the
Investor Has a Majority of the Voting Interest but the Minority
Shareholders Have Certain Approval or Veto Rights. The
guidance in this Issue is effective after June 29, 2005 for
general partners of all new limited partnerships formed and for
existing limited partnerships for which the partnership
agreements are modified. For general partners in all other
limited partnerships, the guidance in this Issue was effective
beginning January 1, 2006. The effect of the adoption of
this EITF Issue was not material to AIGs consolidated
financial condition or results of operations.
On June 29, 2005, FASB issued Statement 133
Implementation Issue No. B38, Embedded Derivatives:
Evaluation of Net Settlement with Respect to the Settlement of a
Debt Instrument through Exercise of an Embedded Put Option or
Call Option. This implementation guidance relates to the
potential settlement of the debtors obligation to the
creditor that would occur upon exercise of the put option or
call option, which meets the net settlement criterion in
FAS 133. The effective date of the implementation guidance
is January 1, 2006. The adop-
18
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
8. |
Recent Accounting
Standards (continued) |
tion of this guidance did not have a material effect on
AIGs consolidated financial condition or results of
operations.
On June 29, 2005, the FASB issued Statement 133
Implementation Issue No. B39, Application of
Paragraph 13(b) to Call Options That Are Exercisable Only
by the Debtor. The conditions in FAS 133
paragraph 13(b) do not apply to an embedded call option in
a hybrid instrument containing a debt host contract if the right
to accelerate the settlement of the debt can be exercised only
by the debtor (issuer/borrower). This guidance does not apply to
other embedded derivative features that may be present in the
same hybrid instrument. The effective date of the implementation
guidance is January 1, 2006. The adoption of this guidance
did not have a material effect on AIGs consolidated
financial condition or results of operations.
On February 16, 2006, the FASB issued FAS No. 155,
Accounting for Certain Hybrid Financial Instruments
(FAS 155), an amendment of FAS 140 and FAS 133.
FAS 155 allows AIG to include changes in fair value in
earnings on an instrument-by-instrument basis for any hybrid
financial instrument that contains an embedded derivative that
would otherwise be required to be bifurcated and accounted for
separately under FAS 133. The election to measure the
hybrid instrument at fair value is irrevocable at the
acquisition or issuance date.
AIG elected to early adopt FAS 155 as of January 1,
2006, and apply FAS 155 fair value measurement to certain
structured note liabilities and structured investments in
AIGs available for sale portfolio that existed at
December 31, 2005. The effect of this adoption resulted in
an $11 million after-tax ($18 million pre-tax)
decrease to opening retained earnings as of January 1,
2006, representing the difference between the fair value of
these hybrid financial instruments and the prior carrying value
as of December 31, 2005. The effect of adoption on
after-tax gross gains and losses was $218 million
($336 million pre-tax) and $229 million
($354 million pre-tax), respectively.
In connection with AIGs early adoption of FAS 155,
structured note liabilities of $8.1 billion, other
structured liabilities in conjunction with equity derivative
transactions of $70 million, and hybrid financial
instruments of $407 million at September 30, 2006 are
now carried at fair value. The effect on earnings for the three
and nine-month periods ended September 30, 2006, for
changes in the fair value of hybrid financial instruments, was a
pre-tax gain of $79 million and a pre-tax loss of
$44 million, respectively, and is reflected in Other income.
On March 27, 2006, the FASB issued FSP
FTB 85-4-1,
Accounting for Life Settlement Contracts by Third-Party
Investors
(FSP 85-4-1), an
amendment of
FTB 85-4,
Accounting for Purchases of Life Insurance. Life
settlements are designed to assist life insurance policyholders
in monetizing the existing value of life insurance policies.
FSP 85-4-1 allows
AIG to measure life settlement contracts using either the
investment method or fair value method. The election is made on
an instrument-by-instrument basis and is irrevocable. AIG
elected to early adopt
FSP 85-4-1 as of
January 1, 2006 using the investment method for
pre-existing investments held at December 31, 2005. The
effect of this adoption resulted in a $319 million after
tax ($487 million pre-tax) increase to opening retained
earnings.
On June 29, 2006, AIG restructured its ownership of life
settlement contracts with no effect on the economic substance of
these investments. At the same time, AIG paid $610 million
to its former co-investors to acquire all the remaining
interests in life settlement contracts held in previously
non-consolidated trusts.
At September 30, 2006, the carrying value of AIGs
life settlement contracts was $1.21 billion, and is
included in Other invested assets on the consolidated balance
sheet. These investments are monitored for impairment on a
contract by contract basis quarterly. During the three month
period ended September 30, 2006, income recognized on life
settlement contracts previously held in non-consolidated trusts
was $5 million, and is included in net investment income on
the consolidated statement of income. Such income totaled
$18 million for the nine month period then ended. Further
information regarding life settlement contracts as of
September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) | |
|
|
|
|
|
|
| |
Remaining Life | |
Expectancy |
|
Number of | |
|
Carrying | |
|
Face Value | |
of Insureds |
|
Contracts | |
|
Value | |
|
(Death Benefits) | |
| |
0 1 year
|
|
|
4 |
|
|
$ |
6 |
|
|
$ |
7 |
|
1 2 years
|
|
|
24 |
|
|
|
14 |
|
|
|
20 |
|
2 3 years
|
|
|
64 |
|
|
|
38 |
|
|
|
59 |
|
3 4 years
|
|
|
135 |
|
|
|
131 |
|
|
|
229 |
|
4 5 years
|
|
|
137 |
|
|
|
85 |
|
|
|
175 |
|
Thereafter
|
|
|
1,540 |
|
|
|
935 |
|
|
|
3,495 |
|
|
|
Total
|
|
|
1,904 |
|
|
$ |
1,209 |
|
|
$ |
3,985 |
|
|
As of September 30, 2006, the anticipated life insurance
premiums required to keep the life settlement contracts in
force, payable in the ensuing twelve months ending
September 30, 2007, and the four succeeding years ending
September 30, 2011 are $84 million, $88 million,
$93 million, $94 million, and $95 million,
respectively.
On April 13, 2006, the FASB issued FSP
FIN 46(R)-6,
Determining the Variability to be Considered in Applying
FASB Interpretation No. 46(R)
(FIN 46(R)-6 or
FSP). The FSP affects the identification of which entities are
variable interest entities through a by design
approach in identifying and measuring the variable interests of
the variable interest entity and its primary beneficiary. The
requirements became effective beginning in the third quarter of
2006 and are to be applied to all new variable interest entities
with
19
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
8. |
Recent Accounting
Standards (continued) |
which AIG becomes involved. The new requirements need not be
applied to entities that have previously been analyzed under
FIN 46(R) unless a reconsideration event occurs. The
adoption of this guidance did not have a material effect on
AIGs consolidated financial condition or results of
operations.
Future Application of Accounting Standards
On September 19, 2005, the FASB issued 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).
SOP 05-1 provides
guidance on accounting for deferred acquisition costs on
internal replacements of insurance and investment contracts
other than those specifically described in FASB Statement
No. 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments. The SOP
defines an internal replacement as a modification in product
benefits, features, rights, or coverage that occurs by the
exchange of a contract for a new contract, or by amendment,
endorsement, or rider to a contract, or by the election of a
feature or coverage within a contract. The effective date of the
implementation guidance is January 1, 2007. AIG is
currently assessing the effect of implementing this guidance.
On July 13, 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109 (FIN 48), which clarifies the accounting
for uncertainty in income tax positions. FIN 48 prescribes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of an income tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, and additional disclosures. The effective date of this
implementation guidance is January 1, 2007, with the
cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. AIG is currently
assessing the effect of implementing this guidance.
On September 13, 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (SAB 108). SAB 108
provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement.
SAB 108 requires registrants to quantify errors using both
a balance sheet and an income statement approach and evaluate
whether either approach results in quantifying a misstatement
that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 is effective for
registrants financial statements for fiscal years ending
on or after November 15, 2006, with early application
encouraged. The adoption of SAB 108 is not expected to have a
material effect on AIGs consolidated financial statements.
In September 2006, the FASB issued FAS No. 157, Fair
Value Measurements (FAS 157). FAS 157 defines
fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. FAS 157
is effective for financial statements issued for fiscal years
beginning after November 15, 2007. AIG is currently
assessing the effect of implementing this guidance.
In September 2006, the FASB issued FAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106 and 132(R) (FAS
No. 158). FAS No. 158 requires an employer to
prospectively recognize the over funded or under funded status
of a defined benefit postretirement plan as an asset or
liability in its balance sheet and to recognize changes in that
funded status in the year in which the changes occur through
other comprehensive income. FAS No. 158 also requires an
employer to measure the funded status of a plan as of the date
of its year-end balance sheet, with limited exceptions. AIG is
required to adopt this standard in its financial statements for
the year ending December 31, 2006. The estimated cumulative
effect, including deferred income taxes, on AIGs
consolidated balance sheet at December 31, 2006 as a result
of the adoption of this standard is a net reduction in
shareholders equity through a charge to Other
comprehensive income of approximately $720 million, with a
corresponding net decrease of approximately $350 million in
total assets, and a net increase of approximately
$370 million in total liabilities. The actual effect of the
adoption at December 31, 2006 may differ from the above
estimates due to changes in assumptions such as the discount
rate, actuarial assumptions, the measurements of fair value of
plan assets and the recognition of any additional minimum
liabilities determined under the provisions of FAS 87 prior
to the adoption of FAS 158. In addition, AIG is in the
process of determining the realizability of additional deferred
tax assets that would be generated by plans in foreign
locations. Accordingly, the net after tax effect of the adoption
of FAS 158 may change pending the outcome of this review
during the fourth quarter.
20
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
9. |
Information Provided in Connection with Outstanding Debt |
The following condensed consolidating financial statements
are provided in compliance with
Regulation S-X of
the Securities and Exchange Commission.
(a) American General Corporation (AGC) is a holding
company and a wholly owned subsidiary of AIG. AIG provides a
full and unconditional guarantee of all outstanding debt of
AGC.
American General Corporation, as issuer:
Condensed Consolidating Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
|
|
|
|
|
|
|
September 30, 2006 |
|
Group, Inc. | |
|
|
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
AGC | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
| |
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets
|
|
$ |
4,756 |
|
|
$ |
|
|
|
$ |
760,818 |
|
|
$ |
(15,512 |
) |
|
$ |
750,062 |
|
|
Cash
|
|
|
28 |
|
|
|
|
|
|
|
1,397 |
|
|
|
|
|
|
|
1,425 |
|
|
Carrying value of subsidiaries and partially owned companies, at
equity
|
|
|
103,611 |
|
|
|
26,913 |
|
|
|
5,608 |
|
|
|
(135,101 |
) |
|
|
1,031 |
|
|
Other assets
|
|
|
3,806 |
|
|
|
2,646 |
|
|
|
184,638 |
|
|
|
(2,064 |
) |
|
|
189,026 |
|
|
Total assets
|
|
$ |
112,201 |
|
|
$ |
29,559 |
|
|
$ |
952,461 |
|
|
$ |
(152,677 |
) |
|
$ |
941,544 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance liabilities
|
|
$ |
332 |
|
|
$ |
|
|
|
$ |
483,079 |
|
|
$ |
(42 |
) |
|
$ |
483,369 |
|
|
Debt
|
|
|
10,816 |
|
|
|
2,096 |
|
|
|
138,942 |
|
|
|
(14,732 |
) |
|
|
137,122 |
|
|
Other liabilities
|
|
|
4,899 |
|
|
|
3,826 |
|
|
|
218,867 |
|
|
|
(2,882 |
) |
|
|
224,710 |
|
|
Total liabilities
|
|
|
16,047 |
|
|
|
5,922 |
|
|
|
840,888 |
|
|
|
(17,656 |
) |
|
|
845,201 |
|
|
Preferred shareholders equity in subsidiary companies
|
|
|
|
|
|
|
|
|
|
|
189 |
|
|
|
|
|
|
|
189 |
|
Total shareholders equity
|
|
|
96,154 |
|
|
|
23,637 |
|
|
|
111,384 |
|
|
|
(135,021 |
) |
|
|
96,154 |
|
|
Total liabilities, preferred shareholders equity in
subsidiary companies and shareholders equity
|
|
$ |
112,201 |
|
|
$ |
29,559 |
|
|
$ |
952,461 |
|
|
$ |
(152,677 |
) |
|
$ |
941,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
|
|
|
|
|
|
|
December 31, 2005 |
|
Group, Inc. | |
|
|
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
AGC | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
| |
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets
|
|
$ |
1,392 |
|
|
$ |
|
|
|
$ |
691,349 |
|
|
$ |
(13,696 |
) |
|
$ |
679,045 |
|
|
Cash
|
|
|
190 |
|
|
|
|
|
|
|
1,707 |
|
|
|
|
|
|
|
1,897 |
|
|
Carrying value of subsidiaries and partially owned companies, at
equity
|
|
|
90,723 |
|
|
|
27,027 |
|
|
|
15,577 |
|
|
|
(132,169 |
) |
|
|
1,158 |
|
|
Other assets
|
|
|
2,768 |
|
|
|
2,577 |
|
|
|
166,933 |
|
|
|
(1,327 |
) |
|
|
170,951 |
|
|
Total assets
|
|
$ |
95,073 |
|
|
$ |
29,604 |
|
|
$ |
875,566 |
|
|
$ |
(147,192 |
) |
|
$ |
853,051 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance liabilities
|
|
$ |
408 |
|
|
$ |
|
|
|
$ |
460,271 |
|
|
$ |
(56 |
) |
|
$ |
460,623 |
|
|
Debt
|
|
|
4,607 |
|
|
|
2,087 |
|
|
|
115,212 |
|
|
|
(12,057 |
) |
|
|
109,849 |
|
|
Other liabilities
|
|
|
3,741 |
|
|
|
4,110 |
|
|
|
191,279 |
|
|
|
(3,054 |
) |
|
|
196,076 |
|
|
Total liabilities
|
|
|
8,756 |
|
|
|
6,197 |
|
|
|
766,762 |
|
|
|
(15,167 |
) |
|
|
766,548 |
|
|
Preferred shareholders equity in subsidiary companies
|
|
|
|
|
|
|
|
|
|
|
186 |
|
|
|
|
|
|
|
186 |
|
Total shareholders equity
|
|
|
86,317 |
|
|
|
23,407 |
|
|
|
108,618 |
|
|
|
(132,025 |
) |
|
|
86,317 |
|
|
Total liabilities, preferred shareholders equity in
subsidiary companies and shareholders equity
|
|
$ |
95,073 |
|
|
$ |
29,604 |
|
|
$ |
875,566 |
|
|
$ |
(147,192 |
) |
|
$ |
853,051 |
|
|
21
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
9. |
Information Provided in Connection with Outstanding
Debt (continued) |
Condensed Consolidating Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 |
|
Group, Inc. | |
|
|
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
AGC | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
|
Operating income (loss)
|
|
$ |
(215 |
) |
|
$ |
(49 |
) |
|
$ |
6,565 |
|
|
$ |
|
|
|
$ |
6,301 |
|
Equity in undistributed net income of consolidated subsidiaries
|
|
|
4,223 |
|
|
|
420 |
|
|
|
|
|
|
|
(4,643 |
) |
|
|
|
|
Dividend income from consolidated subsidiaries
|
|
|
287 |
|
|
|
134 |
|
|
|
|
|
|
|
(421 |
) |
|
|
|
|
Income taxes (benefits)
|
|
|
71 |
|
|
|
(17 |
) |
|
|
1,889 |
|
|
|
|
|
|
|
1,943 |
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
(134 |
) |
|
Net income (loss)
|
|
$ |
4,224 |
|
|
$ |
522 |
|
|
$ |
4,542 |
|
|
$ |
(5,064 |
) |
|
$ |
4,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2005 |
|
Group, Inc. | |
|
|
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
AGC | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
|
Operating income (loss)
|
|
$ |
(41 |
) |
|
$ |
(54 |
) |
|
$ |
2,642 |
|
|
$ |
|
|
|
$ |
2,547 |
|
Equity in undistributed net income of consolidated subsidiaries
|
|
|
1,857 |
|
|
|
615 |
|
|
|
|
|
|
|
(2,472 |
) |
|
|
|
|
Dividend income from consolidated subsidiaries
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
(223 |
) |
|
|
|
|
Income taxes (benefits)
|
|
|
294 |
|
|
|
(19 |
) |
|
|
473 |
|
|
|
|
|
|
|
748 |
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
(54 |
) |
|
Net income (loss)
|
|
$ |
1,745 |
|
|
$ |
580 |
|
|
$ |
2,115 |
|
|
$ |
(2,695 |
) |
|
$ |
1,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
Group, Inc. | |
|
|
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
AGC | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
|
Operating income (loss)
|
|
$ |
(937 |
) |
|
$ |
(135 |
) |
|
$ |
17,407 |
|
|
$ |
|
|
|
$ |
16,335 |
|
Equity in undistributed net income of consolidated subsidiaries
|
|
|
10,990 |
|
|
|
1,088 |
|
|
|
|
|
|
|
(12,078 |
) |
|
|
|
|
Dividend income from consolidated subsidiaries
|
|
|
854 |
|
|
|
592 |
|
|
|
|
|
|
|
(1,446 |
) |
|
|
|
|
Income taxes (benefits)
|
|
|
332 |
|
|
|
(47 |
) |
|
|
4,781 |
|
|
|
|
|
|
|
5,066 |
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(694 |
) |
|
|
|
|
|
|
(694 |
) |
Cumulative effect of an accounting change, net of tax
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
Net income (loss)
|
|
$ |
10,609 |
|
|
$ |
1,592 |
|
|
$ |
11,932 |
|
|
$ |
(13,524 |
) |
|
$ |
10,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
Group, Inc. | |
|
AGC | |
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
Issuer | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
|
Operating income (loss)
|
|
$ |
99 |
|
|
$ |
(130 |
) |
|
$ |
14,928 |
|
|
$ |
|
|
|
$ |
14,897 |
|
Equity in undistributed net income of consolidated subsidiaries
|
|
|
9,287 |
|
|
|
1,906 |
|
|
|
|
|
|
|
(11,193 |
) |
|
|
|
|
Dividend income from consolidated subsidiaries
|
|
|
1,151 |
|
|
|
|
|
|
|
|
|
|
|
(1,151 |
) |
|
|
|
|
Income taxes (benefits)
|
|
|
504 |
|
|
|
(45 |
) |
|
|
4,078 |
|
|
|
|
|
|
|
4,537 |
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(327 |
) |
|
|
|
|
|
|
(327 |
) |
|
Net income (loss)
|
|
$ |
10,033 |
|
|
$ |
1,821 |
|
|
$ |
10,523 |
|
|
$ |
(12,344 |
) |
|
$ |
10,033 |
|
|
22
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
9. |
Information Provided in Connection with Outstanding
Debt (continued) |
Condensed Consolidating Statements of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
International | |
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
Group, Inc. | |
|
|
|
Other | |
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
AGC | |
|
Subsidiaries | |
|
AIG | |
|
Net cash (used in) provided by operating activities
|
|
$ |
(228 |
) |
|
$ |
160 |
|
|
$ |
6,072 |
|
|
$ |
6,004 |
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets disposed
|
|
|
2,681 |
|
|
|
|
|
|
|
117,873 |
|
|
|
120,554 |
|
|
Invested assets acquired
|
|
|
(5,554 |
) |
|
|
|
|
|
|
(164,995 |
) |
|
|
(170,549 |
) |
|
Other
|
|
|
(2,374 |
) |
|
|
(17 |
) |
|
|
986 |
|
|
|
(1,405 |
) |
|
Net cash used in investing activities
|
|
|
(5,247 |
) |
|
|
(17 |
) |
|
|
(46,136 |
) |
|
|
(51,400 |
) |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in debts
|
|
|
6,201 |
|
|
|
|
|
|
|
20,440 |
|
|
|
26,641 |
|
|
Other
|
|
|
(888 |
) |
|
|
(143 |
) |
|
|
19,255 |
|
|
|
18,224 |
|
|
Net cash (used in) provided by financing activities
|
|
|
5,313 |
|
|
|
(143 |
) |
|
|
39,695 |
|
|
|
44,865 |
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
59 |
|
|
Change in cash
|
|
|
(162 |
) |
|
|
|
|
|
|
(310 |
) |
|
|
(472 |
) |
Cash at beginning of period
|
|
|
190 |
|
|
|
|
|
|
|
1,707 |
|
|
|
1,897 |
|
|
Cash at end of period
|
|
$ |
28 |
|
|
$ |
|
|
|
$ |
1,397 |
|
|
$ |
1,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
International | |
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
Group, Inc. | |
|
|
|
Other | |
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
AGC | |
|
Subsidiaries | |
|
AIG | |
|
Net cash provided by operating activities
|
|
$ |
1,487 |
|
|
$ |
685 |
|
|
$ |
18,018 |
|
|
$ |
20,190 |
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets disposed
|
|
|
124 |
|
|
|
|
|
|
|
142,959 |
|
|
|
143,083 |
|
|
Invested assets acquired
|
|
|
(1,761 |
) |
|
|
|
|
|
|
(192,501 |
) |
|
|
(194,262 |
) |
|
Other
|
|
|
(305 |
) |
|
|
(270 |
) |
|
|
(823 |
) |
|
|
(1,398 |
) |
|
Net cash used in investing activities
|
|
|
(1,942 |
) |
|
|
(270 |
) |
|
|
(50,365 |
) |
|
|
(52,577 |
) |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in debts
|
|
|
1,659 |
|
|
|
(299 |
) |
|
|
11,207 |
|
|
|
12,567 |
|
|
Other
|
|
|
(1,119 |
) |
|
|
(116 |
) |
|
|
21,244 |
|
|
|
20,009 |
|
|
Net cash (used in) provided by financing activities
|
|
|
540 |
|
|
|
(415 |
) |
|
|
32,451 |
|
|
|
32,576 |
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
(90 |
) |
|
|
(90 |
) |
|
Change in cash
|
|
|
85 |
|
|
|
|
|
|
|
14 |
|
|
|
99 |
|
Cash at beginning of period
|
|
|
17 |
|
|
|
|
|
|
|
1,992 |
|
|
|
2,009 |
|
|
Cash at end of period
|
|
$ |
102 |
|
|
$ |
|
|
|
$ |
2,006 |
|
|
$ |
2,108 |
|
|
23
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
9. |
Information Provided in Connection with Outstanding
Debt (continued) |
(b) AIG Liquidity Corp. is a wholly owned subsidiary of
AIG. AIG provides a full and unconditional guarantee of all
obligations of AIG Liquidity Corp., which commenced operations
in 2003.
AIG Liquidity Corp., as issuer:
Condensed Consolidating Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
AIG | |
|
|
|
|
|
|
September 30, 2006 |
|
Group, Inc. | |
|
Liquidity | |
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
Corp. | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
| |
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets
|
|
$ |
4,756 |
|
|
$ |
* |
|
|
$ |
760,818 |
|
|
$ |
(15,512 |
) |
|
$ |
750,062 |
|
|
Cash
|
|
|
28 |
|
|
|
* |
|
|
|
1,397 |
|
|
|
|
|
|
|
1,425 |
|
|
Carrying value of subsidiaries and partially owned companies, at
equity
|
|
|
103,611 |
|
|
|
|
|
|
|
32,521 |
|
|
|
(135,101 |
) |
|
|
1,031 |
|
|
Other assets
|
|
|
3,806 |
|
|
|
* |
|
|
|
187,284 |
|
|
|
(2,064 |
) |
|
|
189,026 |
|
|
Total assets
|
|
$ |
112,201 |
|
|
$ |
* |
|
|
$ |
982,020 |
|
|
$ |
(152,677 |
) |
|
$ |
941,544 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance liabilities
|
|
$ |
332 |
|
|
$ |
|
|
|
$ |
483,079 |
|
|
$ |
(42 |
) |
|
$ |
483,369 |
|
|
Debt
|
|
|
10,816 |
|
|
|
* |
|
|
|
141,038 |
|
|
|
(14,732 |
) |
|
|
137,122 |
|
|
Other liabilities
|
|
|
4,899 |
|
|
|
* |
|
|
|
222,693 |
|
|
|
(2,882 |
) |
|
|
224,710 |
|
|
Total liabilities
|
|
|
16,047 |
|
|
|
* |
|
|
|
846,810 |
|
|
|
(17,656 |
) |
|
|
845,201 |
|
|
Preferred shareholders equity in subsidiary companies
|
|
|
|
|
|
|
|
|
|
|
189 |
|
|
|
|
|
|
|
189 |
|
Total shareholders equity
|
|
|
96,154 |
|
|
|
* |
|
|
|
135,021 |
|
|
|
(135,021 |
) |
|
|
96,154 |
|
|
Total liabilities, preferred shareholders equity in
subsidiary companies and shareholders equity
|
|
$ |
112,201 |
|
|
$ |
* |
|
|
$ |
982,020 |
|
|
$ |
(152,677 |
) |
|
$ |
941,544 |
|
|
|
|
* |
Amounts significantly less than $1 million. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
AIG | |
|
|
|
|
|
|
December 31, 2005 |
|
Group, Inc. | |
|
Liquidity | |
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
Corp. | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
| |
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets
|
|
$ |
1,392 |
|
|
$ |
* |
|
|
$ |
691,349 |
|
|
$ |
(13,696 |
) |
|
$ |
679,045 |
|
|
Cash
|
|
|
190 |
|
|
|
* |
|
|
|
1,707 |
|
|
|
|
|
|
|
1,897 |
|
|
Carrying value of subsidiaries and partially owned companies, at
equity
|
|
|
90,723 |
|
|
|
|
|
|
|
42,604 |
|
|
|
(132,169 |
) |
|
|
1,158 |
|
|
Other assets
|
|
|
2,768 |
|
|
|
* |
|
|
|
169,510 |
|
|
|
(1,327 |
) |
|
|
170,951 |
|
|
Total assets
|
|
$ |
95,073 |
|
|
$ |
* |
|
|
$ |
905,170 |
|
|
$ |
(147,192 |
) |
|
$ |
853,051 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance liabilities
|
|
$ |
408 |
|
|
$ |
|
|
|
$ |
460,271 |
|
|
$ |
(56 |
) |
|
$ |
460,623 |
|
|
Debt
|
|
|
4,607 |
|
|
|
* |
|
|
|
117,299 |
|
|
|
(12,057 |
) |
|
|
109,849 |
|
|
Other liabilities
|
|
|
3,741 |
|
|
|
* |
|
|
|
195,389 |
|
|
|
(3,054 |
) |
|
|
196,076 |
|
|
Total liabilities
|
|
|
8,756 |
|
|
|
* |
|
|
|
772,959 |
|
|
|
(15,167 |
) |
|
|
766,548 |
|
|
Preferred shareholders equity in subsidiary companies
|
|
|
|
|
|
|
|
|
|
|
186 |
|
|
|
|
|
|
|
186 |
|
Total shareholders equity
|
|
|
86,317 |
|
|
|
* |
|
|
|
132,025 |
|
|
|
(132,025 |
) |
|
|
86,317 |
|
|
Total liabilities, preferred shareholders equity in
subsidiary companies and shareholders equity
|
|
$ |
95,073 |
|
|
$ |
* |
|
|
$ |
905,170 |
|
|
$ |
(147,192 |
) |
|
$ |
853,051 |
|
|
|
|
* |
Amounts significantly less than $1 million. |
24
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
9. |
Information Provided in Connection with Outstanding
Debt (continued) |
Condensed Consolidating Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
AIG | |
|
|
|
|
|
|
Three Months Ended September 30, 2006 |
|
Group, Inc. | |
|
Liquidity | |
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
Corp. | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
| |
Operating income (loss)
|
|
$ |
(215 |
) |
|
$ |
* |
|
|
$ |
6,516 |
|
|
$ |
|
|
|
$ |
6,301 |
|
Equity in undistributed net income of consolidated subsidiaries
|
|
|
4,223 |
|
|
|
|
|
|
|
420 |
|
|
|
(4,643 |
) |
|
|
|
|
Dividend income from consolidated subsidiaries
|
|
|
287 |
|
|
|
|
|
|
|
134 |
|
|
|
(421 |
) |
|
|
|
|
Income taxes
|
|
|
71 |
|
|
|
* |
|
|
|
1,872 |
|
|
|
|
|
|
|
1,943 |
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
(134 |
) |
|
Net income (loss)
|
|
$ |
4,224 |
|
|
$ |
* |
|
|
$ |
5,064 |
|
|
$ |
(5,064 |
) |
|
$ |
4,224 |
|
|
|
|
* |
Amounts significantly less than $1 million. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
AIG | |
|
|
|
|
|
|
Three Months Ended September 30, 2005 |
|
Group, Inc. | |
|
Liquidity | |
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
Corp. | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
| |
Operating income
|
|
$ |
(41 |
) |
|
$ |
* |
|
|
$ |
2,588 |
|
|
$ |
|
|
|
$ |
2,547 |
|
Equity in undistributed net income of consolidated subsidiaries
|
|
|
1,857 |
|
|
|
|
|
|
|
615 |
|
|
|
(2,472 |
) |
|
|
|
|
Dividend income from consolidated subsidiaries
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
(223 |
) |
|
|
|
|
Income taxes
|
|
|
294 |
|
|
|
* |
|
|
|
454 |
|
|
|
|
|
|
|
748 |
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
|
|
(54 |
) |
|
Net income (loss)
|
|
$ |
1,745 |
|
|
$ |
* |
|
|
$ |
2,695 |
|
|
$ |
(2,695 |
) |
|
$ |
1,745 |
|
|
|
|
* |
Amounts significantly less than $1 million. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
AIG | |
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
Group, Inc. | |
|
Liquidity | |
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
Corp. | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
| |
Operating income (loss)
|
|
$ |
(937 |
) |
|
$ |
* |
|
|
$ |
17,272 |
|
|
$ |
|
|
|
$ |
16,335 |
|
Equity in undistributed net income of consolidated subsidiaries
|
|
|
10,990 |
|
|
|
|
|
|
|
1,088 |
|
|
|
(12,078 |
) |
|
|
|
|
Dividend income from consolidated subsidiaries
|
|
|
854 |
|
|
|
|
|
|
|
592 |
|
|
|
(1,446 |
) |
|
|
|
|
Income taxes
|
|
|
332 |
|
|
|
* |
|
|
|
4,734 |
|
|
|
|
|
|
|
5,066 |
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(694 |
) |
|
|
|
|
|
|
(694 |
) |
Cumulative effect of an accounting change, net of tax
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
Net income (loss)
|
|
$ |
10,609 |
|
|
$ |
* |
|
|
$ |
13,524 |
|
|
$ |
(13,524 |
) |
|
$ |
10,609 |
|
|
|
|
* |
Amounts significantly less than $1 million. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
|
|
International | |
|
AIG | |
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
Group, Inc. | |
|
Liquidity | |
|
Other | |
|
|
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
Corp. | |
|
Subsidiaries | |
|
Eliminations | |
|
AIG | |
| |
Operating income
|
|
$ |
99 |
|
|
$ |
* |
|
|
$ |
14,798 |
|
|
$ |
|
|
|
$ |
14,897 |
|
Equity in undistributed net income of consolidated subsidiaries
|
|
|
9,287 |
|
|
|
|
|
|
|
1,906 |
|
|
|
(11,193 |
) |
|
|
|
|
Dividend income from consolidated subsidiaries
|
|
|
1,151 |
|
|
|
|
|
|
|
|
|
|
|
(1,151 |
) |
|
|
|
|
Income taxes
|
|
|
504 |
|
|
|
* |
|
|
|
4,033 |
|
|
|
|
|
|
|
4,537 |
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(327 |
) |
|
|
|
|
|
|
(327 |
) |
|
Net income (loss)
|
|
$ |
10,033 |
|
|
$ |
* |
|
|
$ |
12,344 |
|
|
$ |
(12,344 |
) |
|
$ |
10,033 |
|
|
|
|
* |
Amounts significantly less than $1 million. |
25
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
9. |
Information Provided in Connection with Outstanding
Debt (continued) |
Condensed Consolidating Statements of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
International | |
|
AIG | |
|
|
|
|
Nine Months Ended September 30, 2006 |
|
Group, Inc. | |
|
Liquidity | |
|
Other | |
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
Corp. | |
|
Subsidiaries | |
|
AIG | |
| |
Net cash (used in) provided by operating activities
|
|
$ |
(228 |
) |
|
$ |
* |
|
|
$ |
6,232 |
|
|
$ |
6,004 |
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets disposed
|
|
|
2,681 |
|
|
|
|
|
|
|
117,873 |
|
|
|
120,554 |
|
|
Invested assets acquired
|
|
|
(5,554 |
) |
|
|
|
|
|
|
(164,995 |
) |
|
|
(170,549 |
) |
|
Other
|
|
|
(2,374 |
) |
|
|
* |
|
|
|
969 |
|
|
|
(1,405 |
) |
|
Net cash used in investing activities
|
|
|
(5,247 |
) |
|
|
* |
|
|
|
(46,153 |
) |
|
|
(51,400 |
) |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in debts
|
|
|
6,201 |
|
|
|
|
|
|
|
20,440 |
|
|
|
26,641 |
|
|
Other
|
|
|
(888 |
) |
|
|
* |
|
|
|
19,112 |
|
|
|
18,224 |
|
|
Net cash (used in) provided by financing activities
|
|
|
5,313 |
|
|
|
* |
|
|
|
39,552 |
|
|
|
44,865 |
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
59 |
|
|
Change in cash
|
|
|
(162 |
) |
|
|
* |
|
|
|
(310 |
) |
|
|
(472 |
) |
Cash at beginning of period
|
|
|
190 |
|
|
|
|
|
|
|
1,707 |
|
|
|
1,897 |
|
|
Cash at end of period
|
|
$ |
28 |
|
|
$ |
* |
|
|
$ |
1,397 |
|
|
$ |
1,425 |
|
|
|
|
* |
Amounts significantly less than $1 million. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American | |
|
|
|
|
|
|
|
|
International | |
|
AIG | |
|
|
|
|
Nine Months Ended September 30, 2005 |
|
Group, Inc. | |
|
Liquidity | |
|
Other | |
|
Consolidated | |
(in millions) |
|
Guarantor | |
|
Corp. | |
|
Subsidiaries | |
|
AIG | |
| |
Net cash (used in) provided by operating activities
|
|
$ |
1,487 |
|
|
$ |
* |
|
|
$ |
18,703 |
|
|
$ |
20,190 |
|
|
Cash flows from investing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets disposed
|
|
|
124 |
|
|
|
|
|
|
|
142,959 |
|
|
|
143,083 |
|
|
Invested assets acquired
|
|
|
(1,761 |
) |
|
|
|
|
|
|
(192,501 |
) |
|
|
(194,262 |
) |
|
Other
|
|
|
(305 |
) |
|
|
* |
|
|
|
(1,093 |
) |
|
|
(1,398 |
) |
|
Net cash used in investing activities
|
|
|
(1,942 |
) |
|
|
* |
|
|
|
(50,635 |
) |
|
|
(52,577 |
) |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in debts
|
|
|
1,659 |
|
|
|
|
|
|
|
10,908 |
|
|
|
12,567 |
|
|
Other
|
|
|
(1,119 |
) |
|
|
* |
|
|
|
21,128 |
|
|
|
20,009 |
|
|
Net cash (used in) provided by financing activities
|
|
|
540 |
|
|
|
* |
|
|
|
32,036 |
|
|
|
32,576 |
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
(90 |
) |
|
|
(90 |
) |
|
Change in cash
|
|
|
85 |
|
|
|
* |
|
|
|
14 |
|
|
|
99 |
|
Cash at beginning of period
|
|
|
17 |
|
|
|
|
|
|
|
1,992 |
|
|
|
2,009 |
|
|
Cash at end of period
|
|
$ |
102 |
|
|
$ |
* |
|
|
$ |
2,006 |
|
|
$ |
2,108 |
|
|
|
|
* |
Amounts significantly less than $1 million. |
|
|
10. |
Stock Compensation Plans |
At September 30, 2006, AIG employees could be awarded
compensation pursuant to six different stock-based compensation
plan arrangements: (i) AIG 1999 Stock Option Plan, as
amended (1999 Plan); (ii) AIG 1996 Employee Stock Purchase
Plan, as amended (1996 Plan); (iii) AIG 2002 Stock
Incentive Plan, as amended (2002 Plan) under which AIG has
issued time-vested restricted stock units (RSUs) and performance
restricted stock units (Performance RSUs); (iv) SICOs
Deferred Compensation Profit Participation Plans (SICO Plans);
(v) AIGs 2005-2006 Deferred Compensation Profit
Participation Plan (AIG DCPPP) and (vi) the AIG Partners
Plan. The AIG DCPPP was adopted as a replacement for the SICO
Plans for the 2005-2006 period, and the AIG Partners Plan
replaces the AIG DCPPP. Stock-based compensation earned under
the AIG DCPPP and the AIG Partners Plan is issued as
awards under the 2002 Plan. AIG currently settles share option
exercises and other share awards to participants through the
issuance of shares it has previously acquired and holds in its
treasury account, except for share awards made by SICO, which
are settled by SICO.
At September 30, 2006, AIGs non-employee directors
received stock-based compensation in two forms, options granted
pursuant to the 1999 Plan and grants of AIG common stock with
delivery deferred until retirement from the Board, pursuant to
the AIG Director Stock Plan, which was approved by the
shareholders at the 2004 Annual Meeting of Shareholders.
From January 1, 2003 through December 31, 2005, AIG
accounted for share-based payment transactions with employ-
26
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
10. |
Stock Compensation
Plans (continued) |
ees under FAS 123, Accounting for Stock-Based
Compensation. Share-based employee compensation expense
from option awards was not recognized in the statement of income
in prior periods. Effective January 1, 2006, AIG adopted
the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123R Share-Based
Payments (FAS 123R). FAS 123R requires that
companies use a fair value method to value share-based payments
and recognize the related compensation expense in net earnings.
AIG adopted FAS 123R using the modified prospective
application method, and accordingly, financial statement amounts
for the prior periods presented have not been restated to
reflect the fair value method of expensing share-based
compensation under FAS 123R. The modified prospective
application method provides for the recognition of the fair
value with respect to share-based compensation for shares
subscribed for or granted on or after January 1, 2006 and
all previously granted but unvested awards as of January 1,
2006.
The adoption of FAS 123R resulted in share-based
compensation expense of approximately $14 million during
the first nine months of 2006, related to awards which were
accounted for under the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees. AIG expects this expense to approximate
$19 million for fiscal 2006. FAS 123R also requires
AIG to estimate forfeitures in calculating the expense relating
to share-based compensation, rather than recognizing these
forfeitures and corresponding reductions in expense as they
occur. The pre-tax cumulative effect of adoption, recognized as
a reduction in stock-based compensation of $46 million, was
recorded as a cumulative effect of an accounting change, net of
tax, in the first quarter of 2006. FAS 123R requires AIG to
reflect the cash savings resulting from excess tax benefits in
its financial statements as cash flow from financing activities,
rather than as cash flow from operating activities as in prior
periods. The amount of this excess tax benefit for the three and
nine-month periods ended September 30, 2006 was
$3.9 million and $6.2 million, respectively.
The effect of the adoption of FAS 123R on the consolidated
statements of income and cash flows was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 | |
|
Nine Months Ended September 30, 2006 | |
|
|
| |
|
| |
|
|
|
|
Including | |
|
|
|
Including | |
|
|
|
|
Effect of | |
|
Effect of | |
|
|
|
Effect of | |
|
Effect of | |
|
|
Pre-adoption of | |
|
Adoption of | |
|
Adoption of | |
|
Pre-adoption of | |
|
Adoption of | |
|
Adoption of | |
(in millions, except per share data) |
|
FAS 123R | |
|
FAS 123R | |
|
FAS 123R | |
|
FAS 123R | |
|
FAS 123R | |
|
FAS 123R | |
| |
Income before income taxes, minority interest and cumulative
effect of an accounting change
|
|
$ |
6,306 |
|
|
$ |
(5 |
) |
|
$ |
6,301 |
|
|
$ |
16,349 |
|
|
$ |
(14 |
) |
|
$ |
16,335 |
|
|
Provision for income taxes
|
|
$ |
1,944 |
|
|
$ |
(1 |
) |
|
$ |
1,943 |
|
|
$ |
5,068 |
|
|
$ |
(2 |
) |
|
$ |
5,066 |
|
|
Income before minority interest and cumulative effect of an
accounting change
|
|
$ |
4,362 |
|
|
$ |
(4 |
) |
|
$ |
4,358 |
|
|
$ |
11,281 |
|
|
$ |
(12 |
) |
|
$ |
11,269 |
|
|
Cumulative effect of an accounting change, net of tax
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
34 |
|
|
$ |
34 |
|
|
Net income
|
|
$ |
4,228 |
|
|
$ |
(4 |
) |
|
$ |
4,224 |
|
|
$ |
10,587 |
|
|
$ |
22 |
|
|
$ |
10,609 |
|
|
Net cash provided by (used in) operating activities
|
|
$ |
(615 |
) |
|
$ |
(4 |
) |
|
$ |
(619 |
) |
|
$ |
6,010 |
|
|
$ |
(6 |
) |
|
$ |
6,004 |
|
|
Net cash provided by financing activities
|
|
$ |
16,922 |
|
|
$ |
4 |
|
|
$ |
16,926 |
|
|
$ |
44,859 |
|
|
$ |
6 |
|
|
$ |
44,865 |
|
|
Basic earnings per share
|
|
$ |
1.62 |
|
|
$ |
|
|
|
$ |
1.62 |
|
|
$ |
4.06 |
|
|
$ |
0.01 |
|
|
$ |
4.07 |
|
|
Diluted earnings per share
|
|
$ |
1.61 |
|
|
$ |
|
|
|
$ |
1.61 |
|
|
$ |
4.03 |
|
|
$ |
0.01 |
|
|
$ |
4.04 |
|
|
The following table presents share-based compensation expenses,
including the cumulative effect of adoption of FAS 123R,
included in AIGs consolidated statement of income:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
(in millions) |
|
September 30, 2006 | |
|
September 30, 2006 | |
| |
Share-based compensation expense before tax
|
|
$ |
66 |
|
|
$ |
277 |
|
Income tax benefit
|
|
|
14 |
|
|
|
42 |
|
|
After-tax share-based compensation expense
|
|
$ |
52 |
|
|
$ |
235 |
|
|
Included in share-based compensation expense of
$277 million for the nine months ended September 30,
2006 was a one-time compensation cost of approximately
$54 million related to the Starr tender offer and various
out of period adjustments totalling $61 million, primarily
relating to stock-splits and other miscellaneous items for the
SICO plans, offset by a $46 million pre-tax adjustment for
the cumulative effect of the adoption of FAS 123R. These
items were recorded in the first quarter of 2006. See
Note 4 herein for a discussion of the Starr tender offer
and Note 8 herein for discussion of the prospective change
to the accounting for retiree eligibility provisions.
If AIG had adopted the FAS 123 provisions for recognizing
compensation expense commencing at the date of grant of the
awards, the effect would not have been material to net income or
basic or diluted earnings per share for the three and nine-month
periods ended September 30, 2005.
27
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
10. |
Stock Compensation
Plans (continued) |
1999 Stock Option Plan
The 1999 Plan provides that options to purchase a maximum of
45,000,000 shares of common stock can be granted to certain
key employees and members of the Board of Directors at prices
not less than fair market value at the date of grant.
The 1999 Plan was approved by the shareholders at the 2000
Annual Meeting of Shareholders, with certain amendments approved
at the 2003 Annual Meeting of Shareholders. The 1999 Plan
superseded the 1991 employee stock option plan (the 1991 Plan),
although outstanding options granted under the 1991 Plan
continue in force until exercise or expiration. The maximum
number of shares that may be granted to any employee in any one
year under the 1999 Plan is 900,000. Options granted under
the 1999 Plan generally vest over four years
(25 percent vesting per year) and expire 10 years from
the date of grant.
At September 30, 2006, there were 20,997,720 shares
reserved for future grants under the 1999 Plan and
27,787,332 shares reserved for issuance under the 1999 and
1991 Plans.
Deferrals
During 2005, options with respect to 1,731,471 shares were
exercised with delivery deferred. At December 31, 2005
optionees had made valid elections to defer delivery of
2,067,643 shares of AIG common stock upon exercise of
options expiring during 2006. Of these elections,
1,780,027 shares were exercised and deferred in the third
quarter of 2006. In addition, non-employee directors of AIG had
made valid elections to defer delivery of 21,093 shares of
AIG common stock upon exercise of options expiring during 2006.
Valuation Methodology
In 2004, AIG developed a binomial lattice model to calculate the
fair value of stock option grants. In prior years, a
Black-Scholes model was used. A more detailed description of the
valuation methodology is provided below.
The following weighted average assumptions were used for stock
options granted in the first nine months of 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
Expected annual dividend
yield(a)
|
|
|
0.71% |
|
|
|
0.36% |
|
Expected
volatility(b)
|
|
|
27.3% |
|
|
|
34.4% |
|
Risk-free interest
rate(c)
|
|
|
4.17% |
|
|
|
3.87% |
|
Expected
term(d)
|
|
|
7 years |
|
|
|
7 years |
|
|
|
|
(a) |
The dividend yield is based on the dividend yield over the
twelve month period prior to the grant date. |
(b) |
In 2006, expected volatility is the average of historical
volatility (based on seven years of daily stock price changes)
and the implied volatility of actively traded options on AIG
shares and in 2005, expected volatility is the historical
volatility based on five years of daily stock price changes. |
|
|
(c) |
The interest rate curves used in the valuation model were the
U.S. Treasury STRIP rates with terms from 3 months to
10 years. |
|
|
(d) |
The contractual term of the option is generally 10 years
with an expected term of 7 years calculated based on an
analysis of historical employee exercise behavior and employee
turnover (post-vesting terminations). The early exercise rate is
a function of time elapsed since the grant. Fifteen years of
historical data was used to estimate the early exercise rate. |
Additional information with respect to AIGs stock option
plans at September 30, 2006, and changes for the nine
months then ended, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
Options: |
|
Shares | |
|
Exercise Price | |
|
Outstanding at beginning of year
|
|
|
52,545,425 |
|
|
$ |
54.84 |
|
Granted
|
|
|
123,500 |
|
|
$ |
64.55 |
|
Exercised
|
|
|
(1,617,411 |
) |
|
$ |
34.02 |
|
Shares subject to deferred delivery
|
|
|
(1,780,027 |
) |
|
$ |
15.80 |
|
Forfeited or expired
|
|
|
(1,167,789 |
) |
|
$ |
69.77 |
|
Outstanding at end of period
|
|
|
48,103,698 |
|
|
$ |
56.65 |
|
Options exercisable at end of period
|
|
|
37,700,495 |
|
|
$ |
54.81 |
|
Weighted average fair value per share of options granted
|
|
|
|
|
|
$ |
21.11 |
|
|
28
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
10. |
Stock Compensation
Plans (continued) |
Information about stock options outstanding at
September 30, 2006, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
|
Weighted | |
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
Weighted | |
|
|
|
|
|
Average | |
|
Weighted | |
|
|
|
|
Remaining | |
|
Average | |
|
Aggregate Intrinsic | |
|
Number | |
|
Remaining | |
|
Average | |
|
Aggregate | |
Range of |
|
Number | |
|
Contractual | |
|
Exercise | |
|
Values | |
|
Exercisable | |
|
Contractual | |
|
Exercise | |
|
Intrinsic Values | |
Exercise Prices |
|
Outstanding | |
|
Life | |
|
Price | |
|
(in millions) | |
|
(vested) | |
|
Life | |
|
Price | |
|
(in millions) | |
| |
$11.28-$27.14
|
|
|
4,284,284 |
|
|
|
0.83 |
|
|
$ |
24.16 |
|
|
$ |
180 |
|
|
|
4,284,284 |
|
|
|
0.83 |
|
|
$ |
24.16 |
|
|
$ |
180 |
|
$30.44-$41.51
|
|
|
5,351,821 |
|
|
|
1.79 |
|
|
|
36.86 |
|
|
|
157 |
|
|
|
5,351,821 |
|
|
|
1.79 |
|
|
|
36.86 |
|
|
|
157 |
|
$43.31-$53.40
|
|
|
6,877,098 |
|
|
|
4.07 |
|
|
|
48.60 |
|
|
|
122 |
|
|
|
6,089,836 |
|
|
|
3.77 |
|
|
|
48.81 |
|
|
|
106 |
|
$54.11-$59.99
|
|
|
8,324,097 |
|
|
|
4.34 |
|
|
|
57.84 |
|
|
|
71 |
|
|
|
6,778,940 |
|
|
|
3.27 |
|
|
|
57.49 |
|
|
|
60 |
|
$60.13-$63.95
|
|
|
8,956,414 |
|
|
|
6.19 |
|
|
|
62.33 |
|
|
|
35 |
|
|
|
5,921,540 |
|
|
|
5.79 |
|
|
|
61.92 |
|
|
|
26 |
|
$64.01-$69.63
|
|
|
8,141,722 |
|
|
|
7.05 |
|
|
|
65.45 |
|
|
|
7 |
|
|
|
3,787,201 |
|
|
|
5.10 |
|
|
|
65.66 |
|
|
|
3 |
|
$70.35-$98.00
|
|
|
6,168,262 |
|
|
|
4.68 |
|
|
|
83.89 |
|
|
|
|
|
|
|
5,486,873 |
|
|
|
4.60 |
|
|
|
84.46 |
|
|
|
|
|
|
Total
|
|
|
48,103,698 |
|
|
|
4.55 |
|
|
$ |
56.65 |
|
|
$ |
572 |
|
|
|
37,700,495 |
|
|
|
3.64 |
|
|
$ |
54.81 |
|
|
$ |
532 |
|
|
Vested and expected-to-vest options as of September 30,
2006, included in the table above, totaled 44,125,436, with a
weighted average exercise price of $56.01, a weighted average
contractual life of 4.27 years and an aggregate intrinsic
value of $553 million.
As of September 30, 2006, total unrecognized compensation
cost (net of expected forfeitures) was $132 million and
$3 million related to non-vested share-based compensation
awards granted under the 1999 Plan and the 1996 Plan,
respectively, with blended weighted average periods of
1.32 years and 0.41 years, respectively. The cost of
awards outstanding under these plans at September 30, 2006
is expected to be recognized over approximately three years and
one year, respectively, for the 1999 Plan and the 1996 Plan.
The intrinsic value of options exercised during the nine months
ended September 30, 2006 was approximately
$138 million. The fair value of options vesting for the
nine months ended September 30, 2006 was approximately
$63 million. AIG received $55 million and
$28 million for the nine-month periods ended
September 30, 2006 and 2005, respectively, from the
exercise of stock options. AIG did not cash-settle any
share-based payment awards for the nine-month periods ended
September 30, 2006 and 2005. The tax benefits realized as a
result of stock option exercises were $15 million for both
the nine-month periods ended September 30, 2006 and 2005,
respectively.
2002 Stock Incentive Plan
AIGs 2002 Plan was adopted at the 2002 shareholders
meeting and amended and restated by the AIG Board of
Directors on September 18, 2002 (the 2002 Plan). The 2002
Plan provides that equity-based or equity-related awards with
respect to shares of common stock can be issued to employees in
any year up to a maximum of that number of shares equal to
(a) 1,000,000 shares plus (b) the number of
shares available but not issued in the prior calendar year. The
maximum award that a grantee may receive under the 2002 Plan per
year is rights with respect to 250,000 shares. For the
nine-month periods ended September 30, 2006 and 2005,
3,919,170 RSUs, including performance RSUs, and
1,133,405 RSUs, respectively, were granted by AIG. There
were 6,316,623 shares reserved for issuance in connection
with future awards at September 30, 2006. Substantially all
RSUs granted to date under the 2002 Plan other than performance
RSUs granted under the Partners Plan vest on the fourth
anniversary of the date of grant.
Director Stock Awards
The methodology used for valuing employee stock options is also
used to value director stock options. Director stock options
vest one year after the grant date, but are otherwise the same
as employee stock options. Options with respect to
40,000 shares and 32,500 shares were granted during
the nine months ended September 30, 2006 and 2005,
respectively.
AIG also granted 10,750 shares and 4,625 shares, with
delivery deferred, to directors for the nine-month periods ended
September 30, 2006 and 2005, respectively, under the
Director Stock Plan. At September 30, 2006, there were
74,250 shares reserved for future grants under the Director
Stock Plan.
Employee Stock Purchase Plan
AIGs 1996 Plan provides that eligible employees (those
employed at least one year) may receive privileges to purchase
up to an aggregate of 10,000,000 shares of AIG common
stock, at a price equal to 85 percent of the fair market
value on the date of the grant of the purchase privilege.
Purchase privileges are granted quarterly and are limited to the
number of whole shares that can be purchased on an annual basis
by
29
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
10. |
Stock Compensation
Plans (continued) |
an amount equal to the lesser of 10 percent of an
employees annual salary or $10,000.
SICO Plans
The SICO Plans provide that shares of AIG common stock currently
held by SICO are set aside for the benefit of the participant
and distributed upon retirement. The SICO Board of Directors
currently may permit an early payout of units under certain
circumstances. Prior to payout, the participant is not entitled
to vote, dispose of or receive dividends with respect to such
shares, and shares are subject to forfeiture under certain
conditions, including but not limited to the participants
termination of employment with AIG prior to normal retirement
age.
Historically, SICOs Board of Directors could elect to pay
a participant cash in lieu of shares of AIG common stock.
On December 9, 2005, SICO notified participants that
essentially all subsequent distributions would be made only in
shares, and not cash. As of that date, AIG modified its
accounting for the SICO Plans from variable to fixed measurement
accounting. Variable measurement accounting is used for those
few awards for which cash elections had been made prior to March
2005. The SICO Plans are also described in Note 4 herein.
Although none of the costs of the various benefits provided
under the SICO Plans has been paid by AIG, AIG has recorded a
charge to reported earnings for the deferred compensation
amounts paid to AIG employees by SICO, with an offsetting amount
credited to additional
paid-in capital
reflecting amounts deemed contributed by SICO.
As of December 9, 2005, there were 12,650,292 non-vested
AIG shares under the SICO Plans with a weighted-average fair
value per share of $61.92. As of September 30, 2006, there
were 11,656,065 non-vested AIG shares under the SICO Plans with
a weighted-average fair value per share of $61.90.
A significant portion of the awards under the SICO Plans vest
upon retirement if the participant reaches age 65. The
portion of the awards for which early payout is available vest
on the applicable payout date.
AIG DCPPP
Effective September 21, 2005, AIG adopted the
AIG DCPPP, which provides equity-based compensation to key
AIG employees, including senior executive officers. The
AIG DCPPP was modeled on the SICO Plans.
The AIG DCPPP contingently allocates a fixed number of shares to
each participant if AIGs cumulative adjusted earnings per
share for 2005 and 2006 exceed that for 2003 and 2004. The
performance period is September 21, 2005 to
December 31, 2006. At the end of the performance period,
common shares are contingently allocated. The service period and
related vesting consists of three pre-retirement tranches and a
final retirement tranche at age 65.
At September 30, 2006, there were units representing
4,643,722 shares granted to participants.
AIG Partners Plan
On June 26, 2006, AIGs Compensation Committee
approved two grants under the AIG Partners Plan. The first grant
has a performance period which runs from January 1, 2006
through December 31, 2007. The second grant has a
performance period which runs from January 1, 2007 through
December 31, 2008. Both grants vest 50 percent on the
fourth and sixth anniversaries of the first day of the related
performance period. In addition, the Compensation Committee
approved the performance metrics for the two grants prior to the
date of grant. The measurement of the grants is deemed to have
occurred on June 26, 2006 when there was mutual
understanding of the key terms and conditions of the grants.
Consistent with this treatment:
a) 1,068,605 performance RSUs for the first grant and
2,488,865 performance RSUs for the second grant and
b) unrecognized compensation of $55 million for the
first grant and $138 million for the second grant are
included in the related disclosure tables. Performance RSUs
related to the first grant are excluded from AIGs diluted
shares calculation because an insufficient amount of time has
elapsed to conclusively determine that the performance metric
will be achieved at the end of the related performance period.
Because the performance period for the second grant does not
begin until January 1, 2007, compensation expense for the
second grant is not included in AIGs 2006 results and
diluted shares calculation.
VALUATION
The fair value of each award granted under the 2002 Plan,
the AIG DCPPP, the AIG Partners Plan, and the SICO Plans is
based on the closing price of AIG stock on the date of grant.
30
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
|
|
10. |
Stock Compensation
Plans (continued) |
A summary of shares relating to outstanding awards unvested
under the foregoing plans as of September 30, 2006, and
changes during the nine months ended September 30, 2006 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares | |
|
Weighted Average Grant-Date Fair Value | |
|
|
| |
|
| |
|
|
|
|
AIG | |
|
AIG Partners | |
|
Total | |
|
SICO | |
|
|
|
AIG | |
|
AIG Partners | |
|
Total | |
|
SICO | |
|
|
2002 Plan | |
|
DCPPP | |
|
Plan | |
|
2002 Plan | |
|
Plans | |
|
2002 Plan | |
|
DCPPP | |
|
Plan | |
|
2002 Plan | |
|
Plans | |
| |
Unvested at January 1, 2006
|
|
|
4,322,265 |
|
|
|
4,898,880 |
|
|
|
|
|
|
|
9,221,145 |
|
|
|
12,650,292 |
|
|
$ |
63.63 |
|
|
$ |
52.55 |
|
|
$ |
|
|
|
$ |
57.74 |
|
|
$ |
61.92 |
|
Granted
|
|
|
315,170 |
|
|
|
|
|
|
|
3,604,000 |
|
|
|
3,919,170 |
|
|
|
|
|
|
|
62.11 |
|
|
|
|
|
|
|
56.42 |
|
|
|
56.88 |
|
|
|
|
|
Vested
|
|
|
(5,080 |
) |
|
|
|
|
|
|
|
|
|
|
(5,080 |
) |
|
|
(653,486 |
) |
|
|
64.25 |
|
|
|
|
|
|
|
|
|
|
|
64.25 |
|
|
|
64.55 |
|
Forfeited
|
|
|
(187,680 |
) |
|
|
(255,158 |
) |
|
|
(16,200 |
) |
|
|
(459,038 |
) |
|
|
(340,741 |
) |
|
|
62.47 |
|
|
|
59.40 |
|
|
|
56.22 |
|
|
|
60.54 |
|
|
|
61.01 |
|
|
Unvested at September 30, 2006
|
|
|
4,444,675 |
|
|
|
4,643,722 |
|
|
|
3,587,800 |
|
|
|
12,676,197 |
|
|
|
11,656,065 |
|
|
$ |
63.57 |
|
|
$ |
52.17 |
|
|
$ |
56.42 |
|
|
$ |
57.37 |
|
|
$ |
61.90 |
|
|
At September 30, 2006, the total unrecognized compensation
cost (net of expected forfeitures) related to non-vested
share-based compensation awards granted under the 2002 Plan, the
AIG DCPPP, the AIG Partners Plan and the SICO plans and the
blended weighted-average period over which that cost is expected
to be recognized is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized | |
|
Blended | |
|
|
Compensation | |
|
Weighted- | |
|
|
Cost | |
|
Average | |
|
|
(in millions) | |
|
Period | |
| |
2002 Plan
|
|
$ |
178 |
|
|
|
1.62 years |
|
|
AIG DCPPP
|
|
$ |
231 |
|
|
|
4.57 years |
|
|
AIG Partners Plan
|
|
$ |
195 |
|
|
|
2.56 years |
|
Total 2002 Plan
|
|
$ |
604 |
|
|
|
3.05 years |
|
SICO Plans
|
|
$ |
313 |
|
|
|
6.06 years |
|
|
The total cost for awards outstanding as of September 30,
2006 under the 2002 Plan, the AIG DCPPP, the AIG Partners Plan,
and the SICO Plans is expected to be recognized over
approximately 4 years, 12 years, 6 years and 23 years,
respectively.
31
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
(continued)
American International Group, Inc. and Subsidiaries
As part of its remediation activities during the third quarter
of 2006, AIG determined that certain non-cash activities and
adjustments, including the effects of changes in foreign
exchange translation on assets and liabilities, previously were
misclassified within the operating, investing and financing
sections of the Consolidated Statement of Cash Flows. The more
significant line items revised include the change in General and
life insurance reserves and Deferred policy acquisition costs
within operating activities; Purchases of fixed maturity
securities within investing activities; and Proceeds from notes,
bonds, loans and mortgages payable, and hybrid financial
instrument liabilities within financing activities. After
evaluating the effect of these items during the third quarter of
2006, AIG has revised the previous periods presented below to
conform to the third quarter 2006 presentation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) | |
| |
|
|
Six Months Ended | |
|
|
|
Three Months Ended | |
|
|
|
Year Ended | |
|
|
|
Nine Months Ended | |
|
|
|
Six Months Ended | |
|
|
|
Three Months Ended | |
|
|
June 30, 2006 | |
|
|
|
March 31, 2006 | |
|
|
|
December 31, 2005 | |
|
|
|
September 30, 2005 | |
|
|
|
June 30, 2005 | |
|
|
|
March 31, 2005 | |
| |
Cash flows from operating activities As previously
reported
|
|
$ |
6,978 |
|
|
|
|
$ |
3,066 |
|
|
|
|
$ |
25,138 |
|
|
|
|
$ |
20,865 |
* |
|
|
|
$ |
13,817 |
|
|
|
|
$ |
(434 |
) |
Revisions
|
|
|
(355 |
) |
|
|
|
|
1,076 |
|
|
|
|
|
(52 |
) |
|
|
|
|
(675 |
) |
|
|
|
|
(2,163 |
) |
|
|
|
|
(1,563 |
) |
|
Cash flows from operating activities As revised
|
|
$ |
6,623 |
|
|
|
|
$ |
4,142 |
|
|
|
|
$ |
25,086 |
|
|
|
|
$ |
20,190 |
|
|
|
|
$ |
11,654 |
|
|
|
|
$ |
(1,997 |
) |
|
Cash flows from investing activities As previously
reported
|
|
$ |
(40,048 |
) |
|
|
|
$ |
(19,937 |
) |
|
|
|
$ |
(57,321 |
) |
|
|
|
$ |
(47,391 |
)* |
|
|
|
$ |
(35,358 |
) |
|
|
|
$ |
(20,118 |
) |
Revisions
|
|
|
5,682 |
|
|
|
|
|
1,724 |
|
|
|
|
|
(7,544 |
) |
|
|
|
|
(5,186 |
) |
|
|
|
|
(2,863 |
) |
|
|
|
|
775 |
|
|
Cash flows from investing activities As revised
|
|
$ |
(34,366 |
) |
|
|
|
$ |
(18,213 |
) |
|
|
|
$ |
(64,865 |
) |
|
|
|
$ |
(52,577 |
) |
|
|
|
$ |
(38,221 |
) |
|
|
|
$ |
(19,343 |
) |
|
Cash flows from financing activities As previously
reported
|
|
$ |
32,243 |
|
|
|
|
$ |
15,672 |
|
|
|
|
$ |
32,999 |
|
|
|
|
$ |
27,230 |
* |
|
|
|
$ |
22,097 |
|
|
|
|
$ |
20,961 |
|
Revisions
|
|
|
(4,304 |
) |
|
|
|
|
(2,273 |
) |
|
|
|
|
6,831 |
|
|
|
|
|
5,346 |
|
|
|
|
|
4,275 |
|
|
|
|
|
725 |
|
|
Cash flows from financing activities As revised
|
|
$ |
27,939 |
|
|
|
|
$ |
13,399 |
|
|
|
|
$ |
39,830 |
|
|
|
|
$ |
32,576 |
|
|
|
|
$ |
26,372 |
|
|
|
|
$ |
21,686 |
|
|
Effect of exchange rate changes on cash As
previously reported
|
|
$ |
1,070 |
|
|
|
|
$ |
550 |
|
|
|
|
$ |
(928 |
) |
|
|
|
$ |
(605 |
)* |
|
|
|
$ |
(827 |
) |
|
|
|
$ |
(57 |
) |
Revisions
|
|
|
(1,023 |
) |
|
|
|
|
(527 |
) |
|
|
|
|
765 |
|
|
|
|
|
515 |
|
|
|
|
|
751 |
|
|
|
|
|
63 |
|
|
Effect of exchange rate changes on cash As revised
|
|
$ |
47 |
|
|
|
|
$ |
23 |
|
|
|
|
$ |
(163 |
) |
|
|
|
$ |
(90 |
) |
|
|
|
$ |
(76 |
) |
|
|
|
$ |
6 |
|
|
|
|
* |
Includes the effects of corrections and reclassifications
made in conjunction with the Second Restatement. See also
AIGs 2005 Annual Report on
Form 10-K/A. |
There was no effect on ending cash balances.
32
American International Group, Inc. and Subsidiaries
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial
Condition and Results of Operations is designed to provide the
reader a narrative with respect to AIGs operations,
financial condition and liquidity and certain other significant
matters.
INDEX
Cautionary Statement Regarding Projections and Other
Information About Future Events
This Quarterly Report and other publicly available documents may
include, and AIGs officers and representatives may from
time to time make, projections concerning financial information
and statements concerning future economic performance and
events, plans and objectives relating to management, operations,
products and services, and assumptions underlying these
projections and statements. These projections and statements are
not historical facts but instead represent only AIGs
belief regarding future events, many of which, by their nature,
are inherently uncertain and outside AIGs control. These
projections and statements may address, among other things, the
status and potential future outcome of the current regulatory
and civil proceedings against AIG and their potential effect on
AIGs businesses, financial position, results of
operations, cash flows and liquidity, the effect of the credit
rating downgrades on AIGs businesses and competitive
position, the unwinding and resolving of various relationships
between AIG and Starr and SICO, and AIGs strategy for
growth, product development, market position, financial results
and reserves. It is possible that AIGs actual results and
financial condition may differ, possibly materially, from the
anticipated results and financial condition indicated in these
projections and statements. Factors that could cause AIGs
actual results to differ, possibly materially, from those in the
specific projections and statements are discussed throughout
this Managements Discussion and Analysis of Financial
Condition and Results of Operations and in Risk
Factors in Item 1A. of Part I of AIGs 2005
Annual Report on
Form 10-K,
Item 1A. of Part II of AIGs Quarterly Report on
Form 10-Q for the
quarter ended March 31, 2006 and Item 1A. of Part II
of this Quarterly Report. AIG is not under any obligation (and
expressly disclaims any such obligations) to update or alter any
projections or other statement, whether written or oral, that
may be made from time to time, whether as a result of new
information, future events or otherwise.
33
American International Group, Inc. and Subsidiaries
Throughout this Managements Discussion and Analysis of
Financial Condition and Results of Operations, AIG presents its
operations in the way it believes will be most meaningful.
Statutory loss ratios and combined ratios are presented in
accordance with accounting principles prescribed by insurance
regulatory authorities because these are standard measures of
performance filed with insurance regulatory authorities and used
for analysis in the insurance industry and thus allow more
meaningful comparisons with AIGs insurance competitors.
AIG has also incorporated into this discussion a number of
cross-references to additional information included throughout
this Form 10-Q and its
2005 Annual Report on
Form 10-K/A for
the year ended December 31, 2005 (2005 Annual Report on
Form 10-K/A) to
assist readers seeking related information on a particular
subject.
Overview of Operations and Business Results
AIG identifies its reportable segments by product line,
consistent with its management structure. AIGs major
product and service groupings are General Insurance, Life
Insurance & Retirement Services, Financial Services and
Asset Management. AIGs operations in 2006 are conducted by
its subsidiaries principally through these segments. Through
these segments, AIG provides insurance and investment products
and services to both businesses and individuals in more than
130 countries and jurisdictions. This geographic, product
and service diversification is one of AIGs major strengths
and sets it apart from its competitors. The Other category
consists of items not allocated to AIGs operating segments.
AIGs subsidiaries serve commercial, institutional and
individual customers through an extensive property-casualty and
life insurance and retirement services network. In the United
States, AIG companies are the largest underwriters of commercial
and industrial insurance and one of the largest life insurance
and retirement services operations as well. AIGs Financial
Services businesses include commercial aircraft and equipment
leasing, capital markets operations and consumer finance, both
in the United States and abroad. AIG also provides asset
management services to institutions and individuals. As part of
its spread-based business activities, AIG issues various debt
instruments in the public and private markets.
AIGs operating performance reflects implementation of
various long-term strategies and defined goals in its various
operating segments. A primary goal of AIG in managing its
General Insurance operations is to achieve an underwriting
profit. To achieve this goal, AIG must be disciplined in its
risk selection and premiums must be adequate and terms and
conditions appropriate to cover the risk accepted. AIG also
believes in strict control of expenses.
A central focus of AIG operations in recent years is the
development and expansion of new distribution channels. In 2005
and the first nine months of 2006, AIG expanded its distribution
channels, which now include banks, credit card companies and
television-media home shopping in many Asian countries. Examples
of new distribution channels used both domestically and overseas
include banks, affinity groups, direct response and e-commerce.
AIG patiently builds relationships in markets around the world
where it sees long-term growth opportunities. For example, the
fact that AIG has the only wholly-owned foreign life insurance
operations in eight cities in China is the result of
relationships developed over nearly 30 years. AIGs
more recent extensions of operations into India, Vietnam, Russia
and other emerging markets reflect the same growth strategy.
Moreover, AIG believes in investing in the economies and
infrastructures of these countries and growing with them. When
AIG companies enter a new jurisdiction, they typically offer
both basic protection and savings products. As the economies
evolve, AIGs products evolve with them, to more
sophisticated and investment-oriented models.
Growth for AIG may be generated both internally and through
acquisitions which both fulfill strategic goals and offer
adequate return on capital. Recently AIG acquired Travel Guard
International, one of the nations leading providers of
travel insurance programs and emergency travel assistance, and
Central Insurance Co., Ltd., a leading general insurance company
in Taiwan.
Consolidated Results
The following table summarizes AIGs revenues, income
before income taxes, minority interest and cumulative effect of
an accounting change and net income for the three and
nine-month periods
ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Total revenues
|
|
$ |
29,199 |
|
|
$ |
26,408 |
|
|
$ |
83,201 |
|
|
$ |
81,513 |
|
|
Income before income taxes, minority interest and cumulative
effect of an accounting change
|
|
|
6,301 |
|
|
|
2,547 |
|
|
|
16,335 |
|
|
|
14,897 |
|
|
Net income
|
|
$ |
4,224 |
|
|
$ |
1,745 |
|
|
$ |
10,609 |
|
|
$ |
10,033 |
|
|
Revenues in the third quarter and first nine months of 2006
increased 11 percent and 2 percent, respectively,
largely as a result of the growth in net premiums earned and net
investment income from global General Insurance operations and
growth in Life Insurance & Retirement Services net
investment income and GAAP premiums. Revenues in the Financial
Services segment increased in the third quarter of 2006, but
decreased for the first nine months of 2006 largely
34
American International Group, Inc. and Subsidiaries
as a result of hedging activities that do not qualify for hedge
accounting treatment under FAS 133, the effects of which
are reported in other income.
Income before income taxes, minority interest and cumulative
effect of an accounting change in the three and nine-month
periods ended September 30, 2006 increased 147 percent
and 10 percent, respectively, with the significant increase
primarily a reflection of the negative effect of
$2.44 billion in catastrophe related losses incurred in the
third quarter of 2005. The 2006 periods also included higher
General Insurance and Life Insurance & Retirement
Services operating income. Fluctuations in Financial Services
operating income in all periods presented were driven by the
transaction oriented nature of Capital Markets operations and
the effects of hedging activities that do not qualify for hedge
accounting treatment under FAS 133.
During the third quarter and nine months ended
September 30, 2006, as part of its continuing remediation
efforts, AIG recorded certain out of period and other
adjustments. These adjustments collectively increased net income
by $73 million in the third quarter of 2006 and decreased
net income by $29 million for the first nine months of
2006. The third quarter adjustments included the following: an
increase in realized capital gains relating to foreign exchange
of $36 million ($23 million after tax); increases in
bad debt expense of $225 million ($146 million after
tax) and earned premiums of $99 million ($65 million
after tax), both of which relate to balance sheet
reconciliations; an increase in partnership income of
$121 million ($79 million after tax), which relates to
improved valuation information; a further increase in unit
investment trust income of $116 million ($75 million
after tax), as described below; and an increase in income tax
expense of $39 million relating to AIGs ongoing
remediation of internal controls over income tax accounting. See
also the discussion of AIGs reportable segments in
Managements Discussion & Analysis of Financial
Condition and Results of Operations.
During the second quarter of 2006, AIG identified and recorded
an out of period adjustment related to the accounting for
certain interests in unit investment trusts in accordance with
FIN 46(R), Consolidation of Variable Interest
Entities and APB Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock.
These investments had previously been accounted for as available
for sale securities, with changes in market values being
reflected in other comprehensive income, net of deferred income
taxes. Beginning with the second quarter of 2006, the changes in
market values are included in AIGs net investment income.
During the second quarter of 2006, the adjustment decreased
Unrealized appreciation (depreciation) of
investments net of reclassification adjustments, and
the related Deferred income tax benefit (expense), in the
Consolidated Statement of Comprehensive Income (Loss) by
approximately $576 million and approximately
$202 million, respectively, and increased Net investment
income by $653 million, increased Incurred policy losses
and benefits, related to certain participating policyholder
funds, by $77 million, and increased Income taxes by
$202 million in the Consolidated Statement of Income. There
was no effect on Total shareholders equity as of
September 30, 2006 or December 31, 2005.
In the second quarter of 2006, AIG also recorded other out of
period adjustments of $85 million ($55 million after
tax) of interest income related to interest earned on deposit
contracts and $32 million ($21 million after tax) of
expenses related to the remediation of a material weakness in
controls over certain balance sheet reconciliations.
AIG also recorded other out of period adjustments in the first
quarter of 2006 of $61 million (before and after tax) of
expenses related to the SICO plans, $59 million
($38 million after tax) of expenses related to deferred
advertising costs in General Insurance, a decrease of
$300 million ($145 million after tax) in revenues
related to the remediation of a material weakness in accounting
for certain derivative transactions under FAS 133, and
$126 million of income tax expense related to AIGs
remediation of a material weakness in controls over income tax
accounting.
Results for the first nine months of 2006 were negatively
affected by a one-time charge relating to the 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.
The effective income tax rate increased from 28.0 percent
for full year 2005 to 30.8 percent and 31.0 percent
for the three and
nine-month periods
ended September 30, 2006, respectively, reflecting changes
in the sources of foreign taxable income, the effect of the
phase out of synfuel tax credits on the estimated full year tax
rate and the aforementioned out of period adjustments.
35
American International Group, Inc. and Subsidiaries
The following table summarizes the operations of each
principal segment for the three and nine-month periods ended
September 30, 2006 and 2005. (See also Note 2 of Notes
to Consolidated Financial Statements).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Revenues(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Insurance(b)(h)
|
|
$ |
12,615 |
|
|
$ |
11,192 |
|
|
$ |
36,438 |
|
|
$ |
33,816 |
|
|
Life Insurance & Retirement
Services(c)(h)
|
|
|
12,356 |
|
|
|
11,760 |
|
|
|
36,819 |
|
|
|
35,086 |
|
|
Financial
Services(d)
|
|
|
3,187 |
|
|
|
1,926 |
|
|
|
6,028 |
|
|
|
8,140 |
|
|
Asset
Management(e)
|
|
|
1,238 |
|
|
|
1,355 |
|
|
|
4,098 |
|
|
|
3,951 |
|
|
Other
|
|
|
(197 |
) |
|
|
175 |
|
|
|
(182 |
) |
|
|
520 |
|
|
Consolidated
|
|
$ |
29,199 |
|
|
$ |
26,408 |
|
|
$ |
83,201 |
|
|
$ |
81,513 |
|
|
Operating Income
(loss)(a)(f)(i)(j):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Insurance(h)
|
|
$ |
2,625 |
|
|
$ |
(137 |
) |
|
$ |
7,819 |
|
|
$ |
3,390 |
|
|
Life Insurance & Retirement
Services(g)(h)
|
|
|
2,448 |
|
|
|
2,248 |
|
|
|
7,424 |
|
|
|
6,787 |
|
|
Financial
Services(g)
|
|
|
1,357 |
|
|
|
224 |
|
|
|
650 |
|
|
|
3,483 |
|
|
Asset Management
|
|
|
341 |
|
|
|
568 |
|
|
|
1,613 |
|
|
|
1,682 |
|
|
Other(k)
|
|
|
(470 |
) |
|
|
(356 |
) |
|
|
(1,171 |
) |
|
|
(445 |
) |
|
Consolidated
|
|
$ |
6,301 |
|
|
$ |
2,547 |
|
|
$ |
16,335 |
|
|
$ |
14,897 |
|
|
|
|
(a) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133, including the
related foreign exchange gains and losses. For the three-month
periods ended September 30, 2006 and 2005, the effect was
$165 million and $(353) million, respectively, in
revenues and $165 million and $(345) million,
respectively, in operating income. For the nine-month periods
ended September 30, 2006 and 2005, the effect was
$(1.13) billion and $2.21 billion, respectively, in
revenues and $(1.13) billion and $2.28 billion,
respectively, in operating income. These amounts result
primarily from interest rate and foreign currency derivatives
which are hedging available for sale securities and
borrowings. |
(b) |
Represents the sum of General Insurance net premiums earned,
net investment income and realized capital gains (losses). |
|
|
(c) |
Represents the sum of Life Insurance & Retirement
Services GAAP premiums, net investment income and realized
capital gains (losses). |
|
|
(d) |
Represents interest, lease and finance charges. |
|
|
(e) |
Represents net investment income with respect to GICs and
management and advisory fees. |
(f) |
Represents income before income taxes, minority interest and
cumulative effect of an accounting change. |
|
|
(g) |
Results of operations of AIG Credit Card Company (Taiwan) are
shared equally by the Life Insurance & Retirement
Services segment and the Financial Services segment. Additional
allowances of $44 million were recorded in the first
quarter of 2006, by each segment, for losses in these credit
card operations. |
|
|
(h) |
Includes the effect of out of period adjustments related to
the accounting for certain interests in unit investment trusts.
For the three and nine- month periods ended September 30,
2006 the effect was an increase of $92 million and
$524 million in both revenues and operating income for
General Insurance and an increase of $24 million in both
revenues and operating income for the three-month period ended
September 30, 2006 and $245 million and
$168 million in revenues and operating income,
respectively, for the nine-month period ended September 30,
2006, for Life Insurance & Retirement Services. |
|
|
(i) |
Includes current year catastrophe related losses of
$2.44 billion in both the third quarter and first nine
months of 2005. There were no significant catastrophe related
losses in the third quarter and first nine months of 2006. |
|
|
(j) |
Includes additional losses incurred and net reinstatement
premiums related to prior year catastrophes of $28 million
and $39 million in the three- month periods ended
September 30, 2006 and 2005, respectively. Such losses and
premiums were $87 million and $252 million in the
nine-month periods ended September 30, 2006 and 2005,
respectively. |
|
|
(k) |
Includes current year catastrophe related losses from
unconsolidated subsidiaries of $246 million for both the
third quarter and first nine months of 2005. There were no
significant catastrophe related losses in the third quarter and
first nine months of 2006. Also includes unfavorable development
from unconsolidated subsidiaries related to prior year
catastrophe related losses of $1 million and
$15 million for the first nine months of 2006 and 2005,
respectively. |
General Insurance
AIGs General Insurance operations provide property and
casualty products and services throughout the world. The
increase in General Insurance operating income in the three and
nine-month periods ended September 30, 2006 compared to the
same periods of 2005 was primarily attributable to catastrophe
related losses of $2.11 billion in the third quarter of
2005 and the improvement in underwriting results for the
Domestic Brokerage Group (DBG). General Insurance operating
income included adverse development in the first nine months of
2006 and 2005 from catastrophes in prior years and certain
long-tail casualty lines, which were more than offset by
favorable development in other lines. Operating income for the
three and nine-month
periods ended September 30, 2006 also increased due to the
effect of the out of period adjustments related to the
accounting for certain interests in unit investment trusts,
partially offset by reconciliation adjustments.
Life Insurance & Retirement Services
AIGs Life Insurance & Retirement Services operations
provide insurance, financial and investment products throughout
the world. Foreign operations provided approximately
65 percent and 61 percent of AIGs Life Insurance
& Retirement Services operating income for the three months
ended September 30, 2006 and 2005, respectively, and
67 percent and 59 percent, respectively, for the first
nine months of 2006 and 2005.
Life Insurance & Retirement Services operating income
increased $200 million in the third quarter of 2006 from
the same period of 2005. Results for the quarter were
particularly strong in the Foreign Life operations that were
helped by
36
American International Group, Inc. and Subsidiaries
higher investment returns and lower acquisition costs. Domestic
Life and Retirement Services results improved over the prior
year with growth in the
in-force business and
lower catastrophe and synfuel losses. Life Insurance &
Retirement Services operating income included $12 million
in catastrophe related losses in the third quarter of 2005.
Realized capital losses included in revenues and operating
income were $176 million in the third quarter of 2006
compared to realized capital losses of $16 million in the
same period of 2005.
Life Insurance & Retirement Services operating income
increased by 9 percent in the first nine months of 2006
when compared to the same period of 2005 due, in part, to the
effect of an out of period adjustment related to the accounting
for certain interests in unit investment trusts. Realized
capital losses included in revenues and operating income were
$117 million in the first nine months of 2006 compared to
realized capital losses of $18 million in the same period
of 2005.
Financial Services
AIGs Financial Services subsidiaries engage in diversified
activities including aircraft and equipment leasing, capital
market transactions, consumer finance and insurance premium
financing.
Financial Services operating income increased in the third
quarter of 2006 and decreased in the first nine months of 2006
compared to the same periods of 2005 primarily due to the
effects of hedging activities that do not qualify for hedge
accounting treatment under FAS 133. Financial Services
operating income in 2005 included catastrophe related losses of
$62 million recorded in the third quarter of 2005 resulting
from hurricane Katrina, which were reduced by $22 million
in the third quarter of 2006. Fluctuations in revenues and
operating income from quarter to quarter are not unusual because
of the transaction-oriented nature of Capital Markets operations
and the effect of not qualifying for hedge accounting treatment
under FAS 133 for hedges on securities available for sale
and borrowings.
Asset Management
AIGs Asset Management operations include institutional and
retail asset management and broker dealer services and
AIGs spread-based investment businesses. The AIG Matched
Investment Program (MIP), which was launched in September of
2005, is replacing AIGs GIC program as AIGs
principal spread-based investment activity.
Asset Management operating income decreased 40 percent for
the third quarter of 2006 when compared to the same period of
2005 due to the continued
run-off of GICs and
decreased transaction-driven fees partially offset by growth in
the asset management fees within Institutional Asset Management
and income from AIGs MIP. Gains and losses arising from
the consolidation of certain variable interest entities and
partnerships are included in operating income, but are offset in
minority interest expense, which is not a component of operating
income. Operating income decreased 4 percent in the first
nine months of 2006 when compared to the same period of 2005,
primarily due to the continued
run-off of GIC balances
combined with spread compression in the remaining GIC portfolio.
Capital Resources
At September 30, 2006, AIG had total consolidated
shareholders equity of $96.15 billion and total
consolidated borrowings of $137.1 billion. At that date,
$122.1 billion of such borrowings were either not
guaranteed by AIG or were AIGFPs matched borrowings under
obligations of guaranteed investment agreements (GIAs),
liabilities connected to trust preferred stock, or matched notes
and bonds payable.
AIG has not purchased any shares of its common stock under its
existing common stock repurchase authorization during 2006.
Liquidity
At September 30, 2006, AIGs consolidated invested
assets included $24.14 billion in cash and short-term
investments. Consolidated net cash provided from operating
activities in the first nine months of 2006 amounted to
$6.0 billion. AIG believes that its liquid assets, cash
provided by operations and access to the capital markets will
enable it to meet its anticipated cash requirements.
Outlook
The commercial property and casualty insurance industry has
historically experienced cycles of price erosion followed by
rate strengthening as a result of catastrophe or other
significant losses that affect the overall capacity of the
industry to provide coverage. Despite industry price erosion in
some classes of general insurance, AIG expects to continue to
identify profitable opportunities and build attractive new
general insurance businesses as a result of AIGs broad
product line and extensive distribution networks. There can be
no assurance, however, that price erosion will not become more
widespread or that AIGs profitability will not deteriorate
from current levels in major commercial lines, as well as in
personal lines and specialty coverages, such as mortgage
guaranty, where the loss ratio is expected to increase due to
softening in the U.S. housing market and the weakening
performance of non-traditional mortgage products.
In December 2005, American International Underwriters Overseas,
Ltd. (AIUO) received a license from the government of Vietnam to
operate a wholly owned general insurance company in Vietnam.
This license, the first general insurance license granted by
Vietnam to a U.S.-based insurance organization, permits AIG to
operate a general insurance company throughout Vietnam.
37
American International Group, Inc. and Subsidiaries
During the second quarter of 2006, the Canadian Parliament
passed legislation that will allow UGC to begin writing business
in Canada, the worlds second largest mortgage guaranty
market, when provincial licenses are issued.
In China, applications for provincial expansion of AIGs
life insurance operations in Guangdong and Jiangsu and of
general insurance operations in Guangdong were approved in April
2006. AIGs wholly-owned life insurance operations in eight
cities have now been structured into four regional management
teams located in Shanghai, Beijing, Guangdong Province and
Jiangsu Province. AIGs operations are expanding resources
in these regions with the opening of additional offices.
In Japan, earnings growth for AIG Star Life Insurance Co., Ltd.
and AIG Edison Life Insurance Company reflects the runoff of the
more profitable in-force business in comparison to new business
currently being generated. In May 2006, AIG announced the merger
of these companies, which is expected to enhance the combined
entitys ability to grow new business by expanding
distribution and gaining efficiency of scale. In the fiscal year
ended March 31, 2006, AIGs life operations in Japan
retained their position as the largest foreign life operation on
a total premium basis. AIG has developed a leadership position
in the distribution of annuities through banks in both Japan and
Korea. Also, American Life Insurance Company (ALICO) has
launched new life products to the Japan bank market after
further deregulation of banks in December 2005. AIG is a leader
in direct marketing through sponsors and in the broad market in
Japan and Korea. AIG also is investing in expanding distribution
channels with emphasis in India, Korea and Vietnam.
Domestically, AIG anticipates its Life Insurance &
Retirement Services businesses to continue growing in 2006
through distribution channel expansion and new and enhanced
products. The home service operation, which is expected to be a
slow growth business, has not met business objectives, although
its cash flow has been strong. Domestic group life/health
results continue to be weak, resulting in ongoing restructuring
activities which may result in the exiting of certain product
lines. AIG Retirement Services individual fixed annuities
business will continue to be challenged due to the interest rate
environment and increased competition from bank products, while
variable annuity products with living benefits will continue to
be the product of consumer choice.
Globally, heightened regulatory scrutiny of financial services
companies in many jurisdictions has the potential to affect
future financial results through higher compliance costs or
other charges. This is particularly true in Japan and Southeast
Asia where financial institutions have received an increased
number of remediation orders affecting consumer/policyholder
rights over the last twelve months.
Changes in market conditions in the aircraft leasing business
are not immediately apparent in operating results. Lease rates
have firmed as a result of continued demand from the global
commercial aviation market, especially in Asia. However, higher
interest rates are expected to continue to compress lease
margins. AIGs Consumer Finance operations overseas were
negatively affected in the first quarter of 2006 by
industry-wide credit deterioration in the Taiwan credit card
market. The operating results of AIGs Consumer Finance
operations in the U.S. could be affected by the residential
housing market, interest rates and unemployment. Also, AIG
continues to explore opportunities to expand its Consumer
Finance operations into new foreign markets.
The GIC portfolio continues to run-off. The MIP has replaced the
GIC program as AIGs principal spread-based investment
activity. Although the MIP is beginning to show positive
operating income, because the asset mix under the MIP does not
include the alternative investments utilized in the GIC program,
AIG does not expect that the income growth in the MIP will
offset the run-off in the GIC portfolio for the foreseeable
future.
AIG has many promising growth initiatives underway around the
world. Cooperative agreements such as those with PICC Property
and Casualty Company Limited and various banks in the U.S.,
Japan and Korea are expected to expand distribution networks for
AIGs products and provide models for future growth.
Critical Accounting Estimates
AIG considers its most critical accounting estimates those with
respect to reserves for losses and loss expenses, future policy
benefits for life and accident and health contracts, deferred
policy acquisition costs, estimated gross profits for
investment-oriented products, fair value determinations for
certain Capital Markets assets and liabilities,
other-than-temporary declines in the value of investments and
flight equipment recoverability. These accounting estimates
require the use of assumptions about matters, some of which are
highly uncertain at the time of estimation. To the extent actual
experience differs from the assumptions used, AIGs results
of operations would be directly affected.
Throughout this Managements Discussion and Analysis of
Financial Condition and Results of Operations, AIGs
critical accounting estimates are discussed in detail. The major
categories for which assumptions are developed and used to
establish each critical accounting estimate are highlighted
below.
Reserves for Losses and Loss Expenses and Reinsurance
Recoverable (General Insurance):
|
|
|
Loss trend factors: used to establish expected loss
ratios for subsequent accident years based on premium rate
adequacy and the projected loss ratio with respect to prior
accident years. |
|
Expected loss ratios for the latest accident year: for
example, accident year 2005 for the year end 2005 loss reserve
analysis. For low frequency, high severity classes |
38
American International Group, Inc. and Subsidiaries
|
|
|
such as excess casualty, expected
loss ratios generally are utilized for at least the three most
recent accident years.
|
|
Loss development
factors: used to
project the reported losses for each accident year to an
ultimate amount.
|
|
Reinsurance recoverable on
unpaid losses: the
expected recoveries from reinsurers on losses that have not yet
been reported and/or settled.
|
Future Policy Benefits for Life and Accident and Health
Contracts (Life Insurance & Retirement Services):
|
|
|
Interest rates: which vary by geographical region, year
of issuance and products. |
|
Mortality, morbidity and surrender rates: based upon
actual experience by geographical region modified to allow for
variation in policy form. |
Estimated Gross Profits (Life Insurance & Retirement
Services):
|
|
|
Estimated gross profits to be realized over the estimated
duration of the contracts (investment-oriented products) affect
the carrying value of deferred policy acquisition costs under
FAS 97. Estimated gross profits include investment income
and gains and losses on investments less required interest,
actual mortality and other expenses. |
Deferred Policy Acquisition Costs (Life Insurance &
Retirement Services):
|
|
|
Recoverability based on current and future expected
profitability, which is affected by interest rates, foreign
exchange rates, mortality experience, and policy persistency. |
Deferred Policy Acquisition Costs (General Insurance):
|
|
|
Recoverability and eligibility based upon the current terms and
profitability of the underlying insurance contracts. |
Fair Value Determinations of Certain Assets and Liabilities
(Financial Services Capital Markets):
|
|
|
Valuation models: utilizing factors, such as market
liquidity and current interest, foreign exchange and volatility
rates. |
|
AIG attempts to secure reliable and independent current market
price data, such as published exchange rates from external
subscription services such as Bloomberg or Reuters or
third-party broker quotes for use in its model. When such prices
are not available, AIG uses an internal methodology, which
includes interpolation and extrapolation from verifiable prices
from trades occurring on dates nearest to the dates of the
transactions. |
Other-Than-Temporary Declines in the Value of Investments:
A security is considered a candidate for other-than-temporary
impairment based upon the following criteria:
|
|
|
Trading at a significant (25 percent or more) discount to
par or amortized cost (if lower) for an extended period of time
(nine months or longer). |
|
The occurrence of a discrete credit event resulting in the
debtor defaulting or seeking bankruptcy or insolvency protection
or voluntary reorganization. |
|
The probability of non-realization of a full recovery on its
investment, irrespective of the occurrence of one of the
foregoing events. |
At each balance sheet date, AIG evaluates its securities
holdings in an unrealized loss position. Where AIG does not
intend to hold such securities until they have fully recovered
their carrying value, based on the circumstances present at the
date of evaluation, AIG records the unrealized loss in income.
If events or circumstances change, such as unexpected changes in
creditworthiness of the obligor, general interest rate
environment, tax circumstances, liquidity events, and statutory
capital management considerations among others, AIG revisits its
intent to determine if a loss should be recorded in income.
Further, if a loss is recognized from a sale subsequent to a
balance sheet date pursuant to these changes in circumstances,
the loss is recognized in the period in which the intent to hold
the securities to recovery no longer exists.
Flight Equipment Recoverability (Financial
Services):
|
|
|
Expected undiscounted future net cash flows: based
upon current lease rates, projected future lease rates and
estimated terminal values of each aircraft based on third party
information. |
Operating Review
General Insurance Operations
AIGs General Insurance subsidiaries are multiple line
companies writing substantially all lines of property and
casualty insurance both domestically and abroad.
Domestic General Insurance operations are comprised of DBG,
which includes the operations of The Hartford Steam Boiler
Inspection and Insurance Company (HSB); Transatlantic Holdings,
Inc. (Transatlantic); Personal Lines, including 21st Century
Insurance Group (21st Century); and United Guaranty Corporation
(UGC).
AIGs primary domestic division is DBG. DBGs business
in the United States and Canada is conducted through its General
Insurance subsidiaries including American Home Assurance Company
(American Home), National Union Fire Insurance Company of
Pittsburgh, Pa. (National Union), Lexington Insurance Company
(Lexington) and certain other General Insurance company
subsidiaries of AIG.
DBG writes substantially all classes of business insurance,
accepting such business mainly from insurance brokers. This
provides DBG the opportunity to select specialized markets and
retain underwriting control. Any licensed broker is able to
submit business to DBG without the traditional agent-company
contractual relationship, but such broker usually has no
authority to commit DBG to accept a risk.
In addition to writing substantially all classes of business
insurance, including large commercial or industrial property
insurance, excess liability, inland marine, environmental,
39
American International Group, Inc. and Subsidiaries
workers compensation and excess and umbrella coverages, DBG
offers many specialized forms of insurance such as aviation,
accident and health, equipment breakdown, directors and officers
liability (D&O), difference-in-conditions, kidnap-ransom,
export credit and political risk, and various types of
professional errors and omissions coverages. The AIG Risk
Management operation provides insurance and risk management
programs for large corporate customers. The AIG Risk Finance
operation is a leading provider of customized structured
insurance products. Also included in DBG are the operations of
AIG Environmental, which focuses specifically on providing
specialty products to clients with environmental exposures.
Lexington writes surplus lines, those risks for which
conventional insurance companies do not readily provide
insurance coverage, either because of complexity or because the
coverage does not lend itself to conventional contracts.
Certain of the products of the DBG companies include funding
components or have been structured in a manner such that little
or no insurance risk is actually transferred. Funds received in
connection with these products are recorded as deposits, and are
included in other liabilities, rather than as premium revenue.
Amounts paid by AIG are recorded as reductions to the deposit
liability rather than as incurred losses.
The AIG Worldsource Division introduces and coordinates
AIGs products and services to
U.S.-based
multinational clients and foreign corporations doing business in
the U.S.
Transatlantic subsidiaries offer reinsurance capacity on both a
treaty and facultative basis both in the U.S. and abroad.
Transatlantic structures programs for a full range of property
and casualty products with an emphasis on specialty risk.
AIGs Personal Lines operations provide automobile
insurance through AIG Direct, the mass marketing operation of
AIG, Agency Auto Division and 21st Century, as well as a broad
range of coverages for high net-worth individuals through the
AIG Private Client Group.
The main business of the UGC subsidiaries is the issuance of
residential mortgage guaranty insurance, both domestically and
internationally, on conventional first lien mortgages for the
purchase or refinance of one to four family residences. UGC
subsidiaries also write second lien and private student loan
guaranty insurance.
AIGs Foreign General Insurance group accepts risks
primarily underwritten through American International
Underwriters (AIU), a marketing unit consisting of wholly owned
agencies and insurance companies. The Foreign General Insurance
group also includes business written by AIGs foreign-based
insurance subsidiaries. The Foreign General group uses various
marketing methods and multiple distribution channels to write
both commercial and consumer lines insurance with certain
refinements for local laws, customs and needs. AIU operates in
Asia, the Pacific Rim, the United Kingdom, Europe, Africa, the
Middle East and Latin America.
As previously noted, AIG believes it should present and discuss
its financial information in a manner most meaningful to its
investors. Accordingly, in its General Insurance business, AIG
uses certain regulatory measures, where AIG has determined these
measurements to be useful and meaningful.
A critical discipline of a successful general insurance business
is the objective to produce profit from underwriting activities
exclusive of investment-related income. When underwriting is not
profitable, premiums are inadequate to pay for insured losses
and underwriting related expenses. In these situations, the
addition of general insurance related investment income and
realized capital gains may, however, enable a general insurance
business to produce operating income. For these reasons, AIG
views underwriting results to be critical in the overall
evaluation of performance.
Statutory underwriting profit is derived by reducing net
premiums earned by net losses and loss expenses incurred and net
expenses incurred. Statutory accounting generally requires
immediate expense recognition and ignores the matching of
revenues and expenses as required by GAAP. That is, for
statutory purposes, expenses are recognized immediately, not
over the same period that the revenues are earned. Thus,
statutory expenses exclude changes in deferred acquisition costs
(DAC).
GAAP provides for the recognition of expenses at the same time
revenues are earned, the accounting principle of matching.
Therefore, acquisition expenses are deferred and amortized over
the period the related net premiums written are earned. DAC is
reviewed for recoverability, and such review requires management
judgment. (See also Critical Accounting Estimates
herein.)
AIG, along with most General Insurance companies, uses the loss
ratio, the expense ratio and the combined ratio as measures of
underwriting performance. The loss ratio is the sum of losses
and loss expenses incurred divided by net premiums earned. The
expense ratio is statutory underwriting expenses divided by net
premiums written. The combined ratio is the sum of the loss
ratio and the expense ratio. These ratios are relative
measurements that describe, for every $100 of net premiums
earned or written, the cost of losses and statutory expenses,
respectively. The combined ratio presents the total cost per
$100 of premium production. A combined ratio below 100
demonstrates underwriting profit; a combined ratio above 100
demonstrates underwriting loss.
Net premiums written are initially deferred and earned based
upon the terms of the underlying policies. The net unearned
premium reserve constitutes deferred revenues which are
generally earned ratably over the policy period. Thus, the net
unearned premium reserve is not fully recognized in income as
net premiums earned until the end of the policy period.
The underwriting environment varies from country to country, as
does the degree of litigation activity. Regulation, product type
and competition have a direct effect on pricing and consequently
on profitability as reflected in underwriting profit and
statutory general insurance ratios.
40
American International Group, Inc. and Subsidiaries
General Insurance operating income is comprised of statutory
underwriting results, changes in DAC, net investment income and
realized capital gains and losses. Operating income, as well as
net premiums written, net premiums earned, net investment income
and realized capital gains (losses) and statutory ratios for the
three and nine-month
periods ended September 30, 2006 and 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
(in millions, except ratios) | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Net premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
6,074 |
|
|
$ |
5,505 |
|
|
$ |
18,454 |
|
|
$ |
17,071 |
|
|
|
Transatlantic
|
|
|
895 |
|
|
|
858 |
|
|
|
2,723 |
|
|
|
2,627 |
|
|
|
Personal Lines
|
|
|
1,162 |
|
|
|
1,191 |
|
|
|
3,540 |
|
|
|
3,550 |
|
|
|
Mortgage Guaranty
|
|
|
232 |
|
|
|
149 |
|
|
|
622 |
|
|
|
459 |
|
|
Foreign General
|
|
|
2,861 |
|
|
|
2,609 |
|
|
|
8,774 |
|
|
|
8,039 |
|
|
Total
|
|
$ |
11,224 |
|
|
$ |
10,312 |
|
|
$ |
34,113 |
|
|
$ |
31,746 |
|
|
Net premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
6,290 |
|
|
$ |
5,613 |
|
|
$ |
17,889 |
|
|
$ |
16,773 |
|
|
|
Transatlantic
|
|
|
895 |
|
|
|
844 |
|
|
|
2,712 |
|
|
|
2,594 |
|
|
|
Personal Lines
|
|
|
1,158 |
|
|
|
1,182 |
|
|
|
3,484 |
|
|
|
3,459 |
|
|
|
Mortgage Guaranty
|
|
|
191 |
|
|
|
114 |
|
|
|
536 |
|
|
|
397 |
|
|
Foreign
General(a)
|
|
|
2,683 |
|
|
|
2,381 |
|
|
|
7,744 |
|
|
|
7,283 |
|
|
Total
|
|
$ |
11,217 |
|
|
$ |
10,134 |
|
|
$ |
32,365 |
|
|
$ |
30,506 |
|
|
Net investment
income(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
880 |
|
|
$ |
589 |
|
|
$ |
2,438 |
|
|
$ |
1,803 |
|
|
|
Transatlantic
|
|
|
107 |
|
|
|
87 |
|
|
|
317 |
|
|
|
256 |
|
|
|
Personal Lines
|
|
|
56 |
|
|
|
54 |
|
|
|
168 |
|
|
|
160 |
|
|
|
Mortgage Guaranty
|
|
|
35 |
|
|
|
32 |
|
|
|
103 |
|
|
|
91 |
|
|
|
Intercompany adjustments and eliminations net
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
Foreign General
|
|
|
291 |
|
|
|
224 |
|
|
|
1,075 |
|
|
|
751 |
|
|
Total
|
|
$ |
1,370 |
|
|
$ |
987 |
|
|
$ |
4,102 |
|
|
$ |
3,062 |
|
|
Realized capital gains (losses)
|
|
$ |
28 |
|
|
$ |
71 |
|
|
$ |
(29 |
) |
|
$ |
248 |
|
|
Operating Income
(loss)(b)(c)(d):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
1,557 |
|
|
$ |
(283 |
) |
|
$ |
4,448 |
|
|
$ |
1,235 |
|
|
|
Transatlantic
|
|
|
143 |
|
|
|
(275 |
) |
|
|
427 |
|
|
|
(62 |
) |
|
|
Personal Lines
|
|
|
133 |
|
|
|
18 |
|
|
|
352 |
|
|
|
229 |
|
|
|
Mortgage Guaranty
|
|
|
85 |
|
|
|
72 |
|
|
|
301 |
|
|
|
285 |
|
|
Foreign
General(e)
|
|
|
707 |
|
|
|
326 |
|
|
|
2,289 |
|
|
|
1,693 |
|
Reclassifications and Eliminations
|
|
|
|
|
|
|
5 |
|
|
|
2 |
|
|
|
10 |
|
|
Total
|
|
$ |
2,625 |
|
|
$ |
(137 |
) |
|
$ |
7,819 |
|
|
$ |
3,390 |
|
|
Statutory underwriting profit
(loss)(c)(d)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DBG
|
|
$ |
681 |
|
|
$ |
(1,001 |
) |
|
$ |
1,904 |
|
|
$ |
(755 |
) |
|
|
Transatlantic
|
|
|
34 |
|
|
|
(380 |
) |
|
|
97 |
|
|
|
(348 |
) |
|
|
Personal Lines
|
|
|
83 |
|
|
|
(40 |
) |
|
|
176 |
|
|
|
45 |
|
|
|
Mortgage Guaranty
|
|
|
48 |
|
|
|
43 |
|
|
|
191 |
|
|
|
195 |
|
|
Foreign
General(e)
|
|
|
376 |
|
|
|
113 |
|
|
|
1,034 |
|
|
|
854 |
|
|
Total
|
|
$ |
1,222 |
|
|
$ |
(1,265 |
) |
|
$ |
3,402 |
|
|
$ |
(9 |
) |
|
Domestic
General(c)(d):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Ratio
|
|
|
66.85 |
|
|
|
97.13 |
|
|
|
68.49 |
|
|
|
83.15 |
|
|
Expense Ratio
|
|
|
23.72 |
|
|
|
20.76 |
|
|
|
21.28 |
|
|
|
20.15 |
|
|
Combined Ratio
|
|
|
90.57 |
|
|
|
117.89 |
|
|
|
89.77 |
|
|
|
103.30 |
|
|
Foreign
General(c)(d):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Ratio(a)
|
|
|
48.91 |
|
|
|
60.31 |
|
|
|
50.30 |
|
|
|
55.63 |
|
|
Expense
Ratio(e)(f)
|
|
|
34.76 |
|
|
|
31.91 |
|
|
|
32.07 |
|
|
|
29.57 |
|
|
41
American International Group, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
(in millions, except ratios) | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Combined ratio
|
|
|
83.67 |
|
|
|
92.22 |
|
|
|
82.37 |
|
|
|
85.20 |
|
|
Consolidated(c)(d):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Ratio
|
|
|
62.56 |
|
|
|
88.48 |
|
|
|
64.14 |
|
|
|
76.58 |
|
|
Expense Ratio
|
|
|
26.54 |
|
|
|
23.58 |
|
|
|
24.05 |
|
|
|
22.53 |
|
|
Combined Ratio
|
|
|
89.10 |
|
|
|
112.06 |
|
|
|
88.19 |
|
|
|
99.11 |
|
|
|
|
(a) |
Income statement accounts expressed in non-functional
currencies are translated into U.S. dollars using average
exchange rates. |
|
(b) |
Includes the effect of out of period adjustments related to
the accounting for certain interests in unit investment trusts.
For DBG, for the three and
nine-month periods
ended September 30, 2006 the effect was an increase of
$70 million and $90 million, respectively, and for
Foreign General, for the three and nine-month periods ended
September 30, 2006, the effect was an increase of
$22 million and $434 million, respectively. |
|
|
(c) |
Includes current year catastrophe related losses of
$2.11 billion for both the three and nine-month periods
ended September 30, 2005. There were no significant
catastrophe related losses in the third quarter and first nine
months of 2006. |
|
|
(d) |
Includes additional losses incurred and net reinstatement
premiums related to prior year catastrophes of $50 million
and $39 million, in the three-month periods ended
September 30, 2006 and 2005, respectively. Such losses and
premiums were $108 million and $237 million in the
nine-month periods ended September 30, 2006 and 2005,
respectively. |
|
|
(e) |
Includes the results of wholly owned Foreign General
agencies. |
|
|
(f) |
Includes amortization of advertising costs. |
|
|
(g) |
Statutory underwriting profit (loss) is a measure that U.S.
domiciled insurance companies are required to report to their
regulatory authorities. The following table reconciles statutory
underwriting profit (loss) to income before income taxes,
minority interest and cumulative effect of an accounting change
for the General Insurance segment for the three and nine-month
periods ended September 30, 2006 and 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage | |
|
|
|
Personal | |
|
Mortgage | |
|
Foreign | |
|
Reclassifications | |
|
|
(in millions) |
|
Group | |
|
Transatlantic | |
|
Lines | |
|
Guaranty | |
|
General | |
|
and Eliminations | |
|
Total | |
| |
Three months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory underwriting profit
|
|
$ |
681 |
|
|
$ |
34 |
|
|
$ |
83 |
|
|
$ |
48 |
|
|
$ |
376 |
|
|
$ |
|
|
|
$ |
1,222 |
|
Increase (decrease) in deferred acquisition costs
|
|
|
(30 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
2 |
|
|
|
39 |
|
|
|
|
|
|
|
5 |
|
Net investment income
|
|
|
880 |
|
|
|
107 |
|
|
|
56 |
|
|
|
35 |
|
|
|
291 |
|
|
|
1 |
|
|
|
1,370 |
|
Realized capital gains (losses)
|
|
|
26 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
(1 |
) |
|
|
28 |
|
|
Income before income taxes, minority interest and cumulative
effect of an accounting change
|
|
$ |
1,557 |
|
|
$ |
143 |
|
|
$ |
133 |
|
|
$ |
85 |
|
|
$ |
707 |
|
|
$ |
|
|
|
$ |
2,625 |
|
|
Three months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory underwriting profit (loss)
|
|
$ |
(1,001 |
) |
|
$ |
(380 |
) |
|
$ |
(40 |
) |
|
$ |
43 |
|
|
$ |
113 |
|
|
$ |
|
|
|
$ |
(1,265 |
) |
Increase (decrease) in deferred acquisition costs
|
|
|
49 |
|
|
|
5 |
|
|
|
5 |
|
|
|
(3 |
) |
|
|
14 |
|
|
|
|
|
|
|
70 |
|
Net investment income
|
|
|
589 |
|
|
|
87 |
|
|
|
54 |
|
|
|
32 |
|
|
|
224 |
|
|
|
1 |
|
|
|
987 |
|
Realized capital gains (losses)
|
|
|
80 |
|
|
|
13 |
|
|
|
(1 |
) |
|
|
|
|
|
|
(25 |
) |
|
|
4 |
|
|
|
71 |
|
|
Income before income taxes, minority interest and cumulative
effect of an accounting change
|
|
$ |
(283 |
) |
|
$ |
(275 |
) |
|
$ |
18 |
|
|
$ |
72 |
|
|
$ |
326 |
|
|
$ |
5 |
|
|
$ |
(137 |
) |
|
Nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory underwriting profit
|
|
$ |
1,904 |
|
|
$ |
97 |
|
|
$ |
176 |
|
|
$ |
191 |
|
|
$ |
1,034 |
|
|
$ |
|
|
|
$ |
3,402 |
|
Increase in deferred acquisition costs
|
|
|
77 |
|
|
|
7 |
|
|
|
8 |
|
|
|
10 |
|
|
|
242 |
|
|
|
|
|
|
|
344 |
|
Net investment income
|
|
|
2,438 |
|
|
|
317 |
|
|
|
168 |
|
|
|
103 |
|
|
|
1,075 |
|
|
|
1 |
|
|
|
4,102 |
|
Realized capital gains (losses)
|
|
|
29 |
|
|
|
6 |
|
|
|
|
|
|
|
(3 |
) |
|
|
(62 |
) |
|
|
1 |
|
|
|
(29 |
) |
|
Income before income taxes, minority interest and cumulative
effect of an accounting change
|
|
$ |
4,448 |
|
|
$ |
427 |
|
|
$ |
352 |
|
|
$ |
301 |
|
|
$ |
2,289 |
|
|
$ |
2 |
|
|
$ |
7,819 |
|
|
42
American International Group, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage | |
|
|
|
Personal | |
|
Mortgage | |
|
Foreign | |
|
Reclassifications | |
|
|
(in millions) |
|
Group | |
|
Transatlantic | |
|
Lines | |
|
Guaranty | |
|
General | |
|
and Eliminations | |
|
Total | |
| |
Nine months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory underwriting profit (loss)
|
|
$ |
(755 |
) |
|
$ |
(348 |
) |
|
$ |
45 |
|
|
$ |
195 |
|
|
$ |
854 |
|
|
$ |
|
|
|
$ |
(9 |
) |
Increase (decrease) in deferred acquisition costs
|
|
|
(49 |
) |
|
|
6 |
|
|
|
28 |
|
|
|
(1 |
) |
|
|
105 |
|
|
|
|
|
|
|
89 |
|
Net investment income
|
|
|
1,803 |
|
|
|
256 |
|
|
|
160 |
|
|
|
91 |
|
|
|
751 |
|
|
|
1 |
|
|
|
3,062 |
|
Realized capital gains (losses)
|
|
|
236 |
|
|
|
24 |
|
|
|
(4 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
9 |
|
|
|
248 |
|
|
Income before income taxes, minority interest and cumulative
effect of an accounting change
|
|
$ |
1,235 |
|
|
$ |
(62 |
) |
|
$ |
229 |
|
|
$ |
285 |
|
|
$ |
1,693 |
|
|
$ |
10 |
|
|
$ |
3,390 |
|
|
AIG transacts business in most major foreign currencies. The
following table summarizes the effect of changes in foreign
currency exchange rates on the growth of General Insurance net
premiums written for the three and nine-month periods ended
September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, 2006 | |
|
September 30, 2006 | |
| |
Growth in original currency
|
|
|
8.5 |
% |
|
|
8.1 |
% |
Foreign exchange effect
|
|
|
0.3 |
|
|
|
(0.6 |
) |
Growth as reported in U.S. dollars
|
|
|
8.8 |
% |
|
|
7.5 |
% |
|
General Insurance Results
General Insurance operating income increased in the third
quarter of 2006 compared to the same period in 2005 due
primarily to the effects of the catastrophes in the third
quarter of 2005. Other factors contributing to the increase were
an improvement in statutory underwriting profit for DBG as a
result of improved loss ratios for the current accident year
compared to the loss ratios recorded in the third quarter of
2005 for accident year 2005, as well as growth in net investment
income. The combined ratio improved to 89.1 during the third
quarter of 2006, a reduction of 23.0 points from the same
period in 2005, primarily due to an improvement in the loss
ratio of 25.9 points. The reduction in catastrophe losses
represented 20.0 points of the overall decrease. Net
premiums written increased 9 percent in the third quarter
of 2006 compared to the same period in 2005 as domestic property
rates improved, submission activity increased in both property
and non-property lines in the aftermath of the 2005 hurricanes
and distribution channels within Foreign General expanded. Net
premiums written for the third quarter of 2005 included a
reduction of $258 million for reinstatement premiums
related to catastrophes, accounting for approximately 3
percentage points of the 2006 increase in net premiums written
compared to the third quarter of 2005. The increase in net
premiums written was tempered by an increase in ceded
reinsurance necessary to manage the increase in property
exposures retained by AIG.
In the third quarter of 2006, certain adjustments were made in
conjunction with the remediation of balance sheet account
reconciliations which increased earned premiums by
$99 million and increased bad debt expense by
$225 million. These adjustments reflect continuing progress
in AIGs ongoing remediation efforts. The combined effect
of these adjustments increased the expense ratio by
2.0 points and decreased the loss ratio by 0.6 points.
Included in net investment income for the three and nine-month
periods ended September 30, 2006 are $213 million and
$645 million of out of period adjustments related to the
accounting for certain investments in unit investment trusts and
additional partnership income arising from improved valuations.
General Insurance operating income increased in the first nine
months of 2006 compared to the same period of 2005 due to the
reduction in catastrophe losses combined with the improvement in
statutory underwriting profit for DBG as a result of improved
loss ratios for the current accident year compared to the loss
ratios recorded in the first nine months of 2005 for accident
year 2005, as well as growth in net investment income. The
combined ratio improved to 88.2, a reduction of 10.9 points
from the first nine months of 2005, primarily due to an
improvement in the loss ratio of 12.4 points. The reduction
in catastrophe losses represented 6.7 points of the overall
reduction. Net premiums written increased 7 percent as
domestic property rates improved, submission activity increased
in the aftermath of the 2005 hurricanes and the distribution
channels within Foreign General expanded. Net premiums written
for the first nine months of 2005 included a reduction of
$258 million for reinstatement premiums related to
catastrophes, accounting for approximately 1 percentage point of
the 2006 increase in net premiums written compared to the first
nine months of 2005.
Quarterly DBG Results
Operating income increased to $1.56 billion in the third
quarter of 2006 compared to a loss of $283 million in the
same period in 2005, an improvement of $1.84 billion.
The improvement is also reflected in the combined ratio, which
declined to 90.0 in the third quarter of 2006 compared to 118.2
in the same period in 2005. The third quarter of
43
American International Group, Inc. and Subsidiaries
2005 included $1.37 billion of losses and net reinstatement
premiums for major catastrophes, which increased the 2005
combined ratio by 24.3 points.
DBGs net premiums written increased 10 percent in the
third quarter of 2006 compared to the same period in 2005 as
property rates improved and submission activity increased in the
aftermath of the 2005 hurricanes. DBG attributes the increase in
submissions to its strong distribution channels and overall
financial strength in comparison to many insurers that
experienced significant losses and reductions of surplus as a
result of the hurricanes. Net premiums written for the third
quarter of 2005 were reduced by $122 million due to
reinstatement premiums related to catastrophes; net premiums
written for the third quarter of 2006 were increased by
$47 million due to the reversal of a reinsurance contract
previously accounted for as reinsurance and now accounted for as
a deposit, the overall effect of which was largely offset in
losses and underwriting expenses. The combined effect of these
two items contributed approximately 3 percentage points to
the increase in net premiums written.
The loss ratio for the third quarter of 2006 declined to 66.9
compared to 99.4 for the same period in 2005, primarily due to
the effects of the catastrophes in the third quarter of 2005.
Lines of business that were not directly affected by the 2005
major catastrophes also improved primarily due to lower accident
year loss ratios for the 2006 accident year compared to the loss
ratios recorded in the third quarter of 2005 for accident year
2005. The improvement in accident year loss ratios for the third
quarter of 2006 was partially offset by an increase of
$21 million in the estimated ultimate losses related to
prior year hurricanes compared to the same period of 2005 which
included an increase of $39 million in losses related to
prior year hurricanes. Reserve development on non-catastrophic
prior year losses increased incurred losses by $40 million
for the third quarter of 2006 compared to an increase of
$190 million for the same period of 2005.
DBGs expense ratio increased in the third quarter of 2006
to 23.1 compared to 18.8 in the same period of 2005. Net
acquisition expenses as a percent of net premiums written
increased by 0.5 in the third quarter of 2006 compared to the
same period in 2005 due to an increase in premium assessments,
partially offset by ceding commissions on quota share
reinsurance programs added in 2006 to manage the level of
property exposures retained by DBG. Other operating expense as a
percent of net premiums written increased by 3.9 points
primarily due to an increase in bad debt expense, due largely to
a charge of $225 million relating to reconciliation
remediation activities. Adjustments from AIGs ongoing
remediation activities described above also resulted in
increases of $155 million and $191 million to earned
premiums and net investment income, respectively, for a net
increase in operating income of $121 million in the third
quarter of 2006. Incurred losses did not change as a result of
the above increase to earned premiums because the adjustment was
isolated to the reconciliation of unearned premium balances.
The combined effect of the out of period and other adjustments
in the third quarter of 2006 was a decrease in the DBG loss
ratio of 1.7 points and an increase in the expense ratio of 3.7
points.
Year-to-date DBG Results
Operating income increased to $4.45 billion in the first
nine months of 2006 compared to $1.24 billion in the same
period in 2005, an improvement of $3.21 billion.
The improvement is also reflected in the combined ratio, which
declined to 88.7 in the first nine months of 2006 compared to
104.2 in the same period in 2005. The first nine months of 2005
included $1.37 billion of losses and net reinstatement
premiums for major catastrophes, which increased the 2005
combined ratio by 8.1 points.
DBGs net premiums written increased 8 percent in the
first nine months of 2006 compared to the same period of 2005
due to property rate increases as well as increases in
submission activity in the aftermath of the 2005 hurricanes. Net
premiums written for the first nine months of 2005 were reduced
by $122 million due to reinstatement premiums related to
catastrophes; net premiums written for the first nine months of
2006 were increased by $47 million due to the reversal of a
reinsurance contract previously accounted for as reinsurance and
now accounted for as a deposit, the overall effect of which was
largely offset in losses and underwriting expenses. The combined
effect of these two items contributed approximately
1 percentage point to the increase in net premiums written.
The loss ratio for the first nine months of 2006 declined to
69.0 compared to 85.7 for the same period in 2005, primarily due
to the effects of the catastrophes in the first nine months of
2005. Lines of business that were not directly affected by the
2005 major catastrophes also improved, primarily due to lower
accident year loss ratios for the 2006 accident year compared to
the loss ratios recorded in the third quarter of 2005 for
accident year 2005. In addition, year-to-date 2006 operating
income included a $4 million reduction in the estimated
ultimate losses related to prior year hurricanes compared to the
same period of 2005, which included $157 million of
increased losses related to prior year hurricanes. Favorable
reserve development on non-catastrophic prior year losses
totaled $25 million for the first nine months of 2006
compared to adverse development of $410 million for the
same period of 2005. The 2006 development relates primarily to
classes of business which did not require reserve strengthening
in connection with AIGs year-end 2005 reserve study.
DBGs expense ratio increased to 19.8 percent in the
first nine months of 2006 compared to 18.4 percent for the
same pe-
44
American International Group, Inc. and Subsidiaries
riod in 2005. Net acquisition expenses as a percent of net
premiums written declined 0.5 points in the first nine
months of 2006 compared to the same period in 2005 despite the
increase in premium assessments in the third quarter of 2006,
reflecting an increase in lines of business such as property
that have a lower commission rate, a modest decrease in overall
commission rates and the new quota share reinsurance programs
added in 2006 to manage the level of property exposures retained
by DBG. Other operating expenses as a percent of net premiums
written increased 1.3 points primarily due to an increase
in bad debt expense, due largely to a charge of
$225 million relating to reconciliation remediation
activities.
Quarterly Transatlantic Results
Transatlantics net premiums written and net premiums
earned in the third quarter of 2006 increased by 4 percent
and 6 percent, respectively, when compared to the same
period in 2005 primarily due to increases in domestic other
liability, medical malpractice and accident and health net
premiums written. These increases were partially offset by
decreases in domestic property, principally homeowners, and
international medical malpractice premiums. Third quarter 2006
operating income increased due largely to lower catastrophe
losses and net ceded reinstatement premiums and increased net
investment income.
Year-to-date Transatlantic Results
Transatlantics net premiums written and net premiums
earned increased in the first nine months of 2006 by
4 percent and 5 percent, respectively, compared to the
same period of 2005 due primarily to increases in domestic other
liability, medical malpractice and accident and health net
premiums written. These increases were offset, in part, by
decreases in international premiums with the most significant
decreases in the auto liability and property lines. Operating
income increased in the first nine months of 2006 compared to
the same period of 2005 due to lower catastrophe losses and net
ceded reinstatement premiums, and increased net investment
income.
Quarterly Personal Lines Results
Personal Lines net premiums written and net premiums earned
decreased slightly in the third quarter of 2006 compared to the
same period in 2005, as growth in the Private Client Group was
offset by the run-off of the involuntary auto business and
declines in the AIG Direct, Agency Auto and 21st Century
divisions. Growth in the Private Client Group spans multiple
products, with continued penetration into the high net worth
market and strong brand and innovative loss prevention programs.
The soft auto market, with flat to declining rates, is adversely
affecting growth in the direct business of AIG Direct and 21st
Century. 21st Century is experiencing solid performance outside
of California, however, it is not outpacing the decline in
California. Agency Auto growth is down due to pricing and
underwriting pressure in certain markets. Operating income in
the third quarter of 2006 increased from the same period in 2005
driven by an improved loss ratio. Operating income in 2005
included $62 million of hurricane Katrina losses and
related reinstatement premiums whereas operating income in 2006
is benefiting from favorable development of prior period
reserves.
Year-to-date Personal Lines Results
Personal Lines net premiums written decreased slightly in the
first nine months of 2006 compared to the same period in 2005,
with growth in the Private Client Group and Agency Auto
divisions being offset by the run-off of the involuntary auto
business and small declines in the AIG Direct and
21st Century divisions. Operating income increased for the
first nine months of 2006 compared to the same period of 2005,
driven primarily by a lower loss ratio. Operating income in 2005
included $62 million of hurricane Katrina losses and
related reinstatement premiums whereas operating income in 2006
is benefiting from an absence of catastrophes and favorable
prior year reserve development. The expense ratio has increased
in 2006, compared to the year ago period, primarily due to
investments in people and technology, national expansion efforts
and lower response rates.
Quarterly UGC Results
Mortgage Guaranty net premiums written were up 56 percent
for the third quarter of 2006 compared to the same period in
2005. All business segments contributed to the increase.
Operating income for the three months ended September 30,
2005 was negatively affected by $29 million of ceded
premiums for the domestic first lien business. Incurred losses
were up compared to the third quarter of 2005 due to aging of
the first lien portfolio and a slowing domestic housing market.
Additionally, early loss development of alternative risk
products and growth in insurance inforce in 2006 drove the
increases in domestic second lien losses. Operating income for
the third quarter of 2006 was up 18 percent compared to the
prior period, with improvements in all business units.
Year-to-date UGC Results
Mortgage Guaranty net premiums written were up 36 percent for
the first nine months of 2006 compared to the same period in
2005. All business units contributed to the increase. Operating
income for the first nine months of 2005 was negatively affected
by $29 million of ceded premiums for domestic first lien
business. Incurred losses increased from the same period in
2005, due to aging of the first lien portfolio, a slowing
domestic housing market, early loss development of alternative
risk second lien product and growth in the domestic second lien
insurance inforce. Operating income for the first nine
months of 2006 increased by 6 percent over the prior year
period.
45
American International Group, Inc. and Subsidiaries
Quarterly Foreign General Insurance Results
Foreign General Insurance net premiums written increased
10 percent (9 percent in original currency) in the third
quarter of 2006 when compared to the same period in 2005. This
increase is due to growth in both the commercial and consumer
lines driven by new business, new distribution channels,
including the acquisition of Central Insurance Co., Ltd. in
Taiwan, and higher premiums for the Ascot Lloyds
syndicate. Lower reinstatement premium costs, which in 2005 were
unusually high due to hurricanes Katrina and Rita, contributed
two percent to the increase in net premiums written. The
personal accident business net premiums written increased in the
third quarter of 2006 from a year ago, but an increase in loss
frequency negatively affected operating income. The commercial
lines net premiums written in Europe, the Far East and the
United Kingdom increased from a year ago due to new business
with a resulting increase in operating income compared to the
third quarter of 2005. Operating income from energy lines,
primarily in the United Kingdom, and the Ascot Lloyds
syndicate both increased compared to the third quarter of 2005
due to increased net premiums written in 2006 and losses
incurred in the third quarter of 2005 relating to catastrophe
events.
The combined ratio for Foreign General Insurance for the third
quarter of 2006 was 83.7, an improvement of 8.5 points from 92.2
in the comparable period of 2005. The Foreign General Insurance
loss ratio decreased 11.4 points in the third quarter of 2006
compared to the same period of 2005. The results of 2006
benefited from lower current accident year losses and favorable
loss development from prior accident years, excluding
catastrophes, of $105 million, offset by $21 million
of adverse loss development on the 2005 hurricanes and by
$22 million of losses related to a typhoon in Japan during
the third quarter of 2006. The results for 2005 included several
catastrophic events, principally hurricanes Katrina and Rita.
The Foreign General Insurance expense ratio increased
2.9 points in the third quarter of 2006 from the same
period in 2005, principally due to higher commission costs, the
increased significance of consumer lines of business, which have
higher acquisition costs, accelerated amortization of
advertising costs and premium reductions of $56 million
relating to reconciliation remediation activities. Due to the
current mix of business, AIG expects commission costs to
continue to increase over the next quarter, principally for
classes of business with historically lower than average loss
ratios.
Year-to-date Foreign General Insurance Results
Foreign General Insurance net premiums written increased
9 percent (12 percent in original currency) in the first
nine months of 2006 compared to the same period in 2005,
reflecting growth in both the commercial and consumer lines. The
personal accident business in the Far East region, the
commercial lines business in both Europe and the United Kingdom,
and the Ascot Lloyds syndicate all contributed to the
growth in net premiums written. Operating income showed
corresponding increases over the prior year, which included
significant losses related to hurricanes Katrina and Rita.
The combined ratio for Foreign General Insurance for the first
nine months of 2006 was 82.4, an improvement of 2.8 points from
2005. The Foreign General Insurance loss ratio decreased 5.3
points in the first nine months of 2006 from the same period of
2005 due to lower current accident year losses, favorable loss
development from prior accident years and fewer catastrophes.
The Foreign General Insurance expense ratio increased 2.5 points
in the first nine months of 2006 from the same period in 2005
principally due to higher commission costs, the increased
significance of consumer lines of business, which have higher
acquisition costs and accelerated amortization of advertising
costs.
Quarterly General Insurance Net Investment Income
General Insurance net investment income increased by
$383 million in the third quarter of 2006, when compared to
the same period of 2005 due to strong cash flows, including the
effect of capital contributions from the parent, higher
partnership income for DBG and the out of period adjustments
relating to unit investment trust and partnership investments.
Foreign General net investment income for the third quarter
increased compared to the same period in 2005 due to strong cash
flows, resulting from higher premium collections and reinsurance
loss recoveries, as well as higher interest rates.
Year-to-date General Insurance Net Investment Income
General Insurance net investment income increased by
$1.04 billion in the first nine months of 2006, when
compared to the same period of 2005. The increase for the nine
month period is principally due to the effects of out of period
adjustments of $524 million related to the accounting for
certain interests in unit investment trusts, $121 million
of out of period adjustments for partnership income and a second
quarter 2006 $85 million out of period adjustment related
to interest earned on a DBG deposit contract. Foreign General
Insurance net investment income increased in the nine-month
period ended September 30, 2006 compared to the same period
of 2005 due to the effects of the out of period adjustments,
offset by a decline in partnership income. Foreign General
partnership income in the first nine months of 2005 benefited
from increases in market valuations due to increased initial
public offering activity.
Realized capital gains and losses resulted from the ongoing
investment management of the General Insurance portfolios within
the overall objectives of the General Insurance operations. See
the discussion on Valuation of Invested Assets
herein.
46
American International Group, Inc. and Subsidiaries
Reinsurance
AIG is a major purchaser of reinsurance for its General
Insurance operations. AIG insures risks globally, and its
reinsurance programs must be coordinated in order to provide AIG
the level of reinsurance protection that AIG desires.
Reinsurance is an important risk management tool to manage
transaction and insurance line risk retention at prudent levels
set by management. AIG also purchases reinsurance to mitigate
its catastrophic exposure. AIG is cognizant of the need to
exercise good judgment in the selection and approval of both
domestic and foreign companies participating in its reinsurance
programs because one or more catastrophe losses could negatively
affect AIGs reinsurers and result in an inability of AIG
to collect reinsurance recoverables. AIGs reinsurance
department evaluates catastrophic events and assesses the
probability of occurrence and magnitude of catastrophic events
through the use of state-of-the-art industry recognized program
models, among other techniques. AIG supplements these models
through continually monitoring the risk exposure of AIGs
worldwide General Insurance operations and adjusting such models
accordingly. For a further discussion of catastrophe exposures,
see Managing Risk Catastrophe Exposures.
Although reinsurance arrangements do not relieve AIG from its
direct obligations to its insureds, an efficient and effective
reinsurance program substantially limits AIGs exposure to
potentially significant losses. With respect to its property
business, AIG has either renewed existing reinsurance coverage
or purchased new coverage that, in the opinion of management, is
adequate to limit AIGs exposures. AIG continually
evaluates the reinsurance markets and the relative
attractiveness of various arrangements for coverage, including
structures such as catastrophe bonds, insurance risk
securitizations and sidecar and similar vehicles.
Effective July 15, 2006, AIGs Lexington Insurance
Company (Lexington) and Concord Re Limited (Concord Re), a
sidecar reinsurer that was established exclusively
to reinsure Lexington, entered into a quota share reinsurance
agreement covering the U.S. commercial property insurance
business written by Lexington. Concord Re was capitalized with
approximately $730 million through the issuance of equity
securities and loans from third party investors. AIG and its
subsidiaries invest in a wide variety of investment vehicles
managed by third parties where AIG has no control over
investment decisions. Accordingly, there can be no assurance
that such vehicles do not, or will not, hold securities of
Concord Re.
AIGs consolidated general reinsurance assets amounted to
$22.99 billion at September 30, 2006 and resulted from
AIGs reinsurance arrangements. Thus, a credit exposure
existed at September 30, 2006 with respect to reinsurance
recoverable to the extent that any reinsurer may not be able to
reimburse AIG under the terms of these reinsurance arrangements.
AIG manages its credit risk in its reinsurance relationships by
transacting with reinsurers that it considers financially sound,
and when necessary AIG holds substantial collateral in the form
of funds, securities and/or irrevocable letters of credit. This
collateral can be drawn on for amounts that remain unpaid beyond
specified time periods on an individual reinsurer basis. At
December 31, 2005, approximately 48 percent of the
general reinsurance assets were from unauthorized reinsurers.
Many of these balances were collateralized, permitting statutory
recognition. Additionally, with the approval of its domiciliary
insurance regulators, AIG posted approximately $1.5 billion
of letters of credit issued by several commercial banks in favor
of certain Domestic General Insurance companies to permit those
companies statutory recognition of balances otherwise
uncollateralized at December 31, 2005. The remaining
52 percent of the general reinsurance assets were from
authorized reinsurers. The terms authorized and unauthorized
pertain to regulatory categories, not creditworthiness. At
December 31, 2005, approximately 88 percent of the
balances with respect to authorized reinsurers are from
reinsurers rated A (excellent) or better, as rated by A.M.
Best, or A (strong) or better, as rated by Standard &
Poors, a division of The McGraw-Hill Companies, Inc.
(S&P). These ratings are measures of financial strength.
Through September 30, 2006, there has been no significant
deterioration in the rating profile of AIGs reinsurers
representing more than five percent of AIGs reinsurance
assets as of December 31, 2005.
AIG maintains an allowance for estimated unrecoverable
reinsurance. Although AIG has been largely successful in its
previous recovery efforts, at September 30, 2006, AIG had
an allowance for unrecoverable reinsurance approximating
$447 million. The allowance was reduced substantially
during 2006, as uncollectible amounts due from individual
reinsurers were charged off against the allowance, primarily due
to the balance sheet reconciliation remediation process; in
addition, a portion of the allowance was reclassified to align
it with the related receivable. The reduction for charge offs
was partially offset by additional provisions totaling
$92 million during the nine months ended September 30,
2006. At September 30, 2006, AIG had no significant
reinsurance recoverables due from any individual reinsurer that
was financially troubled (e.g., liquidated, insolvent, in
receivership or otherwise subject to formal or informal
regulatory restriction).
AIGs Reinsurance Security Department conducts ongoing
detailed assessments of the reinsurance markets and current and
potential reinsurers, both foreign and domestic. Such
assessments include, but are not limited to, identifying if a
reinsurer is appropriately licensed and has sufficient financial
capacity, and evaluating the local economic environment in which
a foreign reinsurer operates. This department also reviews the
nature of the risks ceded and the requirements for credit risk
mitigants. For example, in AIGs treaty reinsurance
contracts, AIG includes provisions that frequently require a
reinsurer to post collateral when a referenced event occurs.
47
American International Group, Inc. and Subsidiaries
Furthermore, AIG limits its unsecured exposure to reinsurers
through the use of credit triggers, which include, but are not
limited to, insurer financial strength rating downgrades,
policyholder surplus declines at or below a certain
predetermined level or a certain predetermined level of a
reinsurance recoverable being reached. In addition, AIGs
Credit Risk Committee reviews the credit limits for and
concentrations with any one reinsurer.
AIG enters into intercompany reinsurance transactions, primarily
through American International Reinsurance Company, Ltd.
(AIRCO), for its General Insurance and Life Insurance
operations. AIG enters into these transactions as a sound and
prudent business practice in order to maintain underwriting
control and spread insurance risk among AIGs various legal
entities. All material intercompany transactions have been
eliminated in consolidation. AIG generally obtains letters of
credit in order to obtain statutory recognition of these
intercompany reinsurance transactions. At September 30,
2006, approximately $3.7 billion of letters of credit were
outstanding to cover intercompany reinsurance transactions with
AIRCO or other General Insurance subsidiaries.
At September 30, 2006, consolidated general reinsurance
assets of $22.99 billion include reinsurance recoverables
for paid losses and loss expenses of $1.58 billion and
$18.35 billion with respect to the ceded reserve for losses
and loss expenses, including ceded losses incurred but not
reported (IBNR) (ceded reserves) and $3.07 billion of ceded
reserve for unearned premiums. The ceded reserve for losses and
loss expenses represent the accumulation of estimates of
ultimate ceded losses including provisions for ceded IBNR and
loss expenses. The methods used to determine such estimates and
to establish the resulting ceded reserves involve significant
judgment in projecting the frequency and severity of losses over
multiple years and are continually reviewed and updated by
management. Any adjustments thereto are reflected in income
currently. It is AIGs belief that the ceded reserves for
losses and loss expenses at September 30, 2006 were
representative of the ultimate losses recoverable. In the
future, as the ceded reserves continue to develop to ultimate
amounts, the ultimate loss recoverable may be greater or less
than the reserves currently ceded.
Reserve for Losses and Loss Expenses
The table below classifies as of September 30, 2006 and
December 31, 2005 the components of the General Insurance
gross reserve for losses and loss expenses (loss reserves) by
major lines of business on a statutory Annual Statement
basis*:
|
|
|
|
|
|
|
|
|
(in millions) |
|
September 30, 2006 | |
|
December 31, 2005 | |
|
Other liability occurrence
|
|
$ |
18,879 |
|
|
$ |
18,116 |
|
Other liability claims made
|
|
|
12,768 |
|
|
|
12,447 |
|
Workers compensation
|
|
|
12,751 |
|
|
|
11,630 |
|
Property
|
|
|
6,634 |
|
|
|
7,217 |
|
Auto liability
|
|
|
6,351 |
|
|
|
6,569 |
|
International
|
|
|
5,376 |
|
|
|
4,939 |
|
Reinsurance
|
|
|
3,419 |
|
|
|
2,886 |
|
Medical malpractice
|
|
|
2,200 |
|
|
|
2,363 |
|
Products liability
|
|
|
1,988 |
|
|
|
1,937 |
|
Accident and health
|
|
|
1,727 |
|
|
|
1,678 |
|
Aircraft
|
|
|
1,642 |
|
|
|
1,844 |
|
Commercial multiple peril
|
|
|
1,449 |
|
|
|
1,359 |
|
Fidelity/ surety
|
|
|
1,015 |
|
|
|
1,072 |
|
Other
|
|
|
3,664 |
|
|
|
3,112 |
|
|
Total
|
|
$ |
79,863 |
|
|
$ |
77,169 |
|
|
|
|
* |
Presented by lines of business pursuant to statutory
reporting requirements as prescribed by the National Association
of Insurance Commissioners. |
AIGs gross reserve for losses and loss expenses represents
the accumulation of estimates of ultimate losses, including IBNR
and loss expenses. The methods used to determine loss reserve
estimates and to establish the resulting reserves are
continually reviewed and updated by management. Any adjustments
resulting therefrom are reflected in operating income currently.
Because loss reserve estimates are subject to the outcome of
future events, changes in estimates are unavoidable given that
loss trends vary and time is often required for changes in
trends to be recognized and confirmed. Reserve changes that
increase previous estimates of ultimate cost are referred to as
unfavorable or adverse development or reserve strengthening.
Reserve changes that decrease previous estimates of ultimate
cost are referred to as favorable development.
At September 30, 2006, General Insurance net loss reserves
increased $4.04 billion from the prior year end to
$61.51 billion. The net loss reserves represent loss
reserves reduced by reinsurance recoverables, net of an
allowance for unrecoverable reinsurance and applicable discount
for future investment income. The table below classifies the
components of the General Insurance net loss reserves by
business unit as of September 30, 2006 and
December 31, 2005.
|
|
|
|
|
|
|
|
|
(in millions) |
|
September 30, 2006 | |
|
December 31, 2005 | |
|
DBG(a)
|
|
$ |
43,383 |
|
|
$ |
40,782 |
|
Transatlantic
|
|
|
6,118 |
|
|
|
5,690 |
|
Personal
Lines(b)
|
|
|
2,486 |
|
|
|
2,578 |
|
Mortgage Guaranty
|
|
|
390 |
|
|
|
340 |
|
Foreign
General(c)
|
|
|
9,136 |
|
|
|
8,086 |
|
|
Total Net Loss Reserve
|
|
$ |
61,513 |
|
|
$ |
57,476 |
|
|
|
|
(a) |
At September 30, 2006 and December 31, 2005, DBG
loss reserves include approximately $3.50 billion and
$3.77 billion, respectively, ($3.87 billion and
$4.26 billion, respectively, before discount) related to |
48
American International Group, Inc. and Subsidiaries
|
|
|
business written by DBG but
ceded to AIRCO and reported in AIRCOs statutory filings.
DBG loss reserves also include approximately $532 million
and $407 million related to business included in
AIUOs statutory filings at September 30, 2006 and
December 31, 2005, respectively. |
(b) |
At September 30, 2006 and
December 31, 2005, Personal Lines loss reserves include
$876 million and $878 million, respectively, related
to business ceded to DBG and reported in DBGs statutory
filings. |
(c) |
At September 30, 2006 and
December 31, 2005, Foreign General loss reserves include
approximately $2.70 billion and $2.15 billion,
respectively, related to business reported in DBGs
statutory filings. |
The DBG net loss reserve of $43.38 billion is comprised
principally of the business of AIG subsidiaries participating in
the American Home/National Union pool (11 companies) and the
surplus lines pool (Lexington, Starr Excess Liability Insurance
Company and Landmark Insurance Company).
Beginning in 1998, DBG ceded a quota share percentage of its
other liability occurrence and products liability occurrence
business to AIRCO. The quota share percentage ceded was
40 percent in 1998, 65 percent in 1999,
75 percent in 2000 and 2001, 50 percent in 2002 and
2003, 40 percent in 2004, 35 percent in 2005 and
20 percent in 2006 and covered all business written in
these years for these lines by participants in the American
Home/National Union pool. In 1998 the cession reflected only the
other liability occurrence business, but in 1999 and subsequent
years included products liability occurrence. AIRCOs loss
reserves relating to these quota share cessions from DBG are
recorded on a discounted basis. As of September 30, 2006,
AIRCO carried a discount of approximately $370 million
applicable to the $3.87 billion in undiscounted reserves it
assumed from the American Home/National Union pool via this
quota share cession. AIRCO also carries approximately
$478 million in net loss reserves relating to Foreign
General insurance business. These reserves are carried on an
undiscounted basis.
Beginning in 1997, the Personal Lines division ceded a
percentage of all business written by the companies
participating in the personal lines pool to the American
Home/National Union pool. As noted above, the total reserves
carried by participants in the American Home/National Union pool
relating to this cession amounted to $876 million as of
September 30, 2006.
The companies participating in the American Home/National Union
pool have maintained a participation in the business written by
AIU for decades. As of September 30, 2006, these AIU
reserves carried by participants in the American Home/National
Union pool amounted to approximately $2.70 billion. The
remaining Foreign General reserves are carried by AIUO, AIRCO,
and other smaller AIG subsidiaries domiciled outside the United
States. Statutory filings in the U.S. by AIG companies reflect
all the business written by U.S. domiciled entities only, and
therefore exclude business written by AIUO, AIRCO, and all other
internationally domiciled subsidiaries. The total reserves
carried at September 30, 2006 by AIUO and AIRCO were
approximately $4.35 billion and $3.98 billion,
respectively. AIRCOs $3.98 billion in total general
insurance reserves consist of approximately $3.50 billion
from business assumed from the American Home/ National Union
pool and an additional $478 million relating to Foreign
General Insurance business.
Discounting of Reserves
At September 30, 2006, AIGs overall General Insurance
net loss reserves reflects a loss reserve discount of
$2.11 billion, including tabular and non-tabular
calculations. The tabular workers compensation discount is
calculated using a 3.5 percent interest rate and the
1979-81 Decennial Mortality Table. The non-tabular workers
compensation discount is calculated separately for companies
domiciled in New York and Pennsylvania, and follows the
statutory regulations for each state. For New York companies,
the discount is based on a five percent interest rate and the
companies own payout patterns. For Pennsylvania companies,
the statute has specified discount factors for accident years
2001 and prior, which are based on a six percent interest rate
and an industry payout pattern. For accident years 2002 and
subsequent, the discount is based on the yield of U.S. Treasury
securities ranging from one to twenty years and the
companys own payout pattern, with the future expected
payment for each year using the interest rate associated with
the corresponding Treasury security yield for that time period.
The discount is comprised of the following:
$512 million tabular discount for workers
compensation in DBG; $1.23 billion non-tabular
discount for workers compensation in DBG; and,
$370 million non-tabular discount for other
liability occurrence and products liability occurrence in AIRCO.
The total undiscounted workers compensation loss reserve carried
by DBG is approximately $10.6 billion as of
September 30, 2006. The other liability occurrence and
products liability occurrence business in AIRCO that is assumed
from DBG is discounted based on the yield of U.S. Treasury
securities ranging from one to twenty years and the DBG payout
pattern for this business. The undiscounted reserves assumed by
AIRCO from DBG totaled approximately $3.87 billion at
September 30, 2006.
Quarterly Reserving Process
It is managements belief that the General Insurance net
loss reserves are adequate to cover General Insurance net losses
and loss expenses as of September 30, 2006. While AIG
regularly reviews the adequacy of established loss reserves,
there can be no assurance that AIGs ultimate loss reserves
will not develop adversely and materially exceed AIGs loss
reserves as of September 30, 2006. In the opinion of
management, such adverse development and resulting increase in
reserves is not likely to have a material adverse effect on
AIGs consolidated financial position, although it could
have a material adverse effect on AIGs consolidated
results of operations for an individual reporting period.
49
American International Group, Inc. and Subsidiaries
The table below presents the reconciliation of General
Insurance net loss reserves for the three and nine-month periods
ended September 30, 2006 and 2005 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Net reserve for losses and loss expenses at beginning of period
|
|
$ |
60,214 |
|
|
$ |
50,564 |
|
|
$ |
57,476 |
|
|
$ |
47,254 |
|
Foreign exchange effect
|
|
|
34 |
|
|
|
(33 |
) |
|
|
521 |
|
|
|
(354 |
) |
Acquisition(a)
|
|
|
55 |
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
Losses and loss expenses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
6,957 |
|
|
|
8,626 |
|
|
|
20,710 |
|
|
|
22,697 |
|
|
Prior years, other than accretion of
discount(b)
|
|
|
(41 |
) |
|
|
244 |
|
|
|
(255 |
) |
|
|
374 |
|
|
Prior years, accretion of discount
|
|
|
101 |
|
|
|
97 |
|
|
|
303 |
|
|
|
291 |
|
|
Losses and loss expenses incurred
|
|
|
7,017 |
|
|
|
8,967 |
|
|
|
20,758 |
|
|
|
23,362 |
|
|
Losses and loss expenses paid
|
|
|
5,807 |
|
|
|
5,439 |
|
|
|
17,297 |
|
|
|
16,203 |
|
|
Net reserve for losses and loss expenses at end of period
|
|
$ |
61,513 |
|
|
$ |
54,059 |
|
|
$ |
61,513 |
|
|
$ |
54,059 |
|
|
|
|
(a) |
Reflects the opening balance with respect to the acquisition
of the Central Insurance Co., Ltd. in the third quarter of
2006. |
(b) |
Includes $24 million and $30 million in the
three-month periods ended September 30, 2006 and 2005,
respectively, for the general reinsurance operations of
Transatlantic and $43 million and $39 million,
respectively, of additional losses incurred resulting from 2005
and 2004 catastrophes. Includes $89 million and
$120 million in the nine-month periods ended
September 30, 2006 and 2005, respectively, for the general
reinsurance operations of Transatlantic and $80 million and
$157 million, respectively, of additional losses incurred
resulting from 2005 and 2004 catastrophes. Transatlantic
included $4 million and $24 million of prior years
adverse catastrophe development in the three and nine months
ended September 30, 2006, respectively. |
The loss ratios recorded by AIG for the first nine months of
2006 take into account the results of the comprehensive reserve
reviews that were completed in the fourth quarter of 2005. As
explained more fully in the 2005 Annual Report on
Form 10-K/A,
AIGs year-end 2005 reserve review reflected careful
consideration of the reserve analyses prepared by AIGs
internal actuarial staff with the assistance of third party
actuaries. In determining the appropriate loss ratios for
accident year 2006 for each class of business, AIG gave
appropriate consideration to the loss ratios resulting from the
reserve analyses as well as all other relevant information
including rate changes, expected changes in loss costs, changes
in coverage, reinsurance or mix of business, and other factors
that may affect the loss ratios.
In the first nine months of 2006, AIG enhanced its process
of determining the quarterly loss development from prior
accident years. In the first quarter of 2006, AIG began
conducting additional analyses to determine the change in
estimated ultimate loss for each accident year for each profit
center. For example, if loss emergence for a profit center is
different than expected for certain accident years in the
quarter, the actuaries now take additional steps to examine the
indicated effect such emergence would have on the reserves of
that profit center. In some cases, the higher or lower than
expected emergence may result in no clear change in the ultimate
loss estimate for the accident years in question, and no
adjustment would be made to the profit centers reserves
for prior accident years. In other cases, the higher or lower
than expected emergence may result in a larger change, either
favorable or unfavorable, than the difference between the actual
and expected loss emergence. Such additional analyses were
conducted for each profit center, as appropriate, in the first,
second and third quarters of 2006 to determine the loss
development from prior accident years for the first, second and
third quarters of 2006. As part of its quarterly reserving
process, AIG also considers notices of claims received with
respect to emerging issues, such as those related to stock
option backdating.
In the third quarter of 2006, net loss development from prior
accident years was favorable by approximately $41 million,
including approximately $43 million of adverse development
pertaining to the major hurricanes in 2005 and 2004 and
$24 million of adverse development pertaining to the
general reinsurance operations of Transatlantic. Excluding
catastrophes and Transatlantic, as well as accretion of discount
of approximately $101 million, net loss development from
prior accident years in the third quarter of 2006 was favorable
by approximately $108 million. This overall favorable
development of $108 million consisted of approximately
$490 million of favorable development from accident years
2003 through 2005, partially offset by approximately
$380 million of adverse development from accident years
2002 and prior. The $490 million of favorable development
from accident years 2003 through 2005 included approximately
$310 million from accident year 2005, $160 million
from accident year 2004, and $20 million from accident year
2003. The adverse development from accident years 2002 and prior
included approximately $130 million from accident year
1999, primarily due to two significant claims, with the balance
spread across many accident years. Foreign General prior
accident year reserves, excluding catastrophes, developed
favorably by approximately $105 million in the quarter. DBG
prior accident year reserves, excluding catastrophes, developed
adversely by approximately $40 million. The overall
development also included approximately $22 million of
favorable development from Personal Lines and approximately
$21 million of favorable development from UGC. The
50
American International Group, Inc. and Subsidiaries
favorable developments experienced in Foreign General included
both short tail as well as longer tail classes of business.
In the first nine months of 2006, net loss development from
prior accident years was favorable by approximately
$255 million, including approximately $80 million of
adverse development pertaining to the major hurricanes in 2004
and 2005 and $89 million of adverse development from the
general reinsurance operations of Transatlantic. Excluding
catastrophes and Transatlantic, as well as accretion of discount
of approximately $303 million, net loss development from
prior accident years in the first nine months of 2006 was
favorable by approximately $424 million. This overall
favorable development of $424 million consisted of
approximately $1.23 billion of favorable development from
accident years 2003 through 2005, partially offset by
approximately $805 million of adverse development from
accident years 2002 and prior. The $1.23 billion of
favorable development from accident years 2003 through 2005
included approximately $550 million from accident year
2005, $450 million from accident year 2004, and
$230 million from accident year 2003. The adverse
developments from accident years 2002 and prior were widely
spread among many accident years. The overall favorable
development of $424 million included approximately
$235 million from Foreign General, $80 million from
Personal Lines, $85 million from UGC, and $25 million
from DBG. For both the third quarter and the first nine months
of 2006, most classes of business throughout AIG continued to
experience favorable development for accident years 2003 through
2005. The adverse development from accident years 2002 and prior
reflected developments from excess casualty, workers
compensation, excess workers compensation, and
post-1986 environmental
liability classes of business, all within DBG.
As a result of the continued favorable experience for accident
years 2003 through 2005, the expected loss ratios for accident
year 2006 were improved for a number of casualty classes of
business in the third quarter of 2006. For those classes of
business where the expected loss ratio for accident year 2006
was adjusted in the third quarter, the revised loss ratio was
generally applied to the cumulative 2006 net earned premium for
the class. The overall effect on the third quarter results was
approximately a $100 million improvement. This amount
represents the application of the revised expected loss ratios
to the net premiums earned reported for the first six months of
2006.
In the third quarter of 2005, net loss development from prior
accident years was adverse by approximately $244 million,
including approximately $39 million of adverse development
pertaining to the major hurricanes from accident year 2004 and
approximately $30 million of adverse development pertaining
to the general reinsurance operations of Transatlantic.
Excluding catastrophes and Transatlantic, as well as accretion
of discount of approximately $97 million, net loss
development from prior accident years in the third quarter of
2005 was adverse by approximately $175 million. In the
third quarter of 2005, most classes of business experienced
favorable development for accident years 2003 and 2004 and
adverse development for accident years 2001 and prior. The
overall development of $175 million consisted of
approximately $350 million of adverse development from
accident years 2001 and prior, partially offset by approximately
$170 million of favorable development from accident year
2004 and $30 million of favorable development from accident
year 2003. Accident year 2002 experienced adverse development
for D&O and excess casualty, with an overall adverse
development of approximately $20 million in the quarter.
For all accident years combined, the D&O and excess casualty
classes accounted for the vast majority of the $175 million
overall adverse development in the quarter. The
$175 million of overall adverse development, excluding
catastrophes, was comprised of approximately $190 million
of adverse development from DBG, $15 million of adverse
development from Foreign General, and $15 million of
favorable development from each of the Personal Lines and UGC
segments.
In the first nine months of 2005, net loss development from
prior accident years was adverse by approximately
$375 million, including approximately $157 million of
adverse development from the major hurricanes from accident year
2004 and approximately $120 million of adverse development
from the general reinsurance operations of Transatlantic.
Excluding catastrophes and Transatlantic, as well as accretion
of discount of approximately $291 million, net loss
development from prior accident years in the first nine months
of 2005 was adverse by approximately $98 million. The
overall development of $98 million consisted of
approximately $1.13 billion of adverse development from
accident years 2002 and prior, offset by approximately
$740 million of favorable development from accident year
2004 and approximately $290 million of favorable
development from accident year 2003. Most classes of business
produced favorable development for accident years 2003 and 2004,
and adverse development for accident years 2001 and prior. The
majority of the adverse development from accident year 2002 and
prior was attributable to the D&O and excess casualty
classes of business. Accident year 2002 experienced favorable
development for many classes of business. However, in total,
accident year 2002 experienced approximately $50 million of
adverse development primarily attributable to approximately
$125 million of adverse development from the D&O class.
The overall adverse development of $98 million for all
prior accident years, excluding catastrophes, was comprised of
approximately $410 million of adverse development from DBG,
$190 million of favorable development from Foreign General,
$60 million of favorable development from Personal Lines,
and $62 million of favorable development from UGC.
51
American International Group, Inc. and Subsidiaries
Loss Reserving Process
The General Insurance loss reserves can generally be categorized
into two distinct groups. One group is long-tail casualty lines
of business which include excess and umbrella liability,
D&O, professional liability, medical malpractice, workers
compensation, general liability, products liability, and related
classes. The other group is short-tail lines of business
consisting principally of property lines, personal lines and
certain classes of casualty lines. These lines of business and
actuarial assumptions made in the review of these lines of
business are described in the 2005 Annual Report on
Form 10-K/A.
The
process of determining the current loss ratio for each class or
business segment is based on a variety of factors and is
described in detail in AIGs 2005 Annual Report on
Form 10-K/A. AIG
uses the process described above to update AIGs reserves
on a quarterly basis. AIGs 2005 Annual Report on
Form 10-K/A also includes a discussion and analysis of the
volatility of AIGs 2005 reserve estimates and a
sensitivity analysis.
Asbestos and Environmental Reserves
The estimation of loss reserves relating to asbestos and
environmental claims on insurance policies written many years
ago is subject to greater uncertainty than other types of claims
due to inconsistent court decisions as well as judicial
interpretations and legislative actions that in some cases have
tended to broaden coverage beyond the original intent of such
policies and in others have expanded theories of liability.
As
described more fully in the 2005 Annual Report on
Form 10-K/A,
AIGs reserves relating to asbestos and environmental
claims reflect the results of the comprehensive ground up
analysis which was completed in the fourth quarter of 2005. AIG
is in the process of updating its ground up analysis and expects
to continue to do so on an annual basis. In the first nine
months of 2006, AIG maintained the ultimate loss estimates for
asbestos and environmental claims resulting from the recently
completed reserve analyses. A minor amount of incurred loss
emergence pertaining to asbestos was reflected in the first nine
months of 2006, as depicted in the table that follows. This
minor development is primarily attributable to the general
reinsurance operations of Transatlantic.
A summary of reserve activity, including estimates for
applicable IBNR, relating to asbestos and environmental claims
separately and combined for the nine months ended
September 30, 2006 and 2005 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
(in millions) |
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
Asbestos:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses at beginning of year
|
|
$ |
4,441 |
|
|
$ |
1,840 |
|
|
$ |
2,559 |
|
|
$ |
1,060 |
|
Losses and loss expenses
incurred*
|
|
|
2 |
|
|
|
7 |
|
|
|
120 |
|
|
|
33 |
|
Losses and loss expenses
paid*
|
|
|
(404 |
) |
|
|
(151 |
) |
|
|
(239 |
) |
|
|
(91 |
) |
|
Reserve for losses and loss expenses at end of period
|
|
$ |
4,039 |
|
|
$ |
1,696 |
|
|
$ |
2,440 |
|
|
$ |
1,002 |
|
|
Environmental:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses at beginning of year
|
|
$ |
926 |
|
|
$ |
410 |
|
|
$ |
974 |
|
|
$ |
451 |
|
Losses and loss expenses
incurred*
|
|
|
(3 |
) |
|
|
|
|
|
|
(9 |
) |
|
|
(2 |
) |
Losses and loss expenses
paid*
|
|
|
(80 |
) |
|
|
(43 |
) |
|
|
(81 |
) |
|
|
(52 |
) |
|
Reserve for losses and loss expenses at end of period
|
|
$ |
843 |
|
|
$ |
367 |
|
|
$ |
884 |
|
|
$ |
397 |
|
|
Combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for losses and loss expenses at beginning of year
|
|
$ |
5,367 |
|
|
$ |
2,250 |
|
|
$ |
3,533 |
|
|
$ |
1,511 |
|
Losses and loss expenses
incurred*
|
|
|
(1 |
) |
|
|
7 |
|
|
|
111 |
|
|
|
31 |
|
Losses and loss expenses
paid*
|
|
|
(484 |
) |
|
|
(194 |
) |
|
|
(320 |
) |
|
|
(143 |
) |
|
Reserve for losses and loss expenses at end of period
|
|
$ |
4,882 |
|
|
$ |
2,063 |
|
|
$ |
3,324 |
|
|
$ |
1,399 |
|
|
|
|
* |
All amounts pertain to policies underwritten in prior
years. |
As indicated in the table above, asbestos loss payments
increased significantly in the first nine months of 2006
compared to the same period in the prior years, primarily as a
result of payments pertaining to settlements that had been
negotiated in earlier periods. There was negligible development
of asbestos and environmental reserves in the first
nine months of 2006.
The gross and net IBNR included in the reserve for losses
and loss expenses, relating to asbestos and environmental claims
separately and combined, at September 30, 2006 and 2005
were estimated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
(in millions) |
|
Gross | |
|
Net | |
|
Gross | |
|
Net | |
|
Asbestos
|
|
$ |
2,863 |
|
|
$ |
1,312 |
|
|
$ |
1,550 |
|
|
$ |
684 |
|
Environmental
|
|
|
567 |
|
|
|
242 |
|
|
|
558 |
|
|
|
253 |
|
|
Combined
|
|
$ |
3,430 |
|
|
$ |
1,554 |
|
|
$ |
2,108 |
|
|
$ |
937 |
|
|
52
American International Group, Inc. and Subsidiaries
A summary of asbestos and environmental claims count
activity for the nine months ended September 30, 2006
and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
Asbestos | |
|
Environmental | |
|
Combined | |
|
Asbestos | |
|
Environmental | |
|
Combined | |
|
Claims at beginning of year
|
|
|
7,293 |
|
|
|
9,873 |
|
|
|
17,166 |
|
|
|
7,575 |
|
|
|
8,216 |
|
|
|
15,791 |
|
Claims during year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opened
|
|
|
538 |
|
|
|
1,032 |
|
|
|
1,570 |
|
|
|
646 |
|
|
|
4,583 |
|
|
|
5,229 |
|
|
Settled
|
|
|
(126 |
) |
|
|
(120 |
) |
|
|
(246 |
) |
|
|
(49 |
) |
|
|
(178 |
) |
|
|
(227 |
) |
|
Dismissed or otherwise resolved
|
|
|
(678 |
) |
|
|
(1,295 |
) |
|
|
(1,973 |
) |
|
|
(831 |
) |
|
|
(2,934 |
) |
|
|
(3,765 |
) |
|
Claims at end of period
|
|
|
7,027 |
|
|
|
9,490 |
|
|
|
16,517 |
|
|
|
7,341 |
|
|
|
9,687 |
|
|
|
17,028 |
|
|
The table below presents AIGs survival ratios for asbestos
and environmental claims at September 30, 2006 and 2005.
The survival ratio is derived by dividing the current carried
loss reserve by the average payments for the three most recent
calendar years for these claims. Therefore, the survival ratio
is a simplistic measure estimating the number of years it would
be before the current ending loss reserves for these claims
would be paid off using recent year average payments. The 2006
survival ratio is lower than the ratio at December 31, 2005
because the more recent periods included in the rolling average
reflect higher claims payments. Many factors, such as aggressive
settlement procedures, mix of business and level of coverage
provided, have a significant effect on the amount of asbestos
and environmental reserves and payments and the resultant
survival ratio. Thus, caution should be exercised in attempting
to determine reserve adequacy for these claims based simply on
this survival ratio.
AIGs survival ratios for asbestos and environmental
claims, separately and combined, were based upon a three-year
average payment. These ratios at September 30, 2006 and
2005 were as follows:
|
|
|
|
|
|
|
|
|
|
(number of years) |
|
Gross | |
|
Net | |
|
2006
|
|
|
|
|
|
|
|
|
Survival ratios:
|
|
|
|
|
|
|
|
|
|
Asbestos
|
|
|
11.9 |
|
|
|
13.6 |
|
|
Environmental
|
|
|
6.5 |
|
|
|
5.3 |
|
|
Combined
|
|
|
10.4 |
|
|
|
10.7 |
|
|
2005
|
|
|
|
|
|
|
|
|
Survival ratios:
|
|
|
|
|
|
|
|
|
|
Asbestos
|
|
|
9.0 |
|
|
|
11.0 |
|
|
Environmental
|
|
|
6.5 |
|
|
|
6.0 |
|
|
Combined
|
|
|
8.1 |
|
|
|
8.9 |
|
|
Life Insurance & Retirement Services
Operations
AIGs Life Insurance & Retirement Services
subsidiaries offer a wide range of insurance and retirement
savings products both domestically and abroad.
Insurance-oriented products consist of individual and group
life, payout annuities, endowment and accident and health
policies. Retirement savings products consist generally of fixed
and variable annuities.
Domestically, AIGs Life Insurance & Retirement
Services operations offer a broad range of protection products,
such as life insurance, group life and health products,
including disability income products and payout annuities, which
include single premium immediate annuities, structured
settlements and terminal funding annuities. Home service
operations include an array of life insurance, accident and
health and annuity products sold primarily through career
agents. In addition, home service includes a small block of
run-off property and casualty coverage. Retirement services
include group retirement products, individual fixed and variable
annuities sold through banks, broker dealers and exclusive sales
representatives, and annuity runoff operations, which include
previously-acquired closed blocks and other fixed
and variable annuities largely sold through distribution
relationships that have been discontinued.
Overseas, AIGs Life Insurance & Retirement
Services operations include insurance and investment-oriented
products such as whole and term life, investment linked,
universal life and endowments, personal accident and health
products, group products including pension, life and health, and
fixed and variable annuities.
53
American International Group, Inc. and Subsidiaries
Life Insurance & Retirement Services operations
presented on a sub-product basis for the three and nine-month
periods ended September 30, 2006 and 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
(in millions) | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
GAAP premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
insurance(a)
|
|
$ |
546 |
|
|
$ |
506 |
|
|
$ |
1,619 |
|
|
$ |
1,506 |
|
|
Home service
|
|
|
196 |
|
|
|
201 |
|
|
|
593 |
|
|
|
606 |
|
|
Group life/health
|
|
|
256 |
|
|
|
272 |
|
|
|
743 |
|
|
|
805 |
|
|
Payout
annuities(b)
|
|
|
414 |
|
|
|
375 |
|
|
|
1,261 |
|
|
|
1,118 |
|
|
|
Total
|
|
|
1,412 |
|
|
|
1,354 |
|
|
|
4,216 |
|
|
|
4,035 |
|
|
Domestic Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group retirement products
|
|
|
94 |
|
|
|
91 |
|
|
|
284 |
|
|
|
261 |
|
|
Individual fixed annuities
|
|
|
32 |
|
|
|
25 |
|
|
|
96 |
|
|
|
72 |
|
|
Individual variable annuities
|
|
|
132 |
|
|
|
119 |
|
|
|
390 |
|
|
|
345 |
|
|
Individual fixed
annuities-runoff(c)
|
|
|
16 |
|
|
|
17 |
|
|
|
50 |
|
|
|
58 |
|
|
|
Total
|
|
|
274 |
|
|
|
252 |
|
|
|
820 |
|
|
|
736 |
|
|
Total Domestic
|
|
|
1,686 |
|
|
|
1,606 |
|
|
|
5,036 |
|
|
|
4,771 |
|
|
Foreign Life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
|
3,834 |
|
|
|
3,671 |
|
|
|
11,851 |
|
|
|
11,664 |
|
|
Personal accident & health
|
|
|
1,398 |
|
|
|
1,258 |
|
|
|
4,084 |
|
|
|
3,746 |
|
|
Group products
|
|
|
588 |
|
|
|
469 |
|
|
|
1,668 |
|
|
|
1,447 |
|
|
|
Total
|
|
|
5,820 |
|
|
|
5,398 |
|
|
|
17,603 |
|
|
|
16,857 |
|
|
Foreign Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual fixed annuities
|
|
|
85 |
|
|
|
80 |
|
|
|
274 |
|
|
|
256 |
|
|
Individual variable annuities
|
|
|
48 |
|
|
|
25 |
|
|
|
123 |
|
|
|
69 |
|
|
|
Total
|
|
|
133 |
|
|
|
105 |
|
|
|
397 |
|
|
|
325 |
|
|
Total Foreign
|
|
|
5,953 |
|
|
|
5,503 |
|
|
|
18,000 |
|
|
|
17,182 |
|
|
Total GAAP Premiums
|
|
$ |
7,639 |
|
|
$ |
7,109 |
|
|
$ |
23,036 |
|
|
$ |
21,953 |
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$ |
347 |
|
|
$ |
314 |
|
|
$ |
998 |
|
|
$ |
1,010 |
|
|
Home service
|
|
|
167 |
|
|
|
147 |
|
|
|
470 |
|
|
|
451 |
|
|
Group life/health
|
|
|
55 |
|
|
|
51 |
|
|
|
161 |
|
|
|
148 |
|
|
Payout annuities
|
|
|
253 |
|
|
|
230 |
|
|
|
734 |
|
|
|
679 |
|
|
|
Total
|
|
|
822 |
|
|
|
742 |
|
|
|
2,363 |
|
|
|
2,288 |
|
|
Domestic Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group retirement products
|
|
|
563 |
|
|
|
569 |
|
|
|
1,674 |
|
|
|
1,665 |
|
|
Individual fixed annuities
|
|
|
893 |
|
|
|
863 |
|
|
|
2,705 |
|
|
|
2,509 |
|
|
Individual variable annuities
|
|
|
51 |
|
|
|
54 |
|
|
|
153 |
|
|
|
165 |
|
|
Individual fixed
annuities-runoff(c)
|
|
|
226 |
|
|
|
240 |
|
|
|
689 |
|
|
|
744 |
|
|
|
Total
|
|
|
1,733 |
|
|
|
1,726 |
|
|
|
5,221 |
|
|
|
5,083 |
|
|
Total Domestic
|
|
|
2,555 |
|
|
|
2,468 |
|
|
|
7,584 |
|
|
|
7,371 |
|
|
Foreign Life:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
insurance(d)
|
|
|
1,401 |
|
|
|
1,270 |
|
|
|
3,991 |
|
|
|
3,583 |
|
|
Personal accident & health
|
|
|
78 |
|
|
|
66 |
|
|
|
213 |
|
|
|
176 |
|
|
Group products
|
|
|
171 |
|
|
|
158 |
|
|
|
463 |
|
|
|
425 |
|
|
Intercompany adjustments
|
|
|
(10 |
) |
|
|
(10 |
) |
|
|
(30 |
) |
|
|
(26 |
) |
|
|
Total
|
|
|
1,640 |
|
|
|
1,484 |
|
|
|
4,637 |
|
|
|
4,158 |
|
|
Foreign Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual fixed annuities
|
|
|
516 |
|
|
|
486 |
|
|
|
1,470 |
|
|
|
1,240 |
|
|
Individual variable annuities
|
|
|
182 |
|
|
|
229 |
|
|
|
209 |
|
|
|
382 |
|
|
|
Total
|
|
|
698 |
|
|
|
715 |
|
|
|
1,679 |
|
|
|
1,622 |
|
|
|
Total Foreign
|
|
|
2,338 |
|
|
|
2,199 |
|
|
|
6,316 |
|
|
|
5,780 |
|
|
Total net investment income
|
|
$ |
4,893 |
|
|
$ |
4,667 |
|
|
$ |
13,900 |
|
|
$ |
13,151 |
|
|
54
American International Group, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
(in millions) | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Realized capital gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic realized capital gains (losses)
|
|
$ |
(147 |
) |
|
$ |
(42 |
) |
|
$ |
(604 |
) |
|
$ |
(93 |
) |
|
Foreign realized capital gains (losses)
|
|
|
(103 |
) |
|
|
(62 |
) |
|
|
201 |
|
|
|
(194 |
) |
Pricing net investment
gains(e)
|
|
|
74 |
|
|
|
88 |
|
|
|
286 |
|
|
|
269 |
|
|
Total Foreign
|
|
|
(29 |
) |
|
|
26 |
|
|
|
487 |
|
|
|
75 |
|
|
Total realized capital gains
(losses)(e)
|
|
$ |
(176 |
) |
|
$ |
(16 |
) |
|
$ |
(117 |
) |
|
$ |
(18 |
) |
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
864 |
|
|
$ |
878 |
|
|
$ |
2,450 |
|
|
$ |
2,753 |
|
|
Foreign(d)
|
|
|
1,584 |
|
|
|
1,370 |
|
|
|
4,974 |
|
|
|
4,034 |
|
|
Total operating income
|
|
$ |
2,448 |
|
|
$ |
2,248 |
|
|
$ |
7,424 |
|
|
$ |
6,787 |
|
|
Life insurance
in-force(f):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
$ |
902,202 |
|
|
$ |
825,151 |
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
1,112,392 |
|
|
|
1,027,682 |
|
|
Total
|
|
|
|
|
|
|
|
|
|
$ |
2,014,594 |
|
|
$ |
1,852,833 |
|
|
|
|
|
(a) |
|
Effective January 1, 2006, the Broker/ Dealer operations
of the Domestic Life Insurance companies are being reported and
managed within the Asset Management segment. Included in GAAP
premiums were revenues of $15 million and $79 million,
respectively, for the three and nine-month periods ended
September 30, 2005. |
|
(b) |
|
Includes structured settlements, single premium immediate
annuities and terminal funding annuities. |
|
(c) |
|
Primarily represents runoff annuity business sold through
discontinued distribution relationships. |
|
(d) |
|
Includes the effect of out of period adjustments related to
the accounting for certain interests in unit investment trusts.
For the nine month period ended September 30, 2006, the
effect was an increase of $245 million and
$168 million in net investment income and operating income,
respectively. |
|
(e) |
|
For purposes of this presentation, pricing net investment
gains are segregated as a component of total realized capital
gains (losses). They represent certain amounts of realized
capital gains where gains are an inherent element in pricing
certain life products in some foreign countries. |
|
(f) |
|
Amounts presented were as at September 30, 2006 and
December 31, 2005. |
AIGs Life Insurance & Retirement Services
subsidiaries report their operations through the following
operating units: Domestic Life AIG American General,
including American General Life Insurance Company (AG Life),
United States Life Insurance in the City of New York
(USLIFE) and American General Life and Accident Insurance
Company (AGLA); Domestic Retirement Services The
Variable Annuity Life Insurance Company (VALIC), AIG Annuity
Insurance Company (AIG Annuity) and AIG SunAmerica; Foreign
Life ALICO, AIRCO, AIG Edison Life, AIG Star Life,
American International Assurance Company, Limited together with
American International Assurance Company (Bermuda) Limited
(AIA), Nan Shan Life Insurance Company, Ltd. (Nan Shan) and The
Philippine American Life and General Insurance Company
(Philamlife).
AIG transacts business in most major foreign currencies. The
following table summarizes the effect of changes in foreign
currency exchange rates on the growth of Life
Insurance & Retirement Services GAAP premiums for the
three and nine-month periods ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30, 2006 | |
|
September 30, 2006 | |
| |
Growth in original
currency*
|
|
|
7.9 |
% |
|
|
7.3 |
% |
Foreign exchange effect
|
|
|
(0.4 |
) |
|
|
(2.4 |
) |
Growth as reported in U.S. dollars
|
|
|
7.5 |
% |
|
|
4.9 |
% |
|
|
|
* |
Computed using a constant exchange rate for each respective
period. |
Life Insurance & Retirement Services
Results
Life Insurance & Retirement Services GAAP premiums
increased 7.5 percent to $7.6 billion in the third
quarter of 2006 compared to the same period in 2005. Net
investment income increased $226 million for the third
quarter of 2006 when compared to the same period in 2005. Net
investment income includes policyholder trading gains (losses)
amounting to $221 million in the third quarter of 2006
compared to $359 million in same period of 2005.
Policyholder trading gains (losses) are linked primarily to
equities and are offset by an equal change in incurred policy
losses and benefits.
Operating income increased 9 percent in the third quarter
of 2006 when compared to the same period in 2005. Domestic Life
operations continued to perform well in its core life insurance
businesses with growth in GAAP premium and invested assets
supporting the underlying reserves. Domestic Retirement Services
operating income growth in the quarter was driven by individual
fixed and variable annuity business, offset in part by lower
growth and spread compression in the group retirement products
line. Foreign Life Insurance & Retirement Services
operating income grew 16 percent in the quarter helped by
higher investment returns. Realized capital gains (losses) for
the third quarter of 2006
55
American International Group, Inc. and Subsidiaries
totaled a net loss of $176 million versus a loss of
$16 million during the same period last year. The loss in
the current quarter was primarily due to the effect of hedging
activities that do not qualify for hedge accounting treatment
under FAS 133, partially offset by foreign currency gains.
Life Insurance & Retirement Services GAAP premiums
increased 4.9 percent to $23 billion for the first
nine months of 2006 compared to the same period of 2005. Net
investment income increased for the first nine months of 2006
reflecting a higher level of invested assets. The increase in
net investment income also includes the effect of out of period
adjustments relating to the accounting for certain interests in
unit investment trusts totaling $24 million and
$245 million for the three and nine-month periods ending
September 30, 2006, respectively. Operating income grew
9 percent for the first nine months of 2006 compared to the
same period of 2005. Domestic Life earnings for the core life
and payout annuity businesses continue to demonstrate earnings
growth, but was more than offset by lower investment income from
calls and tenders, lower partnership income and additional
reserves for legal contingencies. Domestic Retirement Services
earnings declined for the first nine months of 2006 primarily
due to realized capital losses which more than offset increased
income from growth in invested assets and lower amortization of
deferred policy acquisition costs related to capital losses.
Foreign Life Insurance & Retirement Services operating
income grew 23 percent for the first nine months of 2006
due to higher realized capital gains and the effect of the
aforementioned out of period adjustments. Operating income
growth in U.S. dollars is lower than growth on a local
currency basis primarily due to a weaker Japanese Yen in the
first nine months of 2006 compared to the same period last year.
Realized capital losses were $117 million for the first
nine months of 2006 compared to $18 million during the same
period of 2005.
Domestic Life Operations
The following table reflects retail periodic Life insurance
sales by product for the three and nine-month periods ended
September 30, 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Life Insurance Periodic Premium Sales* |
|
|
|
Three Months |
|
Nine Months |
|
|
Ended |
|
Ended |
|
|
September 30, |
|
September 30, |
|
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
By product:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal life
|
|
$ |
46 |
|
|
$ |
79 |
|
|
$ |
289 |
|
|
$ |
191 |
|
|
Variable universal life
|
|
|
15 |
|
|
|
11 |
|
|
|
42 |
|
|
|
35 |
|
|
Term life
|
|
|
59 |
|
|
|
59 |
|
|
|
182 |
|
|
|
172 |
|
|
Whole life/other
|
|
|
3 |
|
|
|
1 |
|
|
|
9 |
|
|
|
7 |
|
|
|
Total
|
|
$ |
123 |
|
|
$ |
150 |
|
|
$ |
522 |
|
|
$ |
405 |
|
|
|
|
* |
Periodic premium represents premium from new business
expected to be collected over a one year period. |
Quarterly Domestic Life Results
AIGs Domestic Life operations had growth of GAAP premiums
for the third quarter of 2006 when compared to the same period
last year. In the life insurance product line, periodic life
sales declined due to re-pricing of certain universal life
products and tightened underwriting standards for certain
markets to maintain margins. AGLA, the home service business, is
diversifying product offerings and enhancing the capabilities
and quality of the sales force, which has resulted in improved
agent productivity and better persistency of in-force business.
Growth of payout annuities GAAP premiums emanated from sales of
single premium immediate annuities and structured settlements.
GAAP premiums for the group life/health product line were
slightly lower in the third quarter of 2006 compared to 2005
reflecting slower growth in the credit insurance
business, and tightened pricing and underwriting in the group
employer lines. Management continues to focus on new product
introductions, cross selling, other growth strategies, and
options that may include exiting certain product lines.
Earnings for the Domestic Life Insurance line of business grew
9 percent for the third quarter of 2006 reflecting growth
in in-force business and higher net investment income. Earnings
for the home service line of business increased 37 percent
compared to the third quarter of 2005, which included
approximately $8 million of hurricane losses, and also due
to higher investment income from partnerships of
$17 million. The group life/health line of business results
for the third quarter of 2006 reflect continuing restructuring
efforts in that business. The payout annuities line of business
earnings increased over last year due to growth in single
premium annuities and also due to a $12 million reserve
strengthening in the third quarter of 2005.
Year-to-date
Domestic Life Results
GAAP premiums for the Domestic Life operations grew
5 percent for the first nine months of 2006 compared to the
same period of 2005 reflecting improved sales of universal life
and single premium immediate annuities. The life insurance
product line experienced increased periodic sales from the
independent distribution platform during the first nine months
of 2006. The home service business GAAP premiums declined
slightly for the first nine months of 2006 as the reduction of
premium in-force from normal lapses and maturities exceeded
sales growth for the period. The payout annuities GAAP premium
growth for the first nine months of 2006 reflects increased
sales of single premium annuities and structured settlements
when compared to the same period last year. GAAP premiums for
the group life/health product line for the first nine months of
2006 reflect the restructuring efforts in certain product lines.
Earnings for the life insurance product line declined for the
first nine months of 2006 due to lower investment income
56
American International Group, Inc. and Subsidiaries
related to yield enhancement activities that offset growth in
in-force business. Earnings for the home service line of
business grew from the same period last year due to increased
net investment income from partnerships and lower catastrophe
and acquisition costs. The group life/health line of business
earnings for the first nine months of 2006 are lower than the
same period last year due to reserves related to litigation and
contingencies in the credit life and A&H business and
transition costs related to the outsourcing of back office
operations. The payout annuities product line earnings declined
for the first nine months of 2006 primarily due to lower calls
and tenders on fixed maturity securities when compared to the
same period last year.
Quarterly Domestic Retirement Services Results
Domestic Retirement Services total deposits declined slightly
for the third quarter of 2006 when compared to the year ago
quarter driven by lower fixed annuity sales that continued to
face increased competition from bank products in the flat yield
curve environment, partially offset by substantially higher
variable annuity sales. Individual variable annuity deposits
grew 36 percent in the third quarter of 2006 from the year
ago quarter reflecting growth in products with new guarantee
features. Group retirement deposits grew only slightly in the
quarter compared to third quarter 2005, reflecting the increased
number of policyholders nearing retirement age. New products
have been launched that are designed to meet the needs of
retirement age policyholders and retain assets under management.
While total deposits within the group retirement business are
growing moderately, annuity deposits are down $49 million,
and group mutual fund deposits are up $69 million, for the
third quarter of 2006 when compared to the same period last
year, due to market demand for lower cost group retirement
products. Over time, this will result in a gradual reduction in
profitability of this business, due to lower profit margins in
the mutual fund product compared to the annuity product.
Group retirement products earnings for the third quarter of 2006
were lower than the same period last year principally due to
lower partnership income and higher amortization of deferred
acquisition costs related to internal replacements of existing
contracts into new contracts. Individual fixed annuity earnings
grew 9 percent for the third quarter of 2006 compared to
the same period last year as a result of increased net
investment spreads and lower DAC amortization due to realized
capital losses. Earnings for individual variable annuities grew
$7 million in the third quarter of 2006 from the year ago
quarter principally due to higher fee income as a result of
increased assets under management.
Year-to-date
Domestic Retirement Services Results
Domestic Retirement Services total deposits declined
approximately 5 percent for the first nine months of 2006
when compared to the first nine months of 2005. The decrease in
total deposits reflects declining fixed annuity sales partially
offset by growth in individual variable annuity sales. In
addition, fixed annuity surrender rates increased during the
first nine months of 2006 when compared to the same period last
year. Net flows for the nine months of 2006 were negative
$4.1 billion compared to positive net flows of
$0.3 billion last year reflecting the lower deposits and
higher surrenders.
Group retirement products earnings were flat for the first nine
months with slightly compressed spreads offsetting the effect of
separate account growth. Individual fixed annuity earnings for
the first nine months of 2006 grew 28 percent primarily
from growth in partnership income, lower amortization of
deferred policy acquisition costs related to capital losses,
growth in average underlying reserves and lower average
crediting rates. The individual variable annuity product line
earnings grew for the first nine months as fee income increased
on higher sales volumes and increased underlying reserves.
Domestic Retirement Services Supplemental Data
The following table reflects deposits for Domestic Retirement
Services for the three and nine-month periods ended
September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
Ended |
|
Ended |
|
|
September 30, |
|
September 30, |
|
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Group retirement products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuities
|
|
$ |
1,335 |
|
|
$ |
1,384 |
|
|
$ |
4,083 |
|
|
$ |
4,161 |
|
|
Mutual funds
|
|
|
284 |
|
|
|
215 |
|
|
|
1,085 |
|
|
|
677 |
|
Individual fixed annuities
|
|
|
1,194 |
|
|
|
1,498 |
|
|
|
4,212 |
|
|
|
5,912 |
|
Individual variable annuities
|
|
|
1,059 |
|
|
|
781 |
|
|
|
3,234 |
|
|
|
2,457 |
|
Individual fixed annuities - runoff
|
|
|
37 |
|
|
|
48 |
|
|
|
122 |
|
|
|
155 |
|
|
|
Total
|
|
$ |
3,909 |
|
|
$ |
3,926 |
|
|
$ |
12,736 |
|
|
$ |
13,362 |
|
|
The following chart shows the amount of reserves by surrender
charge category for Domestic Retirement Services as of
September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group | |
|
Individual | |
|
Individual | |
|
|
Retirement | |
|
Fixed | |
|
Variable | |
(in millions) |
|
Products* | |
|
Annuities | |
|
Annuities | |
| |
Zero or no surrender charge
|
|
$ |
41,266 |
|
|
$ |
10,465 |
|
|
$ |
10,721 |
|
Between 0 percent - 4 percent
|
|
|
11,434 |
|
|
|
10,948 |
|
|
|
8,513 |
|
Greater than 4 percent
|
|
|
2,755 |
|
|
|
29,685 |
|
|
|
10,222 |
|
Non-Surrenderable
|
|
|
887 |
|
|
|
3,163 |
|
|
|
89 |
|
|
|
Total
|
|
$ |
56,342 |
|
|
$ |
54,261 |
|
|
$ |
29,545 |
|
|
For the three months and nine months ended September 30,
2006 surrender rates increased for individual fixed annuities
and individual variable annuities, while surrender rates for
group retirement products declined as a result of successful
asset retention efforts. The increase in surrender rate for
fixed annuities continues to be driven by the shape of the yield
curve and general aging of the in-force block; however, less
than 20 percent of the individual fixed annuity reserves as
of September 30, 2006 are available to be surren-
57
American International Group, Inc. and Subsidiaries
dered without charge. Individual variable annuity surrender
rates for the third quarter and the first nine months of 2006
primarily reflect higher shock-lapses that occur following
expiration of the surrender charge period on certain
3-year and
7-year contracts,
although the trend has moderated during the year. Reflecting a
widespread industry phenomenon, this lapse rate, much of which
was anticipated when the products were issued, has recently been
affected by investor demand to exchange existing policies for
new-generation contracts with living benefits or lower fees. In
addition, the high lapse rates are in part due to the surrenders
within certain acquired blocks of business.
A further increase in the level of surrenders in any of these
businesses or in the individual fixed annuities runoff block
could accelerate the amortization of deferred acquisition costs
and negatively affect fee income earned on assets under
management.
The following table reflects the net flows by line of
business for Domestic Retirement Services for the three and
nine-month periods ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Retirement Services Net Flows(a) |
|
|
|
Three Months |
|
Nine Months |
|
|
Ended |
|
Ended |
|
|
September 30, |
|
September 30, |
|
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Group retirement
products(b)
|
|
$ |
158 |
|
|
$ |
(58 |
) |
|
$ |
793 |
|
|
$ |
520 |
|
Individual fixed annuities
|
|
|
(1,021 |
) |
|
|
13 |
|
|
|
(1,758 |
) |
|
|
1,846 |
|
Individual variable annuities
|
|
|
11 |
|
|
|
(155 |
) |
|
|
(34 |
) |
|
|
(209 |
) |
Individual fixed annuities - runoff
|
|
|
(1,042 |
) |
|
|
(607 |
) |
|
|
(3,121 |
) |
|
|
(1,857 |
) |
|
|
Total
|
|
$ |
(1,894 |
) |
|
$ |
(807 |
) |
|
$ |
(4,120 |
) |
|
$ |
300 |
|
|
|
|
(a) |
Net flows are defined as deposits received, less benefits,
surrenders, withdrawals and death benefits. |
(b) |
Includes mutual funds. |
The combination of lower deposits and higher surrenders in the
individual fixed annuity and individual fixed annuity-runoff
blocks resulted in negative net flows for the three and
nine-month periods ended September 30, 2006. The
continuation of the current interest rate and competitive
environment could prolong this trend.
Quarterly Foreign Life Insurance & Retirement
Services Results
Foreign Life Insurance & Retirement Services operations
produced 78 percent and 77 percent of Life
Insurance & Retirement Services GAAP premiums for the
three months ended September 30, 2006 and 2005,
respectively. Foreign Life Insurance & Retirement
Services GAAP premiums increased in the third quarter of 2006 by
approximately 8 percent compared to the same period in 2005
driven primarily by growth in southeast Asia outside of Japan
and Taiwan. Currency changes had little effect on GAAP premiums
in the quarter when compared to prior year. Foreign life GAAP
premium growth is affected by a continuing trend for clients to
purchase investment-oriented products. This is particularly true
in Southeast Asia, including Taiwan, where AIGs life
operations in that region have responded to this trend by
offering a wide array of investment-linked products, both
periodic pay and single premium, with multiple fund selection,
but with minimal investment guarantees. For GAAP reporting
purposes, only revenues from policy charges for insurance,
administration, and surrender charges are reported as GAAP
premiums for these life products. This product mix shift
contributed to the single digit growth rate in Foreign Life
Insurance & Retirement Services GAAP premiums, while
continuing to grow total reserves.
Foreign Life Insurance & Retirement Services operating
income grew by $214 million or 16 percent, to
$1.6 billion for the third quarter of 2006 and included
$29 million of realized capital losses compared to
$26 million of gains in the year ago quarter. On a
comparable basis, the growth in life insurance earnings for the
quarter were generally in line with the growth in invested
assets and increased overall compared to the third quarter of
2005, helped by higher seasonal dividend income of approximately
$35 million in Taiwan, actuarial adjustments of
$30 million and out of period adjustments of
$24 million related to unit investment trusts and
$18 million related to a reinsurance adjustment. The 2005
earnings included a charge to income of $20 million related
to a wind down of operations in Chile. Personal
accident & health earnings for the third quarter of
2006 reflect continued stable profit margins and revenue growth.
Group products earnings grew in the third quarter of 2006 due to
improved mortality and morbidity costs when compared to the same
period last year. Growth of individual fixed annuities earnings
for the third quarter of 2006, emanating primarily from Japan,
is in line with the growth in average assets under management
and lower acquisition costs from DAC unlocking. The growth of
individual variable annuities earnings in the third quarter of
2006 reflects continued growth in assets under management
related to the increased demand for those products in Japan and
in Europe.
During the second quarter of 2006, Japanese tax authorities
announced a reduction in the amount of premium that
policyholders may deduct from their Japanese tax returns for
certain accident and health products. Foreign life operations in
Japan continued to experience a decline in sales of those
products and an increase in terminations during the quarter,
which resulted in approximately $23 million of higher
expenses. This negative effect was more than offset by a
$29 million benefit to operating income from the personal
accident line of business as a result of an actuarial change in
estimate. If terminations continue at current experience levels,
results will continue to be negatively affected. Higher than
anticipated terminations result in accelerated amortization of
deferred acquisition costs, offset somewhat by the release of
policy benefit reserves in excess of cash value. The amount of
deferred acquisition costs related to the policies in-force for
these products amounted to $240 million as of Sep-
58
American International Group, Inc. and Subsidiaries
tember 30, 2006. In response to the tax law change, AIG has
developed new products, both life and health, to meet the needs
of clients in that market. AIG continues to believe that any
increase in policy terminations would not be material to
AIGs consolidated financial condition or results of
operations.
Year-to-date Foreign
Life Insurance & Retirement Services Results
Foreign Life Insurance & Retirement Services operations
produced 78 percent of Life Insurance & Retirement
Services GAAP premiums in the first nine months of 2006 and
2005. GAAP premiums grew approximately 5 percent for the
first nine months of 2006 (7 percent in original currency)
compared to the same period in 2005. AIG transacts business in
most major foreign currencies and therefore premiums reported in
U.S. dollars will vary by volume and from changes in
foreign currency translation rates. Globally, AIGs deep
and diverse distribution, which includes bancassurance, worksite
marketing, direct marketing and strong agency organizations,
provides a powerful distribution platform for AIGs diverse
product lines. In Japan, distribution of single premium life
insurance products through banks was deregulated in December
2005 resulting in increased sales of products designed for that
market during the first nine months of 2006. This new
distribution outlet adds to the existing multiple distribution
platform in Japan where AIG remains the leading foreign provider.
Foreign Life Insurance & Retirement Services operating
income for the first nine months of 2006 was $5.0 billion,
which included $487 million of realized capital gains and
the effect of out of period adjustments related to the
accounting for certain interests in unit investment trusts that
increased operating income by $168 million, compared with
$4.0 billion of operating income for the same period of
2005, which included $75 million of realized capital gains.
The first nine months of 2006 results for the life insurance
product line also included a $38 million operating loss
attributable to this segments share of the operating
results from AIG Credit Card Company (Taiwan) compared to a gain
of $29 million in the first nine months of 2005, due to an
increase in allowance for losses recorded in the first quarter
of 2006. The positive effect of DAC and value of business
acquired (VOBA) unlocking for the life insurance product
line was $31 million and $91 million for the first
nine months of 2006 and 2005, respectively. Personal accident
and health product line results for the first nine months of
2006 generally reflect the growth of underlying premium
in-force, although growth was negatively affected by a weaker
Yen exchange rate when compared to the same period last year.
The Foreign Retirement Services business continued to grow in
Japan and Korea by expanding distribution and leveraging
AIGs product expertise. The positive effect of DAC and
VOBA unlocking for the Retirement Services lines of business was
$32 million and $13 million for the first nine months
of 2006 and 2005, respectively. Reserves for individual fixed
annuities continue to grow although demand for multi-currency
fixed annuities in Japan has slowed due to currency rate
fluctuations, rising local interest rates and stronger equity
markets. Growth of individual variable annuity deposits has
accelerated as those products have become more popular with
consumers in Japan and Europe coupled with improved performance
of equity markets.
59
American International Group, Inc. and Subsidiaries
Life Insurance & Retirement Services Net Investment
Income and Realized Capital Gains (Losses)
The following table summarizes the components of net
investment income for the three and nine-month periods ended
September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
| |
(in millions) | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, including short term investments
|
|
$ |
2,268 |
|
|
$ |
2,175 |
|
|
$ |
6,795 |
|
|
$ |
6,724 |
|
|
Equity securities
|
|
|
6 |
|
|
|
1 |
|
|
|
13 |
|
|
|
7 |
|
|
Interest on mortgage, policy and collateral loans
|
|
|
201 |
|
|
|
188 |
|
|
|
585 |
|
|
|
532 |
|
|
Partnership income excluding Synfuels
|
|
|
103 |
|
|
|
132 |
|
|
|
316 |
|
|
|
311 |
|
|
Partnership income (loss) Synfuels
|
|
|
(20 |
) |
|
|
(36 |
) |
|
|
(79 |
) |
|
|
(115 |
) |
|
Equity earnings on unit investment trusts
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
Other
|
|
|
23 |
|
|
|
35 |
|
|
|
33 |
|
|
|
|
|
|
|
Total investment income
|
|
|
2,583 |
|
|
|
2,495 |
|
|
|
7,665 |
|
|
|
7,459 |
|
|
|
Investment expenses
|
|
|
28 |
|
|
|
27 |
|
|
|
81 |
|
|
|
88 |
|
|
|
Net investment income
|
|
$ |
2,555 |
|
|
$ |
2,468 |
|
|
$ |
7,584 |
|
|
$ |
7,371 |
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, including short term investments
|
|
$ |
1,737 |
|
|
$ |
1,538 |
|
|
$ |
4,986 |
|
|
$ |
4,435 |
|
|
Equity securities
|
|
|
119 |
|
|
|
130 |
|
|
|
285 |
|
|
|
242 |
|
|
Interest on mortgage, policy and collateral loans
|
|
|
114 |
|
|
|
111 |
|
|
|
332 |
|
|
|
333 |
|
|
Partnership income
|
|
|
36 |
|
|
|
29 |
|
|
|
76 |
|
|
|
49 |
|
|
Equity earnings on unit investment
trusts(a)
|
|
|
75 |
|
|
|
|
|
|
|
259 |
|
|
|
|
|
|
Other
|
|
|
89 |
|
|
|
92 |
|
|
|
271 |
|
|
|
295 |
|
|
|
Total investment income before policyholder trading gains
(losses)
|
|
|
2,170 |
|
|
|
1,900 |
|
|
|
6,209 |
|
|
|
5,354 |
|
|
|
Policyholder trading gains
(losses)(b)
|
|
|
221 |
|
|
|
359 |
|
|
|
282 |
|
|
|
583 |
|
|
|
Total investment income
|
|
|
2,391 |
|
|
|
2,259 |
|
|
|
6,491 |
|
|
|
5,937 |
|
|
|
Investment expenses
|
|
|
53 |
|
|
|
60 |
|
|
|
175 |
|
|
|
157 |
|
|
|
Net investment income
|
|
$ |
2,338 |
|
|
$ |
2,199 |
|
|
$ |
6,316 |
|
|
$ |
5,780 |
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, including short term investments
|
|
$ |
4,005 |
|
|
$ |
3,713 |
|
|
$ |
11,781 |
|
|
$ |
11,159 |
|
|
Equity securities
|
|
|
125 |
|
|
|
131 |
|
|
|
298 |
|
|
|
249 |
|
|
Interest on mortgage, policy and collateral loans
|
|
|
315 |
|
|
|
299 |
|
|
|
917 |
|
|
|
865 |
|
|
Partnership income excluding Synfuels
|
|
|
139 |
|
|
|
161 |
|
|
|
392 |
|
|
|
360 |
|
|
Partnership income (loss) Synfuels
|
|
|
(20 |
) |
|
|
(36 |
) |
|
|
(79 |
) |
|
|
(115 |
) |
|
Equity earnings on unit investment
trusts(a)
|
|
|
77 |
|
|
|
|
|
|
|
261 |
|
|
|
|
|
|
Other
|
|
|
112 |
|
|
|
127 |
|
|
|
304 |
|
|
|
295 |
|
|
|
Total investment income before policyholder trading gains
(losses)
|
|
|
4,753 |
|
|
|
4,395 |
|
|
|
13,874 |
|
|
|
12,813 |
|
|
|
Policyholder trading gains
(losses)(b)
|
|
|
221 |
|
|
|
359 |
|
|
|
282 |
|
|
|
583 |
|
|
|
Total investment income
|
|
|
4,974 |
|
|
|
4,754 |
|
|
|
14,156 |
|
|
|
13,396 |
|
|
|
Investment expenses
|
|
|
81 |
|
|
|
87 |
|
|
|
256 |
|
|
|
245 |
|
|
|
Net investment
income(c)
|
|
$ |
4,893 |
|
|
$ |
4,667 |
|
|
$ |
13,900 |
|
|
$ |
13,151 |
|
|
|
|
(a) |
Includes the effect of an out of period adjustment relating
to the accounting for certain interests in unit investment
trusts. For the three and nine-month periods ending
September 30, 2006, the effect was an increase of
$24 million and $245 million, respectively. |
|
(b) |
Relates principally to assets held in various trading
securities accounts that do not qualify for separate account
treatment under SOP
03-1. These amounts are
offset by an equal change included in incurred policy losses and
benefits. |
|
|
(c) |
Includes call and tender income. |
60
American International Group, Inc. and Subsidiaries
The following table summarizes Domestic Life
Insurance & Retirement Services partnership income
(losses) by line of business for the three and nine-month
periods ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
| |
(in millions) | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Domestic life excluding Synfuels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$ |
14 |
|
|
$ |
19 |
|
|
$ |
24 |
|
|
$ |
123 |
|
|
Home service
|
|
|
10 |
|
|
|
(2 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
Subtotal
|
|
|
24 |
|
|
|
17 |
|
|
|
36 |
|
|
|
123 |
|
|
Domestic life Synfuels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
|
(14 |
) |
|
|
(25 |
) |
|
|
(55 |
) |
|
|
(78 |
) |
|
Home service
|
|
|
(6 |
) |
|
|
(11 |
) |
|
|
(24 |
) |
|
|
(37 |
) |
|
|
|
Subtotal
|
|
|
(20 |
) |
|
|
(36 |
) |
|
|
(79 |
) |
|
|
(115 |
) |
|
Total domestic life
|
|
|
4 |
|
|
|
(19 |
) |
|
|
(43 |
) |
|
|
8 |
|
|
Retirement services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group retirement products
|
|
|
35 |
|
|
|
49 |
|
|
|
112 |
|
|
|
74 |
|
|
Individual fixed annuities
|
|
|
44 |
|
|
|
66 |
|
|
|
168 |
|
|
|
114 |
|
|
Total retirement services
|
|
|
79 |
|
|
|
115 |
|
|
|
280 |
|
|
|
188 |
|
|
Total
|
|
$ |
83 |
|
|
$ |
96 |
|
|
$ |
237 |
|
|
$ |
196 |
|
|
Quarterly Life Insurance & Retirement Services Net
Investment Income and Realized Capital Gains (Losses)
Net investment income increased 5 percent for the third
quarter of 2006 when compared to the same period in 2005. Growth
was negatively affected by lower policyholder trading gains
(losses) in the third quarter of 2006 when compared to 2005.
Policyholder trading gains (losses), which are linked mainly to
equities, are offset by an equal change in incurred policy
losses and benefits. Investment income results for certain
operations include investments in structured notes linked to
emerging market sovereign debt that incorporates both interest
rate risk and currency risk.
Mark-to-market
adjustments related to these structured notes were a gain of
$6 million and a loss of $22 million for the three and
nine months ended September 30, 2006, respectively. In
Taiwan, dividend income increased $35 million over the same
quarter last year due to the increased allocation of invested
assets from fixed maturities to equities and the seasonality of
dividend payments. In addition, period to period comparisons of
investment income for some lines of business are affected by
yield enhancement activity, particularly partnership income as
shown in the above table.
AIG generates income tax credits as a result of investing in
synthetic fuel production (synfuels) related to the
investment loss shown in the above table and records those
benefits in its provision for income taxes. The amount of those
income tax credits was $20 million and $52 million for
the three months ended September 30, 2006 and 2005,
respectively. See Note 6(b) Contingencies of
Notes to Consolidated Financial Statements for a further
discussion of the effect of fluctuating domestic crude oil
prices on synfuel tax credits. For the remainder of 2006, AIG
may adjust production levels depending upon oil prices which
affect the availability of the synthetic fuel tax credit.
Regardless of oil prices, the tax credits expire after 2007.
Year-to-date Life
Insurance & Retirement Services Net Investment Income
and Realized Capital Gains (Losses)
The growth in net investment income for the first nine months of
2006 compared to a year ago parallels the growth in general
account reserves and surplus for both Domestic and Foreign Life
Insurance & Retirement Services companies and the
effect of the aforementioned out of period adjustment. Also, net
investment income was positively affected by the compounding of
previously earned and reinvested investment cash flows along
with the addition of new net cash flows from operations.
Investment income includes income generated from traditional
fixed income investments as well as income generated from other
sources.
The amount of income tax credits generated as a result of
investing in synthetic fuel production (synfuels) was
$79 million and $167 million for the first nine months
of 2006 and 2005, respectively.
61
American International Group, Inc. and Subsidiaries
The following table summarizes realized capital gains
(losses) by major category for the three and nine-month periods
ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
| |
(in millions) | |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Domestic life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$ |
1 |
|
|
$ |
(10 |
) |
|
$ |
(60 |
) |
|
$ |
13 |
|
|
Equity securities
|
|
|
8 |
|
|
|
2 |
|
|
|
14 |
|
|
|
9 |
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange transactions
|
|
|
(6 |
) |
|
|
1 |
|
|
|
(6 |
) |
|
|
1 |
|
|
|
Derivatives instruments
|
|
|
(98 |
) |
|
|
121 |
|
|
|
17 |
|
|
|
55 |
|
|
|
Other-than-temporary decline
|
|
|
(24 |
) |
|
|
(71 |
) |
|
|
(139 |
) |
|
|
(96 |
) |
|
|
Other
|
|
|
(4 |
) |
|
|
(2 |
) |
|
|
(16 |
) |
|
|
(4 |
) |
|
Total domestic life
|
|
$ |
(123 |
) |
|
$ |
41 |
|
|
$ |
(190 |
) |
|
$ |
(22 |
) |
|
Domestic retirement services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
19 |
|
|
|
90 |
|
|
|
(69 |
) |
|
|
32 |
|
|
Equity securities
|
|
|
(8 |
) |
|
|
11 |
|
|
|
23 |
|
|
|
42 |
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange transactions
|
|
|
(13 |
) |
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
Derivatives instruments
|
|
|
13 |
|
|
|
(110 |
) |
|
|
(23 |
) |
|
|
(25 |
) |
|
|
Other-than-temporary decline
|
|
|
(41 |
) |
|
|
(64 |
) |
|
|
(301 |
) |
|
|
(129 |
) |
|
|
Other
|
|
|
6 |
|
|
|
(10 |
) |
|
|
(31 |
) |
|
|
9 |
|
|
Total domestic retirement services
|
|
$ |
(24 |
) |
|
$ |
(83 |
) |
|
$ |
(414 |
) |
|
$ |
(71 |
) |
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(28 |
) |
|
|
102 |
|
|
|
(174 |
) |
|
|
239 |
|
|
Equity securities
|
|
|
14 |
|
|
|
48 |
|
|
|
415 |
|
|
|
205 |
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange transactions
|
|
|
133 |
|
|
|
(27 |
) |
|
|
43 |
|
|
|
(203 |
) |
|
|
Derivatives instruments
|
|
|
(219 |
) |
|
|
(249 |
) |
|
|
127 |
|
|
|
(275 |
) |
|
|
Other-than-temporary decline
|
|
|
(33 |
) |
|
|
(5 |
) |
|
|
(78 |
) |
|
|
(31 |
) |
|
|
Other
|
|
|
104 |
|
|
|
157 |
|
|
|
154 |
|
|
|
140 |
|
|
Total foreign
|
|
$ |
(29 |
) |
|
$ |
26 |
|
|
$ |
487 |
|
|
$ |
75 |
|
|
Total
|
|
$ |
(176 |
) |
|
$ |
(16 |
) |
|
$ |
(117 |
) |
|
$ |
(18 |
) |
|
Realized capital gains (losses) include normal portfolio
transactions as well as derivative gains (losses) for
transactions that do not qualify for hedge accounting treatment
under FAS 133, transactional foreign exchange gains and
losses and other-than-temporary declines in the value of
investments. Line of business results for Domestic Life
Insurance & Retirement Services exclude the effect of
realized capital gains (losses), but include the related effect
on the amortization of deferred acquisition costs.
Life Insurance & Retirement Services Underwriting
and Investment Risk
The risks associated with life and accident and health products
are underwriting risk and investment risk. The risk associated
with the financial and investment contract products is primarily
investment risk.
Underwriting risk represents the exposure to loss resulting from
the actual policy experience adversely emerging in comparison to
the assumptions made in the product pricing associated with
mortality, morbidity, termination and expenses. The emergence of
significant adverse experience would require an adjustment to
DAC and benefit reserves that could have a substantial effect on
AIGs results of operations.
Natural disasters such as hurricanes, earthquakes and other
catastrophes have the potential to adversely affect AIGs
operating results. Other risks, such as an outbreak of a
pandemic disease, such as the Avian Influenza A Virus (H5N1),
could adversely affect AIGs business and operating results
to an extent that may be only minimally offset by reinsurance
programs.
While outbreaks of the Avian Flu continue to occur among poultry
or wild birds in a number of countries in Asia, Europe, and
Africa, transmission to humans has been rare to date. If the
virus mutates to a form that can be transmitted from human to
human, it has the potential to spread rapidly worldwide. If such
an outbreak were to take place, early quarantine and vaccination
could be critical to containment.
Both the contagion and mortality rate of any mutated H5N1 virus
that can be transmitted from human to human are highly
speculative. AIG continues to monitor the developing facts. A
significant global outbreak could have a material adverse effect
on Life Insurance & Retirement Services operating
results and liquidity from increased mortality and morbidity
rates. For a further discussion of pandemic influenza, see
Managing Market Risk Catastrophe
Exposures Pandemic Influenza.
AIGs Foreign Life Insurance & Retirement Services
companies generally limit their maximum underwriting expo-
62
American International Group, Inc. and Subsidiaries
sure on life insurance of a single life to approximately
$1.7 million of coverage. AIGs Domestic Life
Insurance & Retirement Services companies limit their
maximum underwriting exposure on life insurance of a single life
to $10 million of coverage in certain circumstances by
using yearly renewable term reinsurance. (See also the
discussion under Liquidity herein.)
AIRCO acts primarily as an internal reinsurance company for
AIGs foreign life operations. This facilitates insurance
risk management (retention, volatility, concentrations) and
capital planning locally (branch and subsidiary). It also allows
AIG to pool its insurance risks and purchase reinsurance more
efficiently at a consolidated level, manage global counterparty
risk and relationships and manage global life catastrophe risks.
AIGs domestic Life Insurance & Retirement
Services operations utilize internal and third-party reinsurance
relationships to manage insurance risks and to facilitate
capital management strategies. Pools of highly-rated third-party
reinsurers are utilized to manage net amounts at risk in excess
of retention limits. AIGs life insurance companies also
cede excess, non-economic reserves carried on a statutory-basis
only on certain term and universal life insurance and accident
and health policies and certain fixed annuities to AIG Life of
Bermuda Ltd., a wholly owned Bermuda reinsurer.
AIG generally obtains letters of credit in order to obtain
statutory recognition of these intercompany reinsurance
transactions. For this purpose, AIG entered into a
$2.5 billion syndicated letter of credit facility in
December 2004. Letters of credit totaling $2.5 billion were
outstanding as of September 30, 2006. The letter of credit
facility has a ten-year term, but the facility can be reduced or
terminated by the lenders beginning after seven years.
In November 2005, AIG entered into a revolving credit facility
for an aggregate amount of $3 billion. The facility can be
drawn in the form of letters of credit with terms of up to ten
years. As of September 30, 2006, $2.49 billion
principal amount of letters of credit are outstanding under this
facility, of which approximately $1.09 billion relates to
life intercompany reinsurance transactions. AIG also obtained
approximately $298 million letters of credit on a bilateral
basis.
Investment risk represents the exposure to loss resulting from
the cash flows from the invested assets, primarily long-term
fixed rate investments, being less than the cash flows required
to meet the obligations of the expected policy and contract
liabilities and the necessary return on investments. (See also
the discussion under Liquidity herein.)
To minimize its exposure to investment risk, AIG tests the cash
flows from the invested assets and policy and contract
liabilities using various interest rate scenarios to evaluate
investment risk and to confirm that assets are sufficient to pay
these liabilities.
AIG actively manages the asset-liability relationship in its
foreign operations, as it has been doing throughout AIGs
history, even though certain territories lack qualified
long-term investments or certain local regulatory authorities
may impose investment restrictions. For example, in several
Southeast Asian countries, the duration of investments is
shorter than the effective maturity of the related policy
liabilities. Therefore, there is risk that the reinvestment of
the proceeds at the maturity of the initial investments may be
at a yield below that of the interest required for the accretion
of the policy liabilities. Additionally, there exists a future
investment risk associated with certain policies currently
in-force which will have premium receipts in the future. That
is, the investment of these future premium receipts may be at a
yield below that required to meet future policy liabilities.
In the first nine months of 2006, new money investment rates
have generally risen in the U.S. and Japan and have generally
fallen in Taiwan and Thailand. In regard to inforce business,
management focus is required in both the investment and product
management process to maintain an adequate yield to match the
interest necessary to support future policy liabilities.
Business strategies continue to evolve to maintain profitability
of the overall business. As such, in some countries, new
products are being introduced with minimal investment guarantees
resulting in a shift toward investment linked savings products
and away from traditional savings products with higher
guarantees.
The investment of insurance cash flows and reinvestment of the
proceeds of matured securities and coupons requires active
management of investment yields while maintaining satisfactory
investment quality and liquidity.
AIG may use alternative investments in certain foreign
jurisdictions where interest rates remain low and there are
limited long-dated bond markets, including equities, real estate
and foreign currency denominated fixed income instruments to
extend the duration or increase the yield of the investment
portfolio to more closely match the requirements of the
policyholder liabilities and DAC recoverability. This strategy
has been effectively used in Japan and more recently by Nan Shan
in Taiwan. Foreign assets comprised approximately
32 percent of Nan Shans invested assets at
September 30, 2006, slightly below the maximum allowable
percentage under current regulation. The majority of Nan
Shans in-force policy portfolio is traditional life and
endowment insurance products with implicit interest rate
guarantees. New business with lower interest rate guarantees are
gradually reducing the overall interest requirements, but asset
portfolio yields have declined faster due to the prolonged low
interest rate environment. As a result, although the investment
margins for a large block of in-force policies are negative, the
block remains profitable because the mortality and expense
margins presently exceed the negative investment spread. In
response to the low interest rate environment and the volatile
exchange rate of the NT dollar, Nan Shan is
63
American International Group, Inc. and Subsidiaries
emphasizing new products with lower implied guarantees,
including participating endowments and investment-linked
products. Although the risks of a continued low interest rate
environment coupled with a volatile NT dollar could increase net
liabilities and require additional capital to maintain adequate
local solvency margins, Nan Shan currently believes it has
adequate resources to meet all future policy obligations.
AIG actively manages the asset-liability relationship in its
domestic operations. This relationship is more easily managed
through the availability of qualified long-term investments.
AIG uses asset-liability matching as a management tool worldwide
to determine the composition of the invested assets and
appropriate marketing strategies. As a part of these strategies,
AIG may determine that it is economically advantageous to be
temporarily in an unmatched position due to anticipated interest
rate or other economic changes. In addition, the absence of
long-dated fixed income instruments in certain markets may
preclude a matched asset-liability position in those markets.
A number of guaranteed benefits, such as living benefits or
guaranteed minimum death benefits, are offered on certain
variable life and variable annuity products. AIG manages its
exposure resulting from these long-term guarantees through
reinsurance or capital market hedging instruments.
DAC for Life Insurance & Retirement Services products
arises from the deferral of those costs that vary with, and are
directly related to, the acquisition of new or renewal business.
Policy acquisition costs for life insurance products are
generally deferred and amortized over the premium paying period
of the policy. Policy acquisition costs that relate to universal
life and investment-type products, including variable and fixed
annuities (investment-oriented products) are deferred and
amortized, with interest, as appropriate, in relation to the
historical and future incidence of estimated gross profits to be
realized over the estimated lives of the contracts. Amortization
expense includes the effects of current period realized capital
gains and losses for investment type products. With respect to
investment-oriented products, AIGs policy is to adjust
amortization assumptions for DAC when estimates of current or
future gross profits to be realized from these contracts are
revised. With respect to variable annuities sold domestically
(representing the vast majority of AIGs variable annuity
business), the assumption for the long-term annual net growth
rate of the equity markets used in the determination of DAC
amortization is approximately ten percent. A methodology
referred to as reversion to the mean is used to
maintain this long-term net growth rate assumption, while giving
consideration to short-term variations in equity markets.
Estimated gross profits include investment income and gains and
losses less interest required on policyholder reserves, as well
as other charges in the contract less actual mortality and
expenses. Current experience and changes in the expected future
gross profits are analyzed to determine the effect on the
amortization of DAC. The estimation of projected gross profits
requires significant management judgment. The assumptions with
respect to the current and projected gross profits are reviewed
and analyzed quarterly and are adjusted accordingly.
64
American International Group, Inc. and Subsidiaries
The following table summarizes the major components of the
changes in deferred acquisition costs and the value of business
acquired (VOBA) for the nine months ended
September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(in millions) | |
|
2006 | |
|
2005 | |
| |
|
|
DAC | |
|
VOBA | |
|
Total | |
|
DAC | |
|
VOBA | |
|
Total | |
| |
Domestic Life Insurance & Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$ |
10,505 |
|
|
$ |
865 |
|
|
$ |
11,370 |
|
|
$ |
8,830 |
|
|
$ |
836 |
|
|
$ |
9,666 |
|
Acquisition costs deferred
|
|
|
1,379 |
|
|
|
|
|
|
|
1,379 |
|
|
|
1,569 |
|
|
|
|
|
|
|
1,569 |
|
Amortization (charged) or credited to operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to realized capital gains (losses)
|
|
|
72 |
|
|
|
11 |
|
|
|
83 |
|
|
|
22 |
|
|
|
3 |
|
|
|
25 |
|
|
Related to unlocking future assumptions
|
|
|
4 |
|
|
|
(3 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other amortization
|
|
|
(1,049 |
) |
|
|
(59 |
) |
|
|
(1,108 |
) |
|
|
(1,119 |
) |
|
|
(72 |
) |
|
|
(1,191 |
) |
Related to change in unrealized gains (losses) on securities
|
|
|
692 |
|
|
|
30 |
|
|
|
722 |
|
|
|
737 |
|
|
|
59 |
|
|
|
796 |
|
Increase (decrease) due to foreign exchange
|
|
|
20 |
|
|
|
|
|
|
|
20 |
|
|
|
12 |
|
|
|
3 |
|
|
|
15 |
|
Other*
|
|
|
(903 |
) |
|
|
|
|
|
|
(903 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
10,720 |
|
|
$ |
844 |
|
|
$ |
11,564 |
|
|
$ |
10,051 |
|
|
$ |
829 |
|
|
$ |
10,880 |
|
|
Foreign Life Insurance & Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$ |
16,552 |
|
|
$ |
1,278 |
|
|
$ |
17,830 |
|
|
$ |
14,472 |
|
|
$ |
1,681 |
|
|
$ |
16,153 |
|
Acquisition costs deferred
|
|
|
3,733 |
|
|
|
|
|
|
|
3,733 |
|
|
|
3,380 |
|
|
|
|
|
|
|
3,380 |
|
Amortization (charged) or credited to operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to realized capital gains (losses)
|
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
Related to unlocking future assumptions
|
|
|
49 |
|
|
|
14 |
|
|
|
63 |
|
|
|
96 |
|
|
|
8 |
|
|
|
104 |
|
|
All other amortization
|
|
|
(1,750 |
) |
|
|
(142 |
) |
|
|
(1,892 |
) |
|
|
(1,380 |
) |
|
|
(166 |
) |
|
|
(1,546 |
) |
Related to change in unrealized gains (losses) on securities
|
|
|
230 |
|
|
|
(3 |
) |
|
|
227 |
|
|
|
(243 |
) |
|
|
(12 |
) |
|
|
(255 |
) |
Increase (decrease) due to foreign exchange
|
|
|
529 |
|
|
|
27 |
|
|
|
556 |
|
|
|
(491 |
) |
|
|
(102 |
) |
|
|
(593 |
) |
Other*
|
|
|
(186 |
) |
|
|
|
|
|
|
(186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
19,159 |
|
|
$ |
1,175 |
|
|
$ |
20,334 |
|
|
$ |
15,834 |
|
|
$ |
1,408 |
|
|
$ |
17,242 |
|
|
Total Life Insurance & Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$ |
27,057 |
|
|
$ |
2,143 |
|
|
$ |
29,200 |
|
|
$ |
23,302 |
|
|
$ |
2,517 |
|
|
$ |
25,819 |
|
Acquisition costs deferred
|
|
|
5,112 |
|
|
|
|
|
|
|
5,112 |
|
|
|
4,949 |
|
|
|
|
|
|
|
4,949 |
|
Amortization (charged) or credited to operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to realized capital gains (losses)
|
|
|
74 |
|
|
|
12 |
|
|
|
86 |
|
|
|
22 |
|
|
|
2 |
|
|
|
24 |
|
|
Related to unlocking future assumptions
|
|
|
53 |
|
|
|
11 |
|
|
|
64 |
|
|
|
96 |
|
|
|
8 |
|
|
|
104 |
|
|
All other amortization
|
|
|
(2,799 |
) |
|
|
(201 |
) |
|
|
(3,000 |
) |
|
|
(2,499 |
) |
|
|
(238 |
) |
|
|
(2,737 |
) |
Related to change in unrealized gains (losses) on securities
|
|
|
922 |
|
|
|
27 |
|
|
|
949 |
|
|
|
494 |
|
|
|
47 |
|
|
|
541 |
|
Increase (decrease) due to foreign exchange
|
|
|
549 |
|
|
|
27 |
|
|
|
576 |
|
|
|
(479 |
) |
|
|
(99 |
) |
|
|
(578 |
) |
Other*
|
|
|
(1,089 |
) |
|
|
|
|
|
|
(1,089 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
29,879 |
|
|
$ |
2,019 |
|
|
$ |
31,898 |
|
|
$ |
25,885 |
|
|
$ |
2,237 |
|
|
$ |
28,122 |
|
|
|
|
* |
Represents sales inducement assets reclassified from DAC to
Other assets. |
AIGs variable annuity earnings will be affected by changes
in market returns because separate account revenues, primarily
composed of mortality and expense charges and asset management
fees, are a function of asset values.
DAC for both insurance-oriented and investment-oriented products
as well as retirement services products are reviewed for
recoverability, which involves estimating the future
profitability of current business. This review also involves
significant management judgment. If the actual emergence of
future profitability were to be substantially different than
that estimated, AIGs results of operations could be
significantly affected in future periods.
65
American International Group, Inc. and Subsidiaries
Invested Assets
The following tables summarize the composition of AIGs
invested assets by segment, at September 30, 2006 and
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life | |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance & | |
|
|
|
|
|
|
|
|
|
|
General | |
|
Retirement | |
|
Asset | |
|
Financial | |
|
|
|
|
(in millions) | |
|
Insurance | |
|
Services | |
|
Management | |
|
Services | |
|
Other | |
|
Total | |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale, at market value
|
|
$ |
63,651 |
|
|
$ |
279,230 |
|
|
$ |
31,819 |
|
|
$ |
1,336 |
|
|
$ |
|
|
|
$ |
376,036 |
|
|
Bonds held to maturity, at amortized cost
|
|
|
21,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,484 |
|
|
Bond trading securities, at market value
|
|
|
4 |
|
|
|
1,326 |
|
|
|
5,908 |
|
|
|
|
|
|
|
|
|
|
|
7,238 |
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks available for sale, at market value
|
|
|
3,921 |
|
|
|
7,625 |
|
|
|
225 |
|
|
|
|
|
|
|
64 |
|
|
|
11,835 |
|
|
Common and preferred stocks trading, at market value
|
|
|
372 |
|
|
|
10,792 |
|
|
|
364 |
|
|
|
|
|
|
|
|
|
|
|
11,528 |
|
|
Preferred stocks available for sale, at market value
|
|
|
1,840 |
|
|
|
655 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
2,500 |
|
Mortgage loans on real estate, net of allowance
|
|
|
13 |
|
|
|
12,471 |
|
|
|
4,266 |
|
|
|
92 |
|
|
|
|
|
|
|
16,842 |
|
Policy loans
|
|
|
2 |
|
|
|
7,333 |
|
|
|
48 |
|
|
|
2 |
|
|
|
|
|
|
|
7,385 |
|
Collateral and guaranteed loans, net of allowance
|
|
|
3 |
|
|
|
665 |
|
|
|
693 |
|
|
|
2,152 |
|
|
|
84 |
|
|
|
3,597 |
|
Financial services assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment primarily under operating leases, net of
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,460 |
|
|
|
|
|
|
|
39,460 |
|
|
Securities available for sale, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,232 |
|
|
|
|
|
|
|
41,232 |
|
|
Trading securities, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,822 |
|
|
|
|
|
|
|
5,822 |
|
|
Spot commodities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118 |
|
|
|
|
|
|
|
118 |
|
|
Unrealized gain on swaps, options and forward transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,235 |
|
|
|
|
|
|
|
20,235 |
|
|
Trading assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,194 |
|
|
|
|
|
|
|
2,194 |
|
|
Securities purchased under agreements to resell, at contract
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,041 |
|
|
|
|
|
|
|
27,041 |
|
|
Finance receivables, net of allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,634 |
|
|
|
|
|
|
|
28,634 |
|
Securities lending collateral, at market value
|
|
|
5,435 |
|
|
|
52,426 |
|
|
|
13,451 |
|
|
|
76 |
|
|
|
|
|
|
|
71,388 |
|
Other invested assets
|
|
|
8,482 |
|
|
|
10,490 |
|
|
|
11,861 |
|
|
|
1,934 |
|
|
|
10 |
|
|
|
32,777 |
|
Short-term investments, at cost
|
|
|
3,622 |
|
|
|
8,117 |
|
|
|
9,670 |
|
|
|
1,306 |
|
|
|
1 |
|
|
|
22,716 |
|
|
Total investments and financial services assets as shown in the
balance sheet
|
|
|
108,829 |
|
|
|
391,130 |
|
|
|
78,305 |
|
|
|
171,639 |
|
|
|
159 |
|
|
|
750,062 |
|
|
|
Cash
|
|
|
488 |
|
|
|
523 |
|
|
|
133 |
|
|
|
279 |
|
|
|
2 |
|
|
|
1,425 |
|
|
Investment income due and accrued
|
|
|
1,262 |
|
|
|
4,549 |
|
|
|
369 |
|
|
|
22 |
|
|
|
|
|
|
|
6,202 |
|
|
Real estate, net of accumulated depreciation
|
|
|
667 |
|
|
|
2,903 |
|
|
|
2,748 |
|
|
|
24 |
|
|
|
37 |
|
|
|
6,379 |
|
|
Total invested assets
|
|
$ |
111,246 |
|
|
$ |
399,105 |
|
|
$ |
81,555 |
|
|
$ |
171,964 |
|
|
$ |
198 |
|
|
$ |
764,068 |
|
|
66
American International Group, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life | |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance & | |
|
|
|
|
|
|
|
|
|
|
General | |
|
Retirement | |
|
Asset | |
|
Financial | |
|
|
|
|
(in millions) | |
|
Insurance | |
|
Services | |
|
Management | |
|
Services | |
|
Other | |
|
Total | |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale, at market value
|
|
$ |
50,870 |
|
|
$ |
273,165 |
|
|
$ |
34,174 |
|
|
$ |
1,307 |
|
|
$ |
|
|
|
$ |
359,516 |
|
|
Bonds held to maturity, at amortized cost
|
|
|
21,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,528 |
|
|
Bond trading securities, at market value
|
|
|
|
|
|
|
1,073 |
|
|
|
3,563 |
|
|
|
|
|
|
|
|
|
|
|
4,636 |
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks available for sale, at market value
|
|
|
4,505 |
|
|
|
7,436 |
|
|
|
227 |
|
|
|
|
|
|
|
59 |
|
|
|
12,227 |
|
|
Common stocks trading, at market value
|
|
|
425 |
|
|
|
8,122 |
|
|
|
412 |
|
|
|
|
|
|
|
|
|
|
|
8,959 |
|
|
Preferred stocks available for sale, at market value
|
|
|
1,632 |
|
|
|
760 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
2,402 |
|
Mortgage loans on real estate, net of allowance
|
|
|
14 |
|
|
|
10,247 |
|
|
|
3,968 |
|
|
|
71 |
|
|
|
|
|
|
|
14,300 |
|
Policy loans
|
|
|
2 |
|
|
|
6,987 |
|
|
|
48 |
|
|
|
2 |
|
|
|
|
|
|
|
7,039 |
|
Collateral and guaranteed loans, net of allowance
|
|
|
3 |
|
|
|
1,172 |
|
|
|
578 |
|
|
|
1,719 |
|
|
|
98 |
|
|
|
3,570 |
|
Financial services assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment primarily under operating leases, net of
accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,245 |
|
|
|
|
|
|
|
36,245 |
|
|
Securities available for sale, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,511 |
|
|
|
|
|
|
|
37,511 |
|
|
Trading securities, at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,499 |
|
|
|
|
|
|
|
6,499 |
|
|
Spot commodities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
92 |
|
|
Unrealized gain on swaps, options and forward transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,695 |
|
|
|
|
|
|
|
18,695 |
|
|
Trading assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,204 |
|
|
|
|
|
|
|
1,204 |
|
|
Securities purchased under agreements to resell, at contract
value
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
14,519 |
|
|
|
|
|
|
|
14,547 |
|
|
Finance receivables, net of allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,995 |
|
|
|
|
|
|
|
27,995 |
|
Securities lending collateral, at market value
|
|
|
4,931 |
|
|
|
42,991 |
|
|
|
11,549 |
|
|
|
|
|
|
|
|
|
|
|
59,471 |
|
Other invested assets
|
|
|
6,272 |
|
|
|
7,777 |
|
|
|
10,459 |
|
|
|
2,751 |
|
|
|
8 |
|
|
|
27,267 |
|
Short-term investments, at cost
|
|
|
2,482 |
|
|
|
5,855 |
|
|
|
5,619 |
|
|
|
1,382 |
|
|
|
4 |
|
|
|
15,342 |
|
|
Total investments and financial services assets as shown in the
balance sheet
|
|
|
92,664 |
|
|
|
365,613 |
|
|
|
70,597 |
|
|
|
150,002 |
|
|
|
169 |
|
|
|
679,045 |
|
|
|
Cash
|
|
|
305 |
|
|
|
989 |
|
|
|
196 |
|
|
|
331 |
|
|
|
76 |
|
|
|
1,897 |
|
|
Investment income due and accrued
|
|
|
1,232 |
|
|
|
4,073 |
|
|
|
402 |
|
|
|
18 |
|
|
|
2 |
|
|
|
5,727 |
|
|
Real estate, net of accumulated depreciation
|
|
|
603 |
|
|
|
2,729 |
|
|
|
1,710 |
|
|
|
24 |
|
|
|
32 |
|
|
|
5,098 |
|
|
Total invested assets
|
|
$ |
94,804 |
|
|
$ |
373,404 |
|
|
$ |
72,905 |
|
|
$ |
150,375 |
|
|
$ |
279 |
|
|
$ |
691,767 |
|
|
Insurance and Asset Management Invested Assets
AIGs investment strategy is to invest primarily in high
quality securities while maintaining diversification to avoid
significant exposure to issuer, industry and/or country
concentrations. With respect to Domestic General Insurance,
AIGs strategy is to invest in longer duration fixed
maturity investments to maximize the yields at the date of
purchase. With respect to Life Insurance & Retirement
Services, AIGs strategy is to produce cash flows required
to meet maturing insurance liabilities. (See also the discussion
under Operating Review: Life Insurance &
Retirement Services Operations herein.) AIG invests in
equities for various reasons, including diversifying its overall
exposure to interest rate risk. Available for sale bonds and
equity securities are subject to declines in fair value. Such
declines in fair value are presented in unrealized appreciation
or depreciation of investments, net of taxes as a component of
accumulated other comprehensive income. Declines that are
determined to be other-than-temporary are reflected in income in
the period in which the intent to hold the securities to
recovery no longer exists. See Valuation of Invested
Assets. Generally, insurance regulations restrict the
types of assets in which an insurance company may invest. When
permitted by regulatory authorities and when deemed necessary to
protect insurance assets, including invested assets, from
adverse movements in foreign currency exchange rates, interest
rates and equity prices, AIG and its insurance subsidiaries may
enter into derivative transactions as end users. (See also the
discussion under Derivatives herein.)
In certain jurisdictions, significant regulatory and/or foreign
governmental barriers exist which may not permit the immediate
free flow of funds between insurance subsidiaries or from the
insurance subsidiaries to AIG parent.
67
American International Group, Inc. and Subsidiaries
The following tables summarize the composition of AIGs
insurance and asset management invested assets by segment, at
September 30, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life | |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance & | |
|
|
|
|
|
|
|
Percent Distribution | |
|
|
General | |
|
Retirement | |
|
Asset | |
|
|
|
Percent | |
|
| |
(dollars in millions) |
|
Insurance | |
|
Services | |
|
Management | |
|
Total | |
|
of Total | |
|
Domestic | |
|
Foreign | |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale, at market value
|
|
$ |
63,651 |
|
|
$ |
279,230 |
|
|
$ |
31,819 |
|
|
$ |
374,700 |
|
|
|
63.3 |
% |
|
|
57.1 |
% |
|
|
42.9 |
% |
|
Bonds held to maturity, at amortized cost
|
|
|
21,484 |
|
|
|
|
|
|
|
|
|
|
|
21,484 |
|
|
|
3.6 |
|
|
|
100.0 |
|
|
|
|
|
|
Bond trading securities, at market value
|
|
|
4 |
|
|
|
1,326 |
|
|
|
5,908 |
|
|
|
7,238 |
|
|
|
1.2 |
|
|
|
2.6 |
|
|
|
97.4 |
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks available for sale, at market value
|
|
|
3,921 |
|
|
|
7,625 |
|
|
|
225 |
|
|
|
11,771 |
|
|
|
2.0 |
|
|
|
28.9 |
|
|
|
71.1 |
|
|
Common and preferred stocks trading, at market value
|
|
|
372 |
|
|
|
10,792 |
|
|
|
364 |
|
|
|
11,528 |
|
|
|
2.0 |
|
|
|
3.2 |
|
|
|
96.8 |
|
|
Preferred stocks available for sale, at market value
|
|
|
1,840 |
|
|
|
655 |
|
|
|
|
|
|
|
2,495 |
|
|
|
0.4 |
|
|
|
81.4 |
|
|
|
18.6 |
|
Mortgage loans on real estate, net of allowance
|
|
|
13 |
|
|
|
12,471 |
|
|
|
4,266 |
|
|
|
16,750 |
|
|
|
2.8 |
|
|
|
83.5 |
|
|
|
16.5 |
|
Policy loans
|
|
|
2 |
|
|
|
7,333 |
|
|
|
48 |
|
|
|
7,383 |
|
|
|
1.2 |
|
|
|
41.1 |
|
|
|
58.9 |
|
Collateral and guaranteed loans, net of allowance
|
|
|
3 |
|
|
|
665 |
|
|
|
693 |
|
|
|
1,361 |
|
|
|
0.2 |
|
|
|
2.6 |
|
|
|
97.4 |
|
Securities lending collateral, at market value
|
|
|
5,435 |
|
|
|
52,426 |
|
|
|
13,451 |
|
|
|
71,312 |
|
|
|
12.1 |
|
|
|
87.3 |
|
|
|
12.7 |
|
Other invested assets
|
|
|
8,482 |
|
|
|
10,490 |
|
|
|
11,861 |
|
|
|
30,833 |
|
|
|
5.2 |
|
|
|
79.3 |
|
|
|
20.7 |
|
Short-term investments, at cost
|
|
|
3,622 |
|
|
|
8,117 |
|
|
|
9,670 |
|
|
|
21,409 |
|
|
|
3.6 |
|
|
|
32.1 |
|
|
|
67.9 |
|
Cash
|
|
|
488 |
|
|
|
523 |
|
|
|
133 |
|
|
|
1,144 |
|
|
|
0.2 |
|
|
|
39.1 |
|
|
|
60.9 |
|
Investment income due and accrued
|
|
|
1,262 |
|
|
|
4,549 |
|
|
|
369 |
|
|
|
6,180 |
|
|
|
1.1 |
|
|
|
53.2 |
|
|
|
46.8 |
|
Real estate, net of accumulated depreciation
|
|
|
667 |
|
|
|
2,903 |
|
|
|
2,748 |
|
|
|
6,318 |
|
|
|
1.1 |
|
|
|
52.2 |
|
|
|
47.8 |
|
|
Total
|
|
$ |
111,246 |
|
|
$ |
399,105 |
|
|
$ |
81,555 |
|
|
$ |
591,906 |
|
|
|
100.0 |
% |
|
|
60.7 |
% |
|
|
39.3 |
% |
|
68
American International Group, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life | |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance & | |
|
|
|
|
|
|
|
Percent Distribution | |
|
|
General | |
|
Retirement | |
|
Asset | |
|
|
|
Percent | |
|
| |
(dollars in millions) |
|
Insurance | |
|
Services | |
|
Management | |
|
Total | |
|
of Total | |
|
Domestic | |
|
Foreign | |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale, at market value
|
|
$ |
50,870 |
|
|
$ |
273,165 |
|
|
$ |
34,174 |
|
|
$ |
358,209 |
|
|
|
66.2 |
% |
|
|
59.2 |
% |
|
|
40.8 |
% |
|
Bonds held to maturity, at amortized cost
|
|
|
21,528 |
|
|
|
|
|
|
|
|
|
|
|
21,528 |
|
|
|
4.0 |
|
|
|
100.0 |
|
|
|
|
|
|
Bond trading securities, at market value
|
|
|
|
|
|
|
1,073 |
|
|
|
3,563 |
|
|
|
4,636 |
|
|
|
0.9 |
|
|
|
3.3 |
|
|
|
96.7 |
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks available for sale, at market value
|
|
|
4,505 |
|
|
|
7,436 |
|
|
|
227 |
|
|
|
12,168 |
|
|
|
2.2 |
|
|
|
28.7 |
|
|
|
71.3 |
|
|
Common stocks trading, at market value
|
|
|
425 |
|
|
|
8,122 |
|
|
|
412 |
|
|
|
8,959 |
|
|
|
1.7 |
|
|
|
4.8 |
|
|
|
95.2 |
|
|
Preferred stocks available for sale, at market value
|
|
|
1,632 |
|
|
|
760 |
|
|
|
|
|
|
|
2,392 |
|
|
|
0.4 |
|
|
|
88.8 |
|
|
|
11.2 |
|
Mortgage loans on real estate, net of allowance
|
|
|
14 |
|
|
|
10,247 |
|
|
|
3,968 |
|
|
|
14,229 |
|
|
|
2.7 |
|
|
|
84.6 |
|
|
|
15.4 |
|
Policy Loans
|
|
|
2 |
|
|
|
6,987 |
|
|
|
48 |
|
|
|
7,037 |
|
|
|
1.3 |
|
|
|
42.8 |
|
|
|
57.2 |
|
Collateral and guaranteed loans, net of allowance
|
|
|
3 |
|
|
|
1,172 |
|
|
|
578 |
|
|
|
1,753 |
|
|
|
0.3 |
|
|
|
1.2 |
|
|
|
98.8 |
|
Securities purchased under agreements to resell, at contract
value
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
100.0 |
|
Securities lending collateral, at market value
|
|
|
4,931 |
|
|
|
42,991 |
|
|
|
11,549 |
|
|
|
59,471 |
|
|
|
11.0 |
|
|
|
87.3 |
|
|
|
12.7 |
|
Other invested assets
|
|
|
6,272 |
|
|
|
7,777 |
|
|
|
10,459 |
|
|
|
24,508 |
|
|
|
4.5 |
|
|
|
85.8 |
|
|
|
14.2 |
|
Short-term investments, at cost
|
|
|
2,482 |
|
|
|
5,855 |
|
|
|
5,619 |
|
|
|
13,956 |
|
|
|
2.6 |
|
|
|
27.3 |
|
|
|
72.7 |
|
Cash
|
|
|
305 |
|
|
|
989 |
|
|
|
196 |
|
|
|
1,490 |
|
|
|
0.2 |
|
|
|
15.0 |
|
|
|
85.0 |
|
Investment income due and accrued
|
|
|
1,232 |
|
|
|
4,073 |
|
|
|
402 |
|
|
|
5,707 |
|
|
|
1.1 |
|
|
|
56.9 |
|
|
|
43.1 |
|
Real estate, net of accumulated depreciation
|
|
|
603 |
|
|
|
2,729 |
|
|
|
1,710 |
|
|
|
5,042 |
|
|
|
0.9 |
|
|
|
45.2 |
|
|
|
54.8 |
|
|
Total
|
|
$ |
94,804 |
|
|
$ |
373,404 |
|
|
$ |
72,905 |
|
|
$ |
541,113 |
|
|
|
100.0 |
% |
|
|
62.3 |
% |
|
|
37.7 |
% |
|
Credit Quality
At September 30, 2006, approximately 58 percent of the
fixed maturities investments were domestic securities.
Approximately 39 percent of such domestic securities were
rated AAA by one or more of the principal rating agencies.
Approximately six percent were below investment grade or
not rated.
A significant portion of the foreign fixed income portfolio is
rated by Moodys Investors Service (Moodys), S&P
or similar foreign services. Similar credit quality rating
services are not available in all overseas locations. AIG
reviews the credit quality of the foreign portfolio nonrated
fixed income investments, including mortgages. At
September 30, 2006, approximately 19 percent of the
foreign fixed income investments were either rated AAA or, on
the basis of AIGs internal analysis, were equivalent from
a credit standpoint to securities so rated. Approximately
five percent were below investment grade or not rated at
that date. A large portion of the foreign fixed income portfolio
are sovereign fixed maturity securities supporting the policy
liabilities in the country of issuance.
Any fixed income security may be subject to downgrade for a
variety of reasons subsequent to any balance sheet date.
Valuation of Invested Assets
AIG has the ability to hold any fixed maturity security to its
stated maturity, including those fixed maturity securities
classified as available for sale. Therefore, the decision to
sell any such fixed maturity security classified as available
for sale reflects the judgment of AIGs management that the
security sold is unlikely to provide, on a relative value basis,
as attractive a return in the future as alternative securities
entailing comparable risks. With respect to distressed
securities, the sale decision reflects managements
judgment that the risk-discounted anticipated ultimate recovery
is less than the value achievable on sale.
The valuation of invested assets involves obtaining a market
value for each security. The source for the market value is
generally from market exchanges or dealer quotations, with the
exception of nontraded securities.
AIG periodically evaluates its securities for
other-than-temporary
impairments in valuation. As a matter of policy,
69
American International Group, Inc. and Subsidiaries
the determination that a security has incurred an
other-than-temporary decline in value and the amount of any loss
recognition requires the judgment of AIGs management and a
continual review of its investments.
In general, a security is considered a candidate for
other-than-temporary
impairment if it meets any of the following criteria:
|
|
|
Trading at a significant (25 percent or more) discount to par or
amortized cost (if lower) for an extended period of time (nine
months or longer); |
|
|
The occurrence of a discrete credit event resulting in
(i) the issuer defaulting on a material outstanding
obligation; or (ii) the issuer seeking protection from
creditors under the bankruptcy laws or any similar laws intended
for the court supervised reorganization of insolvent
enterprises; or (iii) the issuer proposing a voluntary
reorganization pursuant to which creditors are asked to exchange
their claims for cash or securities having a fair value
substantially lower than par value of their claims; or |
|
|
In the opinion of AIGs management, it is probable that AIG
may not realize a full recovery on its investment, irrespective
of the occurrence of one of the foregoing events. |
At each balance sheet date, AIG evaluates its securities
holdings in an unrealized loss position. Where AIG does not
intend to hold such securities until they have fully recovered
their carrying value based on the circumstances present at the
date of evaluation, AIG records the unrealized loss in income.
If events or circumstances change, such as unexpected changes in
creditworthiness of the obligor, general interest rate
environment, tax circumstances, liquidity events, and statutory
capital management considerations among others, AIG revisits its
intent to determine if a loss should be recorded in income.
Further, if a loss is recognized from a sale subsequent to a
balance sheet date pursuant to these changes in circumstances,
the loss is recognized in the period in which the intent to hold
the securities to recovery no longer exists.
Once a security has been identified as other-than-temporarily
impaired, the amount of such impairment is determined by
reference to that securitys contemporaneous market price
and recorded as a charge to earnings.
As a result of these policies, AIG recorded, in realized capital
gains (losses),
other-than-temporary
impairment pre-tax losses of $170 million and
$184 million for the three-month periods ended
September 30, 2006 and 2005, respectively, and
$766 million and $384 million for the nine-month
periods ended September 30, 2006 and 2005, respectively.
No impairment charge with respect to any one single credit was
significant to AIGs consolidated financial condition or
results of operations, and no individual impairment loss
exceeded 1.0 percent of consolidated net income for the
first nine months of 2006.
Excluding the other-than-temporary impairments noted above, the
changes in market value for AIGs available for sale
portfolio, which constitutes the vast majority of AIGs
investments, were recorded in accumulated other comprehensive
income as unrealized gains or losses, net of tax.
At September 30, 2006, the fair value of AIGs fixed
maturities and equity securities aggregated $431.3 billion.
At September 30, 2006, aggregate unrealized gains after
taxes for fixed maturity and equity securities were
$8.9 billion. At September 30, 2006, the aggregate
unrealized losses after taxes of fixed maturity and equity
securities were approximately $2.9 billion.
The effect on net income of unrealized losses after taxes will
be further mitigated upon realization, because certain realized
losses will be charged to participating policyholder accounts,
or realization will result in current decreases in the
amortization of certain deferred policy acquisition costs.
At September 30, 2006, unrealized losses for fixed maturity
securities and equity securities did not reflect any significant
industry concentrations.
The amortized cost of fixed maturities available for sale in
an unrealized loss position at September 30, 2006, by
contractual maturity, is shown below:
|
|
|
|
|
|
|
Amortized | |
(in millions) |
|
Cost | |
|
Due in one year or less
|
|
$ |
4,734 |
|
Due after one year through five years
|
|
|
30,234 |
|
Due after five years through ten years
|
|
|
56,708 |
|
Due after ten years
|
|
|
64,918 |
|
|
Total
|
|
$ |
156,594 |
|
|
In the nine months ended September 30, 2006, the pretax
realized losses incurred with respect to the sale of fixed
maturities and equity securities were $1.1 billion. The
aggregate fair value of securities sold was $34 billion,
which was approximately 97 percent of amortized cost. The
average period of time that securities sold at a loss during the
nine months ended September 30, 2006 were trading
continuously at a price below book value was approximately four
months.
70
American International Group, Inc. and Subsidiaries
At September 30, 2006, aggregate pretax unrealized gains
were $13.71 billion, while the pretax unrealized losses
with respect to investment grade bonds, non-investment grade
bonds and equity securities were $4.0 billion,
$115 million and $281 million, respectively. Aging of
the pretax unrealized losses with respect to these securities,
distributed as a percentage of cost relative to unrealized loss
(the extent by which the market value is less than amortized
cost or cost), including the number of respective items, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
Less than or equal to |
|
|
Greater than 20% to |
|
|
Greater than |
|
|
|
|
|
|
20% of Cost(a) |
|
|
50% of Cost(a) |
|
|
50% of Cost(a) |
|
|
Total |
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
Aging |
|
|
|
|
Unrealized | |
|
|
|
|
|
|
Unrealized | |
|
|
|
|
|
|
Unrealized | |
|
|
|
|
|
|
Unrealized | |
|
|
(dollars in millions) | |
|
|
Cost(a) | |
|
Loss | |
|
Items | |
|
|
Cost(a) | |
|
Loss | |
|
Items | |
|
|
Cost(a) | |
|
Loss | |
|
Items | |
|
|
Cost(a) | |
|
Loss(b) | |
|
Items | |
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
Investment grade bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
|
$ |
38,228 |
|
|
$ |
591 |
|
|
|
5,368 |
|
|
|
$ |
57 |
|
|
$ |
13 |
|
|
|
6 |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
38,285 |
|
|
$ |
604 |
|
|
|
5,374 |
|
|
7-12 months
|
|
|
|
67,729 |
|
|
|
1,815 |
|
|
|
9,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,729 |
|
|
|
1,815 |
|
|
|
9,159 |
|
|
>12 months
|
|
|
|
45,864 |
|
|
|
1,593 |
|
|
|
6,142 |
|
|
|
|
11 |
|
|
|
3 |
|
|
|
3 |
|
|
|
|
5 |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
45,880 |
|
|
|
1,600 |
|
|
|
6,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$ |
151,821 |
|
|
$ |
3,999 |
|
|
|
20,669 |
|
|
|
$ |
68 |
|
|
$ |
16 |
|
|
|
9 |
|
|
|
$ |
5 |
|
|
$ |
4 |
|
|
|
4 |
|
|
|
$ |
151,894 |
|
|
$ |
4,019 |
|
|
|
20,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
|
$ |
2,550 |
|
|
$ |
25 |
|
|
|
543 |
|
|
|
$ |
5 |
|
|
$ |
1 |
|
|
|
8 |
|
|
|
$ |
2 |
|
|
$ |
1 |
|
|
|
14 |
|
|
|
$ |
2,557 |
|
|
$ |
27 |
|
|
|
565 |
|
|
7-12 months
|
|
|
|
914 |
|
|
|
20 |
|
|
|
163 |
|
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
915 |
|
|
|
21 |
|
|
|
165 |
|
|
>12 months
|
|
|
|
1,222 |
|
|
|
63 |
|
|
|
217 |
|
|
|
|
5 |
|
|
|
3 |
|
|
|
3 |
|
|
|
|
1 |
|
|
|
1 |
|
|
|
9 |
|
|
|
|
1,228 |
|
|
|
67 |
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$ |
4,686 |
|
|
$ |
108 |
|
|
|
923 |
|
|
|
$ |
11 |
|
|
$ |
5 |
|
|
|
13 |
|
|
|
$ |
3 |
|
|
$ |
2 |
|
|
|
23 |
|
|
|
$ |
4,700 |
|
|
$ |
115 |
|
|
|
959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
|
$ |
40,778 |
|
|
$ |
616 |
|
|
|
5,911 |
|
|
|
$ |
62 |
|
|
$ |
14 |
|
|
|
14 |
|
|
|
$ |
2 |
|
|
$ |
1 |
|
|
|
14 |
|
|
|
$ |
40,842 |
|
|
$ |
631 |
|
|
|
5,939 |
|
|
7-12 months
|
|
|
|
68,643 |
|
|
|
1,835 |
|
|
|
9,322 |
|
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,644 |
|
|
|
1,836 |
|
|
|
9,324 |
|
|
>12 months
|
|
|
|
47,086 |
|
|
|
1,656 |
|
|
|
6,359 |
|
|
|
|
16 |
|
|
|
6 |
|
|
|
6 |
|
|
|
|
6 |
|
|
|
5 |
|
|
|
13 |
|
|
|
|
47,108 |
|
|
|
1,667 |
|
|
|
6,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$ |
156,507 |
|
|
$ |
4,107 |
|
|
|
21,592 |
|
|
|
$ |
79 |
|
|
$ |
21 |
|
|
|
22 |
|
|
|
$ |
8 |
|
|
$ |
6 |
|
|
|
27 |
|
|
|
$ |
156,594 |
|
|
$ |
4,134 |
|
|
|
21,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
|
$ |
3,275 |
|
|
$ |
162 |
|
|
|
2,256 |
|
|
|
$ |
183 |
|
|
$ |
42 |
|
|
|
231 |
|
|
|
$ |
22 |
|
|
$ |
12 |
|
|
|
14 |
|
|
|
$ |
3,480 |
|
|
$ |
216 |
|
|
|
2,501 |
|
|
7-12 months
|
|
|
|
404 |
|
|
|
31 |
|
|
|
424 |
|
|
|
|
96 |
|
|
|
29 |
|
|
|
176 |
|
|
|
|
8 |
|
|
|
5 |
|
|
|
23 |
|
|
|
|
508 |
|
|
|
65 |
|
|
|
623 |
|
|
>12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$ |
3,679 |
|
|
$ |
193 |
|
|
|
2,680 |
|
|
|
$ |
279 |
|
|
$ |
71 |
|
|
|
407 |
|
|
|
$ |
30 |
|
|
$ |
17 |
|
|
|
37 |
|
|
|
$ |
3,988 |
|
|
$ |
281 |
|
|
|
3,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
For bonds, represents amortized cost. |
(b) |
As more fully described above, upon realization, certain
realized losses will be charged to participating policyholder
accounts, or realization will result in a current decrease in
the amortization of certain deferred policy acquisition
costs. |
As stated previously, the valuation for AIGs investment
portfolio comes from market exchanges or dealer quotations, with
the exception of nontraded securities. AIG considers nontraded
securities to mean certain fixed income investments, certain
structured securities, direct private equities, limited
partnerships and hedge funds. The aggregate carrying value of
these securities at September 30, 2006 was approximately
$70 billion.
The methodology used to estimate fair value of nontraded fixed
income investments is by reference to traded securities with
similar attributes and using a matrix pricing methodology. This
technique takes into account such factors as the industry, the
securitys rating and tenor, its coupon rate, its position
in the capital structure of the issuer, and other relevant
factors. The change in fair value is recognized as a component
of accumulated other comprehensive income, net of tax.
For certain structured securities, the carrying value is based
on an estimate of the securitys future cash flows pursuant
to the requirements of Emerging Issues Task Force Issue
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial
Assets. The change in carrying value is recognized in
income.
Hedge funds and limited partnerships in which AIG holds in the
aggregate less than a five percent interest are reported at fair
value. The change in fair value is recognized as a component of
accumulated other comprehensive income, net of tax.
With respect to hedge funds and limited partnerships in which
AIG holds in the aggregate a five percent or greater interest,
AIG uses the equity method to record these investments. The
changes in such net asset values are recorded in income.
AIG obtains the fair value of its investments in limited
partnerships and hedge funds from information provided by the
general partner or manager of each of these investments, the
accounts of which are generally audited on an annual basis.
71
American International Group, Inc. and Subsidiaries
Each of these investment categories is regularly tested to
determine if impairment in value exists. Various valuation
techniques are used with respect to each category in this
determination.
Financial Services Operations
AIGs Financial Services subsidiaries engage in diversified
activities including aircraft and equipment leasing, capital
markets transactions, consumer finance and insurance premium
financing.
Aircraft Finance
AIGs Aircraft Finance represents the operations of ILFC,
which generates its revenues primarily from leasing new and used
commercial jet aircraft to domestic and foreign airlines.
Revenues also result from the remarketing of commercial jets for
its own account, and remarketing and fleet management for
airlines and financial institutions.
ILFC finances its purchases of aircraft primarily through the
issuance of a variety of debt instruments. The composite
borrowing rates at September 30, 2006 and 2005 were
5.14 percent and 4.43 percent, respectively. The
composite borrowing rates do not reflect the benefit of hedging
ILFCs floating rate and foreign currency denominated debt.
ILFC hedges these exposures using interest rate and foreign
currency derivatives. These derivatives are effective economic
hedges; however, since hedge accounting under FAS 133 is
not applied, the benefits of using derivatives to hedge these
exposures is not reflected in ILFCs borrowing rates. (See
also the discussions under Capital Resources and
Liquidity herein.)
ILFCs sources of revenue are principally from scheduled
and charter airlines and companies associated with the airline
industry. The airline industry is sensitive to changes in
economic conditions, cyclical and highly competitive. Airlines
and related companies may be affected by political or economic
instability, terrorist activities, changes in national policy,
competitive pressures on certain air carriers, fuel prices and
shortages, labor stoppages, insurance costs, recessions, world
health issues and other political or economic events adversely
affecting world or regional trading markets.
For a discussion of ILFCs potential exposure to airframe
and engine manufacturers, see Risk Factors in
Item 1A. of Part II of this Quarterly Report.
ILFC is exposed to operating loss and liquidity strain through
nonperformance of aircraft lessees, through owning aircraft
which it would be unable to sell or re-lease at acceptable rates
at lease expiration and, in part, through committing to purchase
aircraft which it would be unable to lease.
ILFCs revenues and income may be adversely affected by the
volatile competitive environment in which its customers operate.
ILFC manages the risk of nonperformance by its lessees with
security deposit requirements, repossession rights, overhaul
requirements, and close monitoring industry conditions through
its marketing force. However, there can be no assurance that
ILFC would be able to successfully manage the risks relating to
the effect of possible future deterioration in the airline
industry. Approximately 90 percent of ILFCs fleet is
leased to non-U.S. carriers, and the fleet, comprised of
the most efficient aircraft in the airline industry, continues
to be in high demand from such carriers.
ILFC typically contracts to re-lease aircraft before the end of
the existing lease term. For aircraft returned before the end of
the lease term, ILFC has generally been able to re-lease such
aircraft within two to six months of its return. As a lessor,
ILFC considers an aircraft idle or off
lease when the aircraft is not subject to a signed lease
agreement or signed letter of intent. ILFC had one aircraft off
lease at September 30, 2006, and all new aircraft, but one,
scheduled for delivery through 2007 have been leased. (See also
the discussions under Capital Resources and
Liquidity herein.)
Management formally reviews regularly, and no less frequently
than quarterly, issues affecting ILFCs fleet, including
events and circumstances that may cause impairment of aircraft
values. Management evaluates aircraft in the fleet as necessary,
based on these events and circumstances in accordance with
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (FAS 144). ILFC has not recognized any
impairment related to its fleet. ILFC has been able to re-lease
the aircraft without diminution in lease rates that would result
in an impairment under FAS 144. (See also the discussions
under Liquidity herein.)
Capital Markets
Capital Markets represents the operations of AIGFP, which
engages as principal in a wide variety of financial
transactions, including standard and customized financial
products involving commodities, credit, currencies, energy,
equities and rates. AIGFP also invests in a diversified
portfolio of securities and engages in borrowing activities
involving issuing standard and structured notes and other
securities, and entering into guaranteed investment agreements
(GIAs).
As Capital Markets is a transaction-oriented operation, current
and past revenues and operating results may not provide a basis
for predicting future performance. AIGs Capital Markets
operations derive substantially all their revenues from hedged
financial positions entered in connection with counterparty
transactions rather than from speculative transactions. AIGFP
also participates as a dealer in a wide variety of financial
derivatives transactions. AIGFP economically hedges the market
risks arising from its transactions, although hedge accounting
under FAS 133 is not currently being applied to any of the
derivatives and related assets and
72
American International Group, Inc. and Subsidiaries
liabilities. Accordingly, revenues and operating income are
exposed to volatility resulting from differences in the timing
of revenue recognition between the derivatives and the hedged
assets and liabilities. Revenues and operating income of the
Capital Markets operations and the percentage change in these
amounts for any given period are also significantly affected by
the number, size and profitability of transactions entered into
by these subsidiaries during that period relative to those
entered into during the prior period. Generally, the realization
of transaction revenues as measured by the receipt of funds is
not a significant reporting event as the gain or loss on
AIGFPs trading transactions is currently reflected in
operating income as the fair values change from period to period.
A significant majority of AIGs financial derivative
transactions are conducted by the Capital Markets operations.
Capital Markets enters into derivative transactions to hedge the
interest rate and foreign currency exposures associated with its
available for sale assets and borrowings. Although the
derivatives entered into to hedge its outstanding transactions
and positions are highly effective economic hedges, AIG did not
meet the requirements for hedge accounting under FAS 133.
Derivative transactions are entered into in the ordinary course
of Capital Markets operations. Income on derivatives is recorded
at fair value, determined by reference to the mark to market
value of the derivative or their estimated fair value where
market prices are not readily available. The resulting aggregate
unrealized gains or losses from the derivatives are reflected in
the income statement. Where Capital Markets cannot verify
significant model inputs to observable market data and verify
the model value to market transactions, Capital Markets values
the contract at the transaction price at inception and,
consequently, records no initial gain or loss in accordance with
Emerging Issues Task Force Issue
No. 02-03,
Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities
(EITF 02-03). Such
initial gain or loss is recognized over the life of the
transaction. Capital Markets periodically reevaluates its
revenue recognition under
EITF 02-03 based
on the observability of market parameters. The mark to fair
value of derivative transactions is reflected in the balance
sheet in the captions Unrealized gain on swaps, options
and forward transactions and Unrealized loss on
swaps, options and forward transactions. Unrealized gains
represent the present value of the aggregate of each net
receivable, by counterparty, and the unrealized losses represent
the present value of the aggregate of each net payable, by
counterparty, as of September 30, 2006. These amounts will
change from one period to the next due to changes in interest
rates, currency rates, equity and commodity prices and other
market variables, as well as cash movements, execution of new
transactions and the maturing of existing transactions. (See
also the discussion under Derivatives herein.)
Spread income on investments and borrowings is recorded on an
accrual basis over the life of the transaction. Investments are
classified as securities available for sale and are marked to
market with the resulting unrealized gains or losses reflected
in accumulated other comprehensive income. U.S. dollar
denominated borrowings are carried at cost, while borrowings in
any currency other than the U.S. dollar result in
unrealized foreign exchange gains or losses reported in income.
AIGFP hedges the economic exposure on its investments and
borrowings on a portfolio basis using derivatives and other
financial instruments. While these hedges are highly effective
economic hedges, they do not qualify for hedge accounting
treatment under FAS 133. The change in the fair value of
the derivatives used to hedge these economic exposures is
therefore included in Other income, while the offsetting change
in fair value of the hedged investments and borrowings is not
recognized in earnings.
To the extent the Financial Services subsidiaries, other than
AIGFP, use derivatives to economically hedge their assets or
liabilities with respect to their future cash flows, and such
hedges do not qualify for hedge accounting treatment under
FAS 133, the changes in fair value of such derivatives are
recorded in realized capital gains (losses) or other revenues.
Amounts recorded in realized capital gains (losses) are reported
as part of the Other category.
Consumer Finance
Domestically, AIGs Consumer Finance operations are
principally conducted through American General Finance, Inc.
(AGF). AGF derives a substantial portion of its revenues from
finance charges assessed on outstanding real estate loans,
secured and unsecured non-real estate loans and retail sales
finance receivables. The real estate loans include first or
second mortgages on residential real estate generally having a
maximum term of 360 months, and are considered non-conforming.
These loans may be closed-end accounts or open-end home equity
lines of credit and may be fixed-rate or adjustable rate
products. The non-real estate loans are secured by consumer
goods, automobiles, or other personal property or are unsecured.
Both secured and unsecured non-real estate loans generally have
a maximum term of 60 months. The core of AGFs originations
is sourced through its branches. However, a significant volume
of real estate loans is also originated through broker
relationships, and to lesser extents, through correspondent
relationships and direct mail solicitations. In the first
quarter of 2006, two wholly-owned subsidiaries of AGF
discontinued originating real estate loans through an
arrangement with AIG Federal Savings Bank, a federally chartered
thrift, and began originating such loans under their own state
licenses.
Many of AGFs borrowers are non-prime or sub-prime. Current
economic conditions, such as interest rate and employment
levels, have a direct effect on the borrowers ability to
repay these loans. AGF manages the credit risk inherent in
73
American International Group, Inc. and Subsidiaries
its portfolio by using credit scoring models at the time of
credit applications, established underwriting criteria, and in
certain cases, individual loan reviews. AGFs Credit
Strategy and Policy Committee monitors the quality of the
finance receivables portfolio monthly when determining the
appropriate level of the allowance for losses. The Credit
Strategy and Policy Committee bases its conclusions on
quantitative analyses, qualitative factors, current economic
conditions and trends, and each committee members
experience in the consumer finance industry. Through the first
nine months of 2006, the credit quality of AGFs finance
receivables continues to be strong. However, declines in the
strength of the U.S. housing market or economy may
adversely affect the future credit quality of these receivables.
Internationally, AIGs Consumer Finance operations are
principally conducted through AIG Consumer Finance Group Inc.
(CFG). CFG operates primarily in emerging and developing
markets. CFG has operations in Hong Kong, Taiwan, the
Philippines, Thailand, China, Poland, Argentina, and Mexico.
While products vary by market, the businesses generally provide
credit cards, unsecured and secured non-real estate loans, term
deposits, savings accounts, retail sales finance and real estate
loans. CFG originates finance receivables through its branches
and direct solicitation. CFG also originates finance receivables
indirectly through relationships with retailers, auto dealers,
and independent agents.
Consumer Finance operations are exposed to loss when contractual
payments are not received. Credit loss exposure is managed
through a combination of underwriting controls, mix of finance
receivables, collateral and collection efficiency.
CFG monitors the quality of its finance receivable portfolio
through a combination of a monthly Credit Review and quarterly
Credit Reserve Committee review when determining the appropriate
level of the allowance for losses. The Credit Reserve Committee
bases its conclusions on quantitative analysis, qualitative
factors, current economic conditions and trends, political and
regulatory implications, competition, and the judgment of the
committees members. As a result of such a review and in
light of industry-wide deteriorating credit conditions and
tightening of overall consumer credit, the aggregate allowance
for losses in AIG Credit Card Company (Taiwan) was increased by
$88 million in the first quarter of 2006 to
$130 million at March 31, 2006. The remaining balance,
net of write-offs during the second and third quarters, is
approximately $69 million at September 30, 2006. This
balance, representing approximately 14 percent of
CFGs outstanding credit card receivables for Taiwan,
continues to be CFGs best estimate of the overall exposure
and hence no additional increases to the allowance for losses
were deemed necessary at September 30, 2006. The results of
AIG Credit Card Company (Taiwan) are shared equally by the
Financial Services and Life Insurance & Retirement
Services segments.
Financial Services Results
Financial Services operations for the three and nine- month
periods ended September 30, 2006 and 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
| |
Revenues(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
Finance(b)
|
|
$ |
1,060 |
|
|
$ |
943 |
|
|
$ |
3,067 |
|
|
$ |
2,661 |
|
Capital
Markets(c)(d)
|
|
|
1,118 |
|
|
|
23 |
|
|
|
30 |
|
|
|
2,754 |
|
Consumer
Finance(e)
|
|
|
970 |
|
|
|
940 |
|
|
|
2,833 |
|
|
|
2,664 |
|
Other
|
|
|
39 |
|
|
|
20 |
|
|
|
98 |
|
|
|
61 |
|
|
Total
|
|
$ |
3,187 |
|
|
$ |
1,926 |
|
|
$ |
6,028 |
|
|
$ |
8,140 |
|
|
Operating income
(loss)(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Finance
|
|
$ |
157 |
|
|
$ |
165 |
|
|
$ |
475 |
|
|
$ |
476 |
|
Capital
Markets(d)
|
|
|
965 |
|
|
|
(150 |
) |
|
|
(457 |
) |
|
|
2,306 |
|
Consumer
Finance(f)(g)
|
|
|
220 |
|
|
|
190 |
|
|
|
594 |
|
|
|
649 |
|
Other, including intercompany adjustments
|
|
|
15 |
|
|
|
19 |
|
|
|
38 |
|
|
|
52 |
|
|
Total
|
|
$ |
1,357 |
|
|
$ |
224 |
|
|
$ |
650 |
|
|
$ |
3,483 |
|
|
|
|
(a) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133, including the
related foreign exchange gains and losses. For the three and
nine-month periods ended September 30, 2005, the effect was
$(10) million and $(59) million, respectively, in
operating income for Aircraft Finance. During 2006, Aircraft
Finance derivative gains and losses are reported as part of the
Other category, and not reported in Aircraft Finance operating
income. For the three-month periods ended September 30,
2006 and 2005, the effect was $783 million and
$(365) million in both revenues and operating income,
respectively, for Capital Markets. For the nine-month periods
ended September 30, 2006 and 2005, the effect was
$(1.06) billion and $1.80 billion in both revenues and
operating income for Capital Markets. These amounts result
primarily from interest rate and foreign currency derivatives
which are hedging available for sale securities and
borrowings. |
(b) |
Revenues are primarily aircraft lease rentals from ILFC. |
(c) |
Revenues, shown net of interest expense, are primarily from
hedged financial positions entered into in connection with
counterparty transactions and the effect of hedging activities
that do not qualify for hedge accounting treatment under
FAS 133 described in (a) above. |
(d) |
Certain transactions entered into by AIGFP generate tax
credits and benefits which are included in income taxes in the
consolidated statement of income. The amount of such tax credits
and benefits for the three-month periods ended
September 30, 2006 and 2005 are $3 million and
$23 million, respectively. The amount of such tax credits
and benefits for the nine-month periods ended September 30,
2006 and 2005 are $29 million and $63 million,
respectively. |
(e) |
Revenues are primarily finance charges. |
(f) |
Includes $44 million in additional allowances for losses
recorded in the first quarter of 2006 from AIG Credit Card
Company (Taiwan). |
(g) |
Includes catastrophe related losses of $62 million
recorded in the third quarter of 2005 resulting from hurricane
Katrina, which were reduced by $22 million in the third
quarter of 2006. |
Financial Services operating income increased in the third
quarter and decreased in the first nine months of 2006 compared
to the same periods of 2005 due primarily to the effect of
hedging activities that do not qualify for hedge accounting
under FAS 133.
74
American International Group, Inc. and Subsidiaries
Quarterly Aircraft Finance Results
ILFCs operating income decreased slightly in the third
quarter of 2006 compared to the same period of 2005. Rental
revenues increased by $120 million or 13 percent
driven by a larger aircraft fleet. At September 30, 2006,
ILFC had 818 aircraft subject to operating leases compared
to 734 aircraft at September 30, 2005. The increase in
rental revenues was more than offset by increases in
depreciation and interest expense. Depreciation expense
increased by $47 million or 13 percent in line with
the increase in the size of aircraft fleet. Interest expense
increased by $91 million or 30 percent driven by the
rising cost of funds and additional borrowings to fund aircraft
purchases. ILFCs interest expense does not reflect the
benefit of hedging ILFCs floating rate and foreign
currency denominated debt, ILFC hedges these exposures using
interest rate and foreign currency derivatives. These
derivatives are effective economic hedges. Since hedge
accounting under FAS 133 is not applied, the benefits of
using derivatives to hedge these exposures is not reflected in
its borrowing rates.
Year-to-date Aircraft Finance Results
ILFCs operating income remained relatively stable in the
first nine months of 2006 compared to the same period of 2005.
Rental revenues increased by $392 million or
15 percent driven by a larger aircraft fleet and increased
utilization. The increase in rental revenues was offset by
increases in depreciation, interest expense, charges related to
bankrupt airlines as well as the settlement of a tax dispute in
Australia related to the restructuring of ownership of aircraft.
Depreciation expense increased by $134 million or
13 percent in line with the increase in the size of
aircraft fleet. Interest expense increased by $166 million
or 19 percent driven by rising cost of funds and additional
borrowings funding aircraft purchases. As discussed above,
ILFCs interest expense does not reflect the benefit of
hedging ILFCs floating rate and foreign currency
denominated debt.
Quarterly Capital Markets Results
Capital Markets operating income in the third quarter of 2006
increased by $1.12 billion compared to the same period of
2005 primarily due to a gain related to derivatives not
qualifying for hedge accounting treatment of $783 million
in the current quarter compared to a loss of $365 million
in the comparable period last year. A large part of the net gain
on AIGFPs derivatives recognized in the third quarter of
2006 was due to the decrease in long term U.S. interest
rates which increased the fair value of AIGFPs derivatives
hedging its assets and liabilities. The performance of the U.S.
dollar against other currencies in the third quarter of 2006 did
not have a significant effect on the fair value of the
derivatives hedging AIGFPs assets and liabilities. The
majority of the net loss on AIGFPs derivatives in the
third quarter of 2005 was due to rising long term interest
rates, which decreased the fair value of AIGFPs
derivatives hedging its assets and liabilities. This net loss
was slightly offset by the strengthening of the U.S. dollar
primarily against the Euro and British Pound, which increased
the fair value of the foreign currency derivatives hedging
available for sale securities.
Financial market conditions in the third quarter of 2006 were
characterized by lower levels of interest rates globally,
unchanged credit spreads and higher equity valuations. The
increase in Capital Markets operating income for the third
quarter of 2006 was principally due to gains on derivatives not
qualifying for hedge accounting under FAS 133. AIGFPs
transaction flow in credit, commodity and equity products
improved during the third quarter of 2006 compared to the third
quarter of 2005, although this was more than offset by reduced
revenues from other product groups.
The most significant component of Capital Markets operating
expenses is compensation, which was approximately
$115 million and $138 million in the third quarter of
2006 and 2005, respectively. The amount of compensation was not
affected by gains and losses not qualifying for hedge accounting
treatment under FAS 133.
AIG elected to early adopt FAS 155 in 2006 and,
accordingly, AIGFP has elected to account for a significant
majority of its hybrid financial instruments at fair value. The
change in fair value of these hybrid financial instruments is
included in operating income. AIGFP economically hedges these
hybrid financial instruments with other derivative positions
with third parties. The change in fair value of these positions
is reflected in operating income. The net effect of these hybrid
financial instruments and the derivatives economically hedging
these instruments had a minimal effect on AIGFPs operating
income for the third quarter of 2006.
Year-to-date Capital Markets Results
Capital Markets operating income in the nine month period ended
September 30, 2006 decreased by $2.76 billion compared
to the same period of 2005. Improved results, primarily from
increased transaction flow in AIGFPs credit, commodity
index and equity products, were more than offset by the loss
resulting from the effect of derivatives not qualifying for
hedge accounting treatment of $1.06 billion in the current
period compared to a gain of $1.80 billion in the
comparable period last year, a decrease of $2.86 billion. A
large part of the net loss on AIGFPs derivatives
recognized in the first nine months of 2006 was due to the
weakening of the U.S. dollar, primarily against the British
Pound and Euro, resulting in a decrease in the fair value of the
foreign currency derivatives hedging AIGFPs available for
sale securities. The majority of the net gain on AIGFPs
derivatives in the first nine months of 2005 was due to the
strengthening of the U.S. dollar, primarily against the
British Pound and Euro, which increased the fair value of the
foreign currency derivatives hedging available for sale
securities. To a lesser extent, the net gain in 2005 was due to
the decrease in long term U.S. interest rates which
75
American International Group, Inc. and Subsidiaries
increased the fair value of derivatives hedging AIGFPs
assets and liabilities.
Financial market conditions in the first nine months of 2006
were characterized by a general flattening of interest rate
yield curves across fixed income markets globally, tightening of
credit spreads and equity valuations that were higher.
The compensation expense of Capital Markets was approximately
$380 million and $359 million in the first nine months
of 2006 and 2005, respectively. The amount of compensation was
not affected by gains and losses not qualifying for hedge
accounting treatment under FAS 133.
As a result of AIGs early adoption of FAS 155, AIGFP
elected to apply the fair value option to its structured notes
and other financial liabilities containing embedded derivatives
outstanding as of January 1, 2006. The cumulative effect
from the adoption of FAS 155 on these instruments at
January 1, 2006 was a loss of approximately
$29 million pre-tax.
The application of the fair value option to these hybrid
financial instruments did not have a significant effect on
AIGFPs operating income for the first nine months of 2006.
Quarterly Consumer Finance Results
Consumer Finance operating income increased in the third quarter
of 2006 compared to the same period of 2005 in the domestic
operations and decreased slightly in foreign operations.
Domestically, the relatively low interest rate environment
throughout 2005 contributed to a high level of mortgage
refinancing activity. AGFs average net finance receivables
increased 5 percent in the third quarter of 2006 when
compared to the same period in 2005. However, net originations
and purchases of finance receivables in AGFs centralized
real estate business segment decreased in the third quarter of
2006 compared to the same period in 2005 primarily caused by a
less robust U.S. housing market. The increase in AGFs
revenues that principally resulted from portfolio growth was
offset by higher interest expense and depressed whole loan sale
prices resulting from a flattened yield curve. Both short-term
and long-term market interest rates continued to increase
significantly over the past year. AGFs short-term
borrowing costs were 5.38 percent in the third quarter of
2006 compared to 3.96 percent in the third quarter of 2005.
AGFs long-term borrowing costs were 5.09 percent in the
third quarter of 2006 compared to 4.47 percent in the third
quarter of 2005. Despite high energy costs, the
U.S. economy continued to expand during the third quarter
of 2006, improving consumer credit quality compared to the third
quarter of 2005. AGFs charge-off ratio improved
17 basis points in the third quarter of 2006 when compared
to the same period in 2005.
AGFs results included catastrophe related losses of
$62 million in the third quarter of 2005 resulting from
hurricane Katrina. However, after a reassessment of payment and
charge-off experience during the past year, AGF reduced the
reserve by $22 million in the third quarter of 2006. At
September 30, 2006, AGFs allowance ratio was
1.99 percent compared to 2.24 percent at
September 30, 2005.
Revenues from foreign consumer finance operations increased by
approximately 15 percent in the third quarter of 2006
compared to the same period in 2005. Loan growth was the primary
driver behind higher revenues in 2006. Higher revenues were
offset by higher loan loss provisions due to loan growth and
higher operating expenses in connection with expansion of
distribution channels and new product promotions, resulting in
slightly lower operating income for the third quarter of 2006
compared to the same period in 2005.
Year-to-date Consumer Finance Results
Consumer Finance operating income decreased in the first nine
months of 2006 compared to the same period of 2005. The domestic
operations remain essentially unchanged year over year while the
foreign operations decreased primarily due to the credit
deterioration in the Taiwan credit card market.
Domestically, the relatively low interest rate environment
throughout 2005 contributed to a high level of mortgage
refinancing activity. AGFs average net finance receivables
increased 9 percent in the first nine months of 2006 when
compared to the same period in 2005. However, net originations
and purchases of finance receivables in AGFs centralized
real estate business decreased in the first nine months of 2006
compared to the same period in 2005 primarily caused by a less
robust U.S. housing market. The increase in AGFs
revenues that principally resulted from portfolio growth was
offset by higher interest expense and depressed whole loan sale
prices resulting from a flattened yield curve. AGFs
short-term borrowing costs were 5.06 percent in the first
nine months of 2006 compared to 3.47 percent in the same
period in 2005. AGFs long-term borrowing costs were 4.97
percent in the first nine months of 2006 compared to 4.36
percent in the same period in 2005. Despite high energy costs,
the U.S. economy continued to expand during the first nine
months of 2006, improving consumer credit quality. AGFs
charge-off ratio improved 25 basis points in the first nine
months of 2006 when compared to the same period in 2005.
AGFs delinquency ratio at September 30, 2006 remained
the same when compared to September 30, 2005. At
September 30, 2006, AGFs allowance ratio was
1.99 percent compared to 2.24 percent at
September 30, 2005.
During the third quarter of 2006, AGF reassessed the adequacy of
the reserve established in September 2005 resulting from
hurricane Katrina as discussed above.
76
American International Group, Inc. and Subsidiaries
Revenues from the foreign consumer finance operations increased
by approximately 20 percent in the first nine months of
2006 compared to the same period in 2005. Loan growth was the
primary driver behind higher revenues. Higher revenues were more
than offset by increases in the allowance for losses related to
industry-wide credit deterioration in the Taiwan credit card
market, increased cost of funds, and higher operating expenses
in connection with expansion of distribution channels and new
product promotions, resulting in a lower operating income for
the first nine months of 2006 compared to the same period in
2005.
Financial Services Invested Assets
The following table is a summary of the composition of
AIGs Financial Services invested assets at
September 30, 2006 and December 31, 2005. (See also
the discussions under Operating Review: Financial Services
Operations, Capital Resources and
Derivatives herein.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
Invested | |
|
Percent of | |
|
Invested | |
|
Percent of | |
(dollars in millions) |
|
Assets | |
|
Total | |
|
Assets | |
|
Total | |
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale, at market value
|
|
$ |
1,336 |
|
|
|
0.8 |
% |
|
$ |
1,307 |
|
|
|
0.9 |
% |
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks available for sale, at market value
|
|
|
5 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
Mortgage loans on real estate, net of allowance
|
|
|
92 |
|
|
|
|
|
|
|
71 |
|
|
|
|
|
Policy loans
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
Collateral and guaranteed loans, net of allowance
|
|
|
2,152 |
|
|
|
1.3 |
|
|
|
1,719 |
|
|
|
1.2 |
|
Financial services assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment primarily under operating leases, net of
accumulated depreciation
|
|
|
39,460 |
|
|
|
22.9 |
|
|
|
36,245 |
|
|
|
24.1 |
|
|
Securities available for sale, at market value
|
|
|
41,232 |
|
|
|
24.0 |
|
|
|
37,511 |
|
|
|
24.9 |
|
|
Trading securities, at market value
|
|
|
5,822 |
|
|
|
3.4 |
|
|
|
6,499 |
|
|
|
4.3 |
|
|
Spot commodities
|
|
|
118 |
|
|
|
0.1 |
|
|
|
92 |
|
|
|
0.1 |
|
|
Unrealized gain on swaps, options and forward transactions
|
|
|
20,235 |
|
|
|
11.8 |
|
|
|
18,695 |
|
|
|
12.4 |
|
|
Trading assets
|
|
|
2,194 |
|
|
|
1.3 |
|
|
|
1,204 |
|
|
|
0.8 |
|
|
Securities purchased under agreements to resell, at contract
value
|
|
|
27,041 |
|
|
|
15.7 |
|
|
|
14,519 |
|
|
|
9.7 |
|
|
Finance receivables, net of allowance
|
|
|
28,634 |
|
|
|
16.7 |
|
|
|
27,995 |
|
|
|
18.6 |
|
Securities lending collateral, at market value
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested assets
|
|
|
1,934 |
|
|
|
1.1 |
|
|
|
2,751 |
|
|
|
1.9 |
|
Short-term investments, at cost
|
|
|
1,306 |
|
|
|
0.7 |
|
|
|
1,382 |
|
|
|
0.9 |
|
Cash
|
|
|
279 |
|
|
|
0.2 |
|
|
|
331 |
|
|
|
0.2 |
|
Investment income due and accrued
|
|
|
22 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
Real estate, net of accumulated depreciation
|
|
|
24 |
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
Total
|
|
$ |
171,964 |
|
|
|
100.0 |
% |
|
$ |
150,375 |
|
|
|
100.0 |
% |
|
As previously discussed, the cash used for the purchase of
flight equipment is derived primarily from the proceeds of
ILFCs debt financings. The primary sources for the
repayment of this debt and the interest thereon are the cash
flow from operations, proceeds from the sale of flight equipment
and the rollover and refinancing of the prior debt. During the
first nine months of 2006, ILFC acquired flight equipment
costing $4.86 billion. (See also the discussion under
Operating Review: Financial Services Operations and
Capital Resources herein.)
At September 30, 2006, ILFC had committed to purchase
268 new aircraft deliverable from 2006 through 2015 at an
estimated aggregate purchase price of $19.2 billion and had
options to purchase three new aircraft at an estimated
aggregate purchase price of $453 million. As of
September 30, 2006, ILFC has entered into leases for all,
but one, of the new aircraft scheduled for delivery through
2007. ILFC will be required to find customers for any aircraft
currently on order and any aircraft to be ordered, and it must
arrange financing for portions of the purchase price of such
equipment. ILFC has been successful to date both in placing its
new aircraft on lease or under sales contract and obtaining
adequate financing, but there can be no assurance that such
success will continue in future environments.
77
American International Group, Inc. and Subsidiaries
AIGs Consumer Finance operations provide a wide variety of
consumer finance products, including real estate loans, credit
card loans, non-real estate loans, retail sales finance and
credit-related insurance to customers both domestically and
overseas, particularly in emerging markets. These products are
funded through a combination of deposits and various borrowings
including commercial paper and medium term notes. AIGs
Consumer Finance operations are exposed to credit risk and risk
of loss resulting from adverse fluctuations in interest rates.
Over half of the finance receivables are real estate loans which
are substantially collateralized by the related properties.
With respect to credit losses, the allowance for losses is
maintained at a level considered adequate to absorb anticipated
credit losses existing in that portfolio as of the balance sheet
date.
Capital Markets derivative transactions are carried at market
value or at estimated fair value when market prices are not
readily available. AIGFP reduces its economic risk exposure
through similarly valued offsetting transactions including
swaps, trading securities, options, forwards and futures. The
estimated fair values of these transactions represent
assessments of the present value of expected future cash flows.
These transactions are exposed to liquidity risk if AIGFP were
required to sell or close out the transactions prior to
maturity. AIG believes that the effect of any such event would
not be significant to AIGs financial condition or its
overall liquidity. (See also the discussion under
Operating Review: Financial Services Operations and
Derivatives herein.)
AIGFP uses the proceeds from the issuance of notes and bonds and
GIAs to invest in a diversified portfolio of securities,
including securities available for sale, at market, and
derivative transactions. The funds may also be invested in
securities purchased under agreements to resell. The proceeds
from the disposal of the aforementioned securities available for
sale and securities purchased under agreements to resell are
used to fund the maturing GIAs or other AIGFP financings, or
invest in new assets. (See also the discussion under
Capital Resources herein.)
Securities available for sale is predominantly a diversified
portfolio of high grade fixed income securities, where the
individual securities have varying degrees of credit risk. At
September 30, 2006, the average credit rating of this
portfolio was in the AA category or the equivalent thereto as
determined through rating agencies or internal review. AIGFP has
also entered into credit derivative transactions to economically
hedge its credit risk associated with $128 million of these
securities. Securities deemed below investment grade at
September 30, 2006 amounted to approximately
$259 million in fair value representing 0.6 percent of
the total AIGFP securities available for sale. There have been
no significant downgrades through September 30, 2006. If
its securities available for sale portfolio were to suffer
significant default and the collateral held declined
significantly in value with no replacement or the credit default
swap counterparty failed to perform, AIGFP could have a
liquidity strain. AIG guarantees AIGFPs payment
obligations, including its debt obligations.
AIGFPs risk management objective is to minimize interest
rate, currency, commodity and equity risks associated with its
securities available for sale. That is, when AIGFP purchases a
security for its securities available for sale investment
portfolio, it simultaneously enters into an offsetting internal
hedge such that the payment terms of the hedging transaction
offset the payment terms of the investment security, which
achieves the economic result of converting the return on the
underlying security to U.S. dollar LIBOR plus or minus a
spread based on the underlying profit on each security on the
initial trade date. The market risk associated with such
internal hedges is managed on a portfolio basis, with
third-party hedging transactions executed as necessary. As hedge
accounting treatment is not achieved in accordance with
FAS 133, the unrealized gains and losses on the derivative
transactions with unaffiliated third parties are reflected in
operating income, whereas the unrealized gains and losses on the
underlying securities available for sale resulting from changes
in interest rates, currency rates, commodity and equity prices,
are recorded in accumulated other comprehensive income. When a
security is sold, the realized gain or loss with respect to this
security is then recorded in operating income.
Securities purchased under agreements to resell are treated as
collateralized financing transactions. AIGFP takes possession of
or obtains a security interest in securities purchased under
agreements to resell.
AIGFP owns inventories in certain commodities in which it
trades, and may reduce the exposure to market risk through the
use of swaps, forwards, futures and option contracts. Physical
commodities held in AIGFPs wholly-owned broker dealer
subsidiary are recorded at market value. All other commodities
are recorded at the lower of cost or market.
Trading securities, at market value, and securities and spot
commodities sold but not yet purchased, at market value are
marked to market daily with the unrealized gain or loss being
recognized in income at that time. These trading securities are
purchased and sold as necessary to meet the risk management
objectives of Capital Markets operations.
78
American International Group, Inc. and Subsidiaries
The gross unrealized gains and gross unrealized losses of
Capital Markets operations included in the financial services
assets and liabilities at September 30, 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Gross | |
|
|
Unrealized | |
|
Unrealized | |
(in millions) |
|
Gains | |
|
Losses | |
|
Securities available for sale, at market value
|
|
$ |
749 |
|
|
$ |
18 |
|
Unrealized gain/ loss on swaps, options and forward
transactions*
|
|
|
20,235 |
|
|
|
12,764 |
|
|
|
|
* |
These amounts are also presented as the respective balance
sheet amounts. |
The senior management of AIG defines the policies and
establishes general operating parameters for Capital Markets
operations. AIGs senior management has established various
oversight committees to monitor on an ongoing basis the various
financial market, operational and credit risk attendant to the
Capital Markets operations. The senior management of AIGFP
reports the results of its operations to and reviews future
strategies with AIGs senior management.
AIG actively manages the exposures to limit potential losses,
while maximizing the rewards afforded by these business
opportunities. In doing so, AIG must continually manage a
variety of exposures including credit, market, liquidity,
operational and legal risks.
Asset Management Operations
AIGs Asset Management operations comprise a wide variety
of investment-related services and investment products including
institutional and retail asset management, broker dealer
services and spread-based investment business from the sale of
guaranteed investment contracts, also known as funding
agreements (GICs). Such services and products are offered to
individuals and institutions both domestically and overseas.
Asset Management Results
Asset Management revenues and operating income for the three
and nine-month periods ended September 30, 2006 and 2005
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment contracts
|
|
$ |
845 |
|
|
$ |
908 |
|
|
$ |
2,517 |
|
|
$ |
2,707 |
|
|
Institutional Asset Management
|
|
|
265 |
|
|
|
279 |
|
|
|
1,163 |
|
|
|
776 |
|
|
Brokerage Services and Mutual Funds
|
|
|
71 |
|
|
|
67 |
|
|
|
217 |
|
|
|
192 |
|
|
Other
|
|
|
57 |
|
|
|
101 |
|
|
|
201 |
|
|
|
276 |
|
|
Total
|
|
$ |
1,238 |
|
|
$ |
1,355 |
|
|
$ |
4,098 |
|
|
$ |
3,951 |
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment
contracts(a)
|
|
$ |
175 |
|
|
$ |
294 |
|
|
$ |
635 |
|
|
$ |
939 |
|
|
Institutional Asset
Management(b)(c)
|
|
|
89 |
|
|
|
155 |
|
|
|
721 |
|
|
|
424 |
|
|
Brokerage Services and Mutual Funds
|
|
|
23 |
|
|
|
20 |
|
|
|
67 |
|
|
|
50 |
|
|
Other
|
|
|
54 |
|
|
|
99 |
|
|
|
190 |
|
|
|
269 |
|
|
Total
|
|
$ |
341 |
|
|
$ |
568 |
|
|
$ |
1,613 |
|
|
$ |
1,682 |
|
|
|
|
(a) |
Includes the effect of hedging activities that do not qualify
for hedge accounting treatment under FAS 133, including the
related foreign exchange gains and losses. For the three and
nine-month periods ended September 30, 2005, the effect was
a gain of $18 million and $127 million, respectively, in
operating income. During 2006, these derivative gains and losses
are reported as part of the Other category, and not reported in
Asset Management operating income. |
(b) |
Includes the full results of certain AIG managed private
equity and real estate funds that are consolidated pursuant to
FIN 46(R), Consolidation of Variable Interest
Entities. Also includes $(3) million and
$77 million for the three-month periods ended
September 30, 2006 and 2005, respectively, and
$207 million and $189 million for the nine-month
periods ended September 30, 2006 and 2005, respectively, of
third-party limited partner earnings offset in minority interest
expense which is not a component of operating income. |
(c) |
Includes the full results of certain AIG managed partnerships
that are consolidated effective January 1, 2006 pursuant to
EITF 04-5,
Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights. For
the three and nine-month periods ended September 30, 2006,
operating income includes $47 million and
$203 million, respectively, of third-party limited partner
earnings offset in minority interest expense which is not a
component of operating income. |
Quarterly Asset Management Results
Asset Management operating income decreased 40 percent in
the third quarter of 2006 compared to the same period of 2005 on
revenues that declined 9 percent due to the continued
run-off of GIC balances combined with spread compression in the
remaining GIC portfolio. The spread compression has occurred due
to an increase in the cost of funds in the short-term floating
rate portion of the GIC portfolio, only partially offset by
increased investment income from the floating rate assets
backing the portfolio.
79
American International Group, Inc. and Subsidiaries
Operating income in the third quarter of 2006 also declined from
the year-ago quarter due to lower transaction-driven revenues
that were partially offset by growth in asset-based management
fees within Institutional Asset Management.
The GIC portfolio continues to
run-off. The MIP has
replaced the GIC program as AIGs principal spread-based
investment activity. Although the MIP is beginning to show
positive operating income, because the asset mix under the MIP
does not include the alternative investments utilized in the GIC
program, AIG does not expect that the income growth in the MIP
will offset the run-off in the GIC portfolio for the foreseeable
future. A significant portion of the remaining GIC portfolio
consists of floating rate obligations. AIG has entered into
hedges to manage against increases in short-term interest rates.
AIG continues to believe these hedges are economically effective
but do not qualify for hedge accounting treatment under
FAS 133. As a result, continued increases in short-term
interest rates will negatively affect operating income in the
segment. Realized capital gains from the hedges offset the
negative trend in GIC related operating income. GIC revenues
include income from Sun America partnerships supporting the GIC
line of business and are significantly affected by performance
in the equity markets. Thus, revenues, operating income and cash
flow attributable to GICs will vary among reporting periods.
The MIP was initially launched in the Euromarkets in September
2005 through AIGs $10 billion Euro medium term note
program. Through September 30, 2006, AIG has issued the
equivalent of $3.3 billion for the MIP in the Euro, U.S.
Rule 144A and U.S. public markets.
The revenues and operating income for this segment are largely
affected by the general conditions in the equity and credit
markets. Realized gains and performance fees are contingent upon
various fund closings, maturity levels and market conditions,
and by their nature are not predictable. Therefore, the
segments earnings may vary from period to period.
Year-to-date Asset Management Results
Asset Management revenues and operating income decreased
4 percent in the first nine months of 2006 compared to the
same period of 2005 due to the decline in operating income from
the GIC portfolio, reflecting the continued
run-off of GIC
balances, combined with spread compression in the remaining GIC
portfolio. The decrease in revenues and operating income was
partially offset by growth in asset management fees in
Institutional Asset Management.
At September 30, 2006 and 2005, AIGs non-affiliated
client assets under management, including both retail mutual
funds and institutional accounts, were approximately
$70 billion and $59 billion and the aggregate GIC
reserve was $49.2 billion and $49.7 billion,
respectively.
Other Operations
The operating income (loss) for Other operations for the
three and nine-month periods ended September 30, 2006 and
2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
Nine Months | |
|
|
Ended | |
|
Ended | |
|
|
September 30, | |
|
September 30, | |
Other |
|
| |
|
| |
(in millions) |
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity earnings in unconsolidated subsidiaries
|
|
$ |
48 |
|
|
$ |
(205 |
) |
|
$ |
178 |
|
|
$ |
(109 |
) |
Compensation expense SICO Plans
|
|
|
(14 |
) |
|
|
(63 |
) |
|
|
(104 |
) |
|
|
(130 |
) |
Compensation expense C.V. Starr tender offer
|
|
|
|
|
|
|
|
|
|
|
(54 |
) |
|
|
|
|
Interest expense
|
|
|
(227 |
) |
|
|
(131 |
) |
|
|
(633 |
) |
|
|
(382 |
) |
Unallocated corporate expenses
|
|
|
(95 |
) |
|
|
(92 |
) |
|
|
(356 |
) |
|
|
(287 |
) |
Realized capital gains (losses)
|
|
|
(197 |
) |
|
|
175 |
|
|
|
(182 |
) |
|
|
520 |
|
Other miscellaneous, net
|
|
|
15 |
|
|
|
(40 |
) |
|
|
(20 |
) |
|
|
(57 |
) |
|
Total Other
|
|
$ |
(470 |
) |
|
$ |
(356 |
) |
|
$ |
(1,171 |
) |
|
$ |
(445 |
) |
|
Other operating loss amounted to $470 million and
$356 million in the three-month periods ended
September 30, 2006 and 2005, respectively, as interest
expense increased, primarily reflecting increased borrowings by
the parent holding company. The third quarter of 2006 also
reflects net realized capital losses, primarily reflecting the
effect of hedging activities of the Financial Services and Asset
Management segments that do not qualify for hedge accounting
treatment under FAS 133, partially offset by a gain in the
parent company of $86 million from the sale of AIGs
investment in IPC Holdings, Ltd. These declines were
partially offset by increased equity earnings in certain
unconsolidated subsidiaries driven primarily by a decrease in
catastrophe losses of $246 million. The third quarter of
2006 also reflects a decrease in compensation expense with
respect to the SICO Plans, and income of $21 million
resulting from a change in accounting estimate relating to a
favorable resolution of a litigation matter.
Other operating loss amounted to $1.17 billion and
$445 million in the nine-month periods ended
September 30, 2006 and 2005, respectively, as interest
expense increased, primarily reflecting increased borrowings by
the parent holding company. The first nine months of 2006 also
reflects net realized capital losses, as discussed in the
preceding paragraph, and an increase in unallocated corporate
expenses, reflecting expenses of $29 million in the first
nine months of 2006 relating to certain executive departures (of
which approximately $18 million related to departures in
2005), and an overall increase in corporate operating expenses
primarily resulting from
on-going efforts to
improve internal controls at the parent holding company. Also
reflected in operating loss in the first nine months of 2006 is
an out of period adjustment totaling $61 million with
respect to the SICO Plans and a
one-time charge related
to the Starr tender offer of $54 million, both of which
were recorded in the first quarter of 2006. See also Note 4
of Notes to the Consolidated Financial Statements for further
discussion. These declines
80
American International Group, Inc. and Subsidiaries
were partially offset by increased equity earnings in certain
unconsolidated subsidiaries, and income of $21 million
resulting from a change in accounting estimate, as discussed in
the preceding paragraph.
Capital Resources
At September 30, 2006, AIG had total consolidated
shareholders equity of $96.15 billion and total
consolidated borrowings of $137.1 billion. At that date,
$122.1 billion of such borrowings were either not
guaranteed by AIG or were AIGFPs matched borrowings under
obligations of GIAs, liabilities connected to trust preferred
stock, or matched notes and bonds payable.
Borrowings
At September 30, 2006, AIGs net borrowings were
$14.98 billion after reflecting amounts that were matched
borrowings under AIGFPs obligations of GIAs, matched notes
and bonds payable, amounts not guaranteed by AIG and liabilities
connected to trust preferred stock. The following table
summarizes borrowings outstanding at September 30, 2006 and
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
(in millions) | |
|
2006 | |
|
2005 | |
|
AIGs net borrowings
|
|
$ |
14,982 |
|
|
$ |
10,425 |
|
Liabilities connected to trust preferred stock
|
|
|
1,399 |
|
|
|
1,391 |
|
AIG Matched Investment Program Matched notes and bonds payable
|
|
|
3,333 |
|
|
|
|
|
AIGFP
|
|
|
|
|
|
|
|
|
|
GIAs
|
|
|
21,091 |
|
|
|
20,811 |
|
|
Matched notes and bonds payable
|
|
|
38,184 |
|
|
|
24,950 |
|
Borrowings not guaranteed by AIG
|
|
|
58,133 |
|
|
|
52,272 |
|
|
Total
|
|
$ |
137,122 |
|
|
$ |
109,849 |
|
|
Borrowings issued or guaranteed by AIG and those borrowings
not guaranteed by AIG at September 30, 2006 and
December 31, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
(in millions) | |
|
2006 | |
|
2005 | |
| |
AIG borrowings:
|
|
|
|
|
|
|
|
|
|
Notes and bonds payable
|
|
$ |
7,482 |
|
|
$ |
4,607 |
|
|
Loans and mortgages payable
|
|
|
833 |
|
|
|
814 |
|
|
AIG Matched Investment Program Matched notes and bonds payable
|
|
|
3,333 |
|
|
|
|
|
|
|
Total
|
|
|
11,648 |
|
|
|
5,421 |
|
|
Borrowings guaranteed by AIG:
|
|
|
|
|
|
|
|
|
AIGFP
|
|
|
|
|
|
|
|
|
|
GIAs
|
|
|
21,091 |
|
|
|
20,811 |
|
|
Notes and bonds payable
|
|
|
31,420 |
|
|
|
26,463 |
|
|
Hybrid financial instrument liabilities
|
|
|
8,150 |
|
|
|
|
|
|
|
Total
|
|
|
60,661 |
|
|
|
47,274 |
|
|
AIG Funding, Inc. commercial paper
|
|
|
4,484 |
|
|
|
2,694 |
|
|
AGC Notes and bonds payable
|
|
|
797 |
|
|
|
797 |
|
|
Liabilities connected to trust preferred stock
|
|
|
1,399 |
|
|
|
1,391 |
|
|
Total borrowings issued or guaranteed by AIG
|
|
|
78,989 |
|
|
|
57,577 |
|
|
Borrowings not guaranteed by AIG:
|
|
|
|
|
|
|
|
|
ILFC
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
3,148 |
|
|
|
2,615 |
|
|
Notes and bonds payable*
|
|
|
26,085 |
|
|
|
23,715 |
|
|
|
Total
|
|
|
29,233 |
|
|
|
26,330 |
|
|
AGF
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
4,534 |
|
|
|
3,423 |
|
|
Notes and bonds payable
|
|
|
18,983 |
|
|
|
18,719 |
|
|
|
Total
|
|
|
23,517 |
|
|
|
22,142 |
|
|
Commercial paper:
|
|
|
|
|
|
|
|
|
|
AIG Credit Card Company (Taiwan)
|
|
|
243 |
|
|
|
476 |
|
|
AIG Finance (Taiwan) Limited
|
|
|
9 |
|
|
|
|
|
|
|
Total
|
|
|
252 |
|
|
|
476 |
|
|
Loans and mortgages payable:
|
|
|
|
|
|
|
|
|
|
AIGCFG
|
|
|
1,046 |
|
|
|
864 |
|
|
AIG Finance (Hong Kong) Limited
|
|
|
190 |
|
|
|
183 |
|
|
|
Total
|
|
|
1,236 |
|
|
|
1,047 |
|
|
Other Subsidiaries
|
|
|
1,128 |
|
|
|
927 |
|
|
Variable Interest Entity debt:
|
|
|
|
|
|
|
|
|
|
A.I. Credit
|
|
|
880 |
|
|
|
|
|
|
AIG Global Investment Group
|
|
|
55 |
|
|
|
140 |
|
|
AIG Global Real Estate Investment
|
|
|
1,555 |
|
|
|
977 |
|
|
AIG SunAmerica
|
|
|
193 |
|
|
|
233 |
|
|
ALICO
|
|
|
84 |
|
|
|
|
|
|
Total
|
|
|
2,767 |
|
|
|
1,350 |
|
|
Total borrowings not guaranteed by AIG
|
|
|
58,133 |
|
|
|
52,272 |
|
|
Total Debt
|
|
$ |
137,122 |
|
|
$ |
109,849 |
|
|
|
|
* |
Includes borrowings under Export Credit Facility of
$2.7 billion and $2.6 billion, at September 30,
2006 and December 31, 2005, respectively. |
AIG intends to continue its customary practice of issuing debt
securities from time to time to meet its financing needs and
those of certain of its subsidiaries for general corporate
purposes, as well as for a matched investment program. In July
2006, AIG filed and had declared effective a post-effec-
81
American International Group, Inc. and Subsidiaries
tive amendment to its universal shelf registration statement to
sell up to $25.1 billion of debt securities, preferred and
common stock and other securities.
In October 2006, AIG established a medium term note program
under its shelf registration statement providing for the
issuance of up to $25.1 billion of AIG debt securities, the
proceeds of which may be used by either AIG or AIGFP for general
corporate purposes or to fund the MIP. In October 2006, AIG
issued under the program $750 million principal amount of
senior notes maturing in 2016 for AIGs general corporate
purposes and an aggregate of $1.0 billion principal amount
of senior notes maturing in 2011 to fund the MIP.
On April 20, 2006, AIG sold $1.0 billion principal
amount of senior notes in a Rule 144A/Regulation S
offering maturing in 2036, and on September 30, 2005, AIG
sold $1.5 billion principal amount of senior notes in a
Rule 144A/Regulation S offering, of which
$500 million matures in 2010 and $1.0 billion matures
in 2015. The proceeds from these offerings were used by AIG for
general corporate purposes. In August 2006, AIG completed
exchange offers for these notes pursuant to which AIG issued in
exchange substantially identical notes that are registered under
the Securities Act.
On June 16, 2006, AIG sold $750 million principal
amount of senior, floating rate notes in a
Rule 144A offering that matures in 2009. The proceeds
of this offering were used to fund the MIP.
AIG has a Euro medium term note program under which an aggregate
nominal amount of up to $10.0 billion of notes may be
outstanding at any one time. The program provides that
additional notes may be issued to replace matured or redeemed
notes. As of September 30, 2006, the equivalent of
$4.4 billion principal amount of notes were outstanding
under the program, of which the proceeds from $2.6 billion
of notes were used to fund the MIP. The aggregate amount
outstanding includes $76 million resulting from foreign
exchange translation into U.S. dollars, of which
$72 million relates to notes issued by AIG for general
corporate purposes and $4 million relates to notes issued
to fund the MIP. AIG has hedged the currency exposure arising
from foreign currency denominated notes by economically hedging
that exposure, although such hedges do not qualify for hedge
accounting treatment under FAS 133. In addition, in October
2006, AIG sold the equivalent of $218 million under the
program, of which $180 million was used to fund the MIP and
$38 million was used for AIGs general corporate
purposes.
In March 2006, AIG borrowed a total of $1.3 billion on an
unsecured basis pursuant to loan agreements with third-party
banks, of which $500 million matures in February 2007 but
can be extended by AIG for an additional seven months and
$200 million matures in March 2007; $600 million was
repaid in September 2006.
AIGFP uses the proceeds from the issuance of notes and bonds and
GIA borrowings to invest in a diversified portfolio of
securities and derivative transactions. The borrowings may also
be temporarily invested in securities purchased under agreements
to resell. AIG guarantees the obligations of AIGFP under
AIGFPs structured notes and bonds and GIA borrowings.
Certain of AIGFPs notes contain embedded derivatives that
are required to be accounted for separately under FAS 133.
Upon AIGs early adoption of FAS 155, AIGFP has
elected the fair value option for these instruments. Those notes
that are accounted for using the fair value option are reported
separately under hybrid financial instrument liabilities. (See
also the discussions under Operating Review: Financial
Services Operations, Liquidity and
Derivatives herein.)
On June 16, 2006, AIGFP sold an aggregate of
$2.0 billion principal amount of senior, floating rate
notes in Rule 144A offerings, of which
$1.0 billion matures in 2007 and $1.0 billion matures
in 2008. AIGFP has a Euro medium term note program under which
an aggregate nominal amount of up to $10.0 billion of notes
may be outstanding at any one time. The program provides that
additional notes may be issued to replace matured or redeemed
notes. As of September 30, 2006, $5.39 billion of
notes were outstanding under the program, including
$283 million resulting from foreign exchange translation
into U.S. dollars. Notes issued under this program are
included in Notes and Bonds Payable in the preceding table of
borrowings.
AIG Funding, Inc. (AIG Funding), through the issuance of
commercial paper, helps fulfill the short-term cash requirements
of AIG and its subsidiaries. AIG Funding intends to continue to
meet AIGs funding requirements through the issuance of
commercial paper guaranteed by AIG. The issuance of AIG
Fundings commercial paper is subject to the approval of
AIGs Board of Directors.
AIG and AIG Funding are parties to unsecured syndicated
revolving credit facilities, which as of September 30,
2006, aggregated to $3.25 billion, consisting of
$1.625 billion in a
364-day facility that
expires in July of 2007 and $1.625 billion in a
five-year facility that
expires in July of 2011. The 364-day facility allows for the
conversion by AIG of any outstanding loans at expiration into
one-year term loans. The facilities can be used for general
corporate purposes and also to provide backup for AIGs
commercial paper programs administered by AIG Funding. AIG
expects to replace or extend these credit facilities on or prior
to their expiration. There are currently no borrowings
outstanding under these facilities, nor were any borrowings
outstanding as of September 30, 2006.
In November 2005, AIG and AIG Funding entered into a 364-day
revolving credit facility for an aggregate amount of
$3 billion, which can be drawn in the form of loans or
letters of credit. The credit facility expires in November 2006
but
82
American International Group, Inc. and Subsidiaries
allows for the issuance of letters of credit with terms of up to
ten years and provides for the conversion by AIG of any
outstanding loans at expiration into one-year term loans. The
facility can be used for general corporate purposes, including
providing backup for AIGs commercial paper programs
administered by AIG Funding and obtaining letters of credit to
secure obligations under insurance and reinsurance transactions.
There are currently no loans outstanding under the facility, nor
were any loans outstanding as of September 30, 2006. As of
such dates, $511 million was available to be drawn under
the facility, with the remainder having been drawn in the form
of letters of credit.
AIG is also a party to an unsecured 364-day inter-company
revolving credit facility provided by certain of its
subsidiaries aggregating $2 billion that expires in October
of 2007. The facility allows for the conversion of any
outstanding loans at expiration into one-year term loans. The
facility can be used for general corporate purposes and also to
provide backup for AIGs commercial paper programs. AIG
expects to replace or extend this credit facility on or prior to
its expiration. There are currently no borrowings outstanding
under the inter-company facility, nor were any borrowings
outstanding as of September 30, 2006.
ILFC fulfills its short term cash requirements through operating
cash flows and the issuance of commercial paper. The issuance of
commercial paper is subject to the approval of ILFCs Board
of Directors and is not guaranteed by AIG. ILFC is a party to
unsecured syndicated revolving credit facilities aggregating
$6.0 billion at September 30, 2006. The facilities can
be used for general corporate purposes and also to provide
backup for ILFCs commercial paper program. They consist of
$2.0 billion in a 364-day revolving credit facility that
expires in October 2006, with a one-year term out option,
$2.0 billion in a five-year revolving credit facility that
expires in October 2009 and $2.0 billion in a five-year
revolving credit facility that expires in October 2010.
Subsequent to September 30, 2006, ILFC replaced the
$2.0 billion
364-day facility with a
five-year, $2.5 billion facility expiring in October 2011.
ILFC expects to replace or extend these credit facilities on or
prior to their expiration. There are currently no borrowings
under these facilities, nor were any borrowings outstanding as
of September 30, 2006.
As a well-known seasoned issuer, ILFC has filed an automatic
shelf registration statement with the SEC allowing ILFC
immediate access to the U.S. public debt markets. For the
nine months ended September 30, 2006, $1.2 billion of
debt securities were issued under this registration statement
and $5.8 billion were issued under a prior registration
statement. In addition, ILFC has a Euro medium term note program
for $7.0 billion, under which $4.28 billion in notes
were sold through September 30, 2006. Notes issued under
the Euro medium term note program are included in Notes and
bonds payable in the preceding table of borrowings. The foreign
exchange adjustment for the foreign currency denominated debt
was $534 million at September 30, 2006 and
$197 million at December 31, 2005. ILFC has
substantially eliminated the currency exposure arising from
foreign currency denominated notes by economically hedging the
portion of the note exposure not already offset by Euro
denominated operating lease payments, although such hedges do
not qualify for hedge accounting treatment under FAS 133.
ILFC had a $4.3 billion Export Credit Facility for use in
connection with the purchase of approximately 75 aircraft
delivered through 2001. This facility was guaranteed by various
European Export Credit Agencies. The interest rate varies from
5.75 percent to 5.90 percent on these amortizing ten-year
borrowings depending on the delivery date of the aircraft. At
September 30, 2006, ILFC had $1.0 billion outstanding
under this facility. The debt is collateralized by a pledge of
the shares of a subsidiary of ILFC, which holds title to the
aircraft financed under the facility.
In May 2004, ILFC entered into a similarly structured Export
Credit Facility for up to a maximum of $2.64 billion for
Airbus aircraft to be delivered through May 31, 2005. The
facility was subsequently increased to $3.64 billion and
extended to include aircraft to be delivered through
May 31, 2007. The facility becomes available as the various
European Export Credit Agencies provide their guarantees for
aircraft based on a six-month forward-looking calendar, and the
interest rate is determined through a bid process. At
September 30, 2006, ILFC had $1.7 billion outstanding
under this facility. Borrowings with respect to these facilities
are included in Notes and Bonds Payable in the preceding table
of borrowings.
In December of 2005, ILFC entered into two tranches of junior
subordinated debentures totaling $1.0 billion. Both mature
on December 21, 2065, but each tranche has a different call
option. The $600 million tranche has a call date of
December 21, 2010 and the $400 million tranche has a
call date of December 21, 2015. The debenture with the 2010
call date has a fixed interest rate of 5.90 percent for the
first five years. The debenture with the 2015 call date has a
fixed interest rate of 6.25 percent for the first ten years.
Both tranches have interest rate adjustments if the call option
is not exercised. If the call option is not exercised, the new
interest rate will be a floating quarterly reset rate based on
the initial credit spread plus the highest of
(i) 3 month LIBOR, (ii) 10-year constant maturity
treasury and (iii) 30-year constant maturity treasury.
The proceeds of ILFCs debt financing are primarily used to
purchase flight equipment, including progress payments during
the construction phase. The primary sources for the repayment of
this debt and the interest expense thereon are the cash flow
from operations, proceeds from the sale of flight equipment and
the rollover and refinancing of the prior debt. AIG does not
guarantee the debt obligations of ILFC.
83
American International Group, Inc. and Subsidiaries
(See also the discussions under Operating Review:
Financial Services Operations and Liquidity
herein.)
AGF fulfills its short term cash requirements through the
issuance of commercial paper. The issuance of commercial paper
is subject to the approval of AGFs Board of Directors and
is not guaranteed by AIG. AGF is a party to unsecured syndicated
revolving committed credit facilities aggregating
$4.25 billion, including a $2.125 billion 364-day
revolving credit facility that expires in July of 2007 and a
$2.125 billion five-year revolving credit facility that
expires in July of 2010. The 364-day facility allows for the
conversion by AGF of any outstanding loans at expiration into a
one-year term loan. The facilities can be used for general
corporate purposes and also to provide backup for AGFs
commercial paper programs. AGF expects to replace or extend
these credit facilities on or prior to their expiration. There
are currently no borrowings under these AGF facilities, nor were
any borrowings outstanding as of September 30, 2006.
AGF issued $5.44 billion during 2005 and $1.76 billion
in the first nine months of 2006 of fixed rate and variable rate
medium term notes ranging in maturities from two to ten years.
As of September 30, 2006, notes aggregating
$17.48 billion were outstanding with maturity dates ranging
from 2006 to 2016 at interest rates ranging from
1.94 percent to 7.50 percent. To the extent deemed
appropriate, AGF may enter into swap transactions to manage its
effective borrowing with respect to these notes. As a well-known
seasoned issuer, AGF has filed an automatic shelf registration
statement with the SEC allowing AGF immediate access to the U.S.
public debt markets.
AGFs other funding sources include private placement debt,
retail note issuances, securitizations of finance receivables
that AGF accounts for as on-balance-sheet secured financings and
bank financings. In addition, AGF has become an established
issuer of long-term debt in the international capital markets.
In addition to debt refinancing activities, proceeds from the
collection of finance receivables may be used to pay the
principal and interest on AGFs debt. AIG does not
guarantee any of the debt obligations of AGF. See also the
discussion under Operating Review Financial
Services Operations and Liquidity herein.
AIG Credit Card Company (Taiwan) and AIG Finance (Taiwan)
Limited, both consumer finance businesses in Taiwan, have issued
commercial paper for the funding of their own operations. AIG
did not guarantee the commercial paper issued by either of these
subsidiaries.
Contractual Obligations and Other Commercial
Commitments
The maturity schedule of AIGs contractual obligations
at September 30, 2006 was as follows:
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period | |
|
|
|
|
| |
|
|
|
|
Less | |
|
|
|
|
|
|
Than | |
|
|
|
|
Total | |
|
One | |
|
1-3 | |
|
3+-5 | |
|
Over Five | |
|
|
Payments | |
|
Year | |
|
Years | |
|
Years | |
|
Years | |
|
Borrowings(a)
|
|
$ |
121,937 |
|
|
$ |
28,800 |
|
|
$ |
28,763 |
|
|
$ |
26,120 |
|
|
$ |
38,254 |
|
Interest payments on borrowings
|
|
|
45,021 |
|
|
|
4,133 |
|
|
|
8,351 |
|
|
|
5,988 |
|
|
|
26,549 |
|
Loss
reserves(b)
|
|
|
79,863 |
|
|
|
21,962 |
|
|
|
24,358 |
|
|
|
11,580 |
|
|
|
21,963 |
|
Insurance and investment contract
liabilities(c)
|
|
|
633,884 |
|
|
|
18,756 |
|
|
|
53,186 |
|
|
|
48,687 |
|
|
|
513,255 |
|
Aircraft purchase commitments
|
|
|
19,213 |
|
|
|
983 |
|
|
|
10,143 |
|
|
|
4,833 |
|
|
|
3,254 |
|
|
Total
|
|
$ |
899,918 |
|
|
$ |
74,634 |
|
|
$ |
124,801 |
|
|
$ |
97,208 |
|
|
$ |
603,275 |
|
|
|
|
(a) |
Excludes commercial paper and obligations included as debt
pursuant to FIN 46(R) and includes hybrid financial
instrument liabilities recorded at fair value. |
(b) |
Represents future loss and loss adjustment expense payments
estimated based on historical loss development payment
patterns. |
(c) |
Insurance and investment contract liabilities include various
investment-type products with contractually scheduled maturities
including periodic payments of a term certain nature and
guaranteed maturities under guaranteed investment contracts.
Insurance and investment contract liabilities also include
benefit and claim liabilities, of which a significant portion
represents policies and contracts that do not have stated
contractual maturity dates and may not result in any future
payment obligations. For these policies and contracts
(i) AIG is currently not making payments until the
occurrence of an insurable event, such as death or disability,
(ii) payments are conditional on survivorship, or
(iii) the occurrence of a payment due to a surrender or
other non-scheduled event out of AIGs control. AIG has
made significant assumptions to determine the estimated
undiscounted cash flows of these contractual policy benefits
which include mortality, morbidity, future lapse rates,
expenses, investment returns and interest crediting rates,
offset by expected future deposits and premium on in-force
policies. Due to the significance of the assumptions used, the
amounts presented could be materially different from actual
required payments. The amounts presented in this table are
undiscounted and therefore exceed the future policy benefits and
policyholder contract deposits included in the balance sheet. |
84
American International Group, Inc. and Subsidiaries
The maturity schedule of AIGs other commercial
commitments by segment at September 30, 2006 was as
follows:
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration | |
|
|
|
|
| |
|
|
|
|
Less | |
|
|
|
|
Total | |
|
Than | |
|
|
|
Over | |
|
|
Amounts | |
|
One | |
|
1-3 | |
|
3+-5 | |
|
Five | |
|
|
Committed | |
|
Year | |
|
Years | |
|
Years | |
|
Years | |
|
Letters of credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance & Retirement Services
|
|
$ |
185 |
|
|
$ |
31 |
|
|
$ |
1 |
|
|
$ |
23 |
|
|
$ |
130 |
|
|
Parent
Company(b)
|
|
|
540 |
|
|
|
426 |
|
|
|
1 |
|
|
|
113 |
|
|
|
|
|
|
DBG
|
|
|
183 |
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Markets
|
|
|
1,749 |
|
|
|
1,457 |
|
|
|
77 |
|
|
|
42 |
|
|
|
173 |
|
Guarantees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance & Retirement
Services(a)
|
|
|
2,140 |
|
|
|
112 |
|
|
|
419 |
|
|
|
7 |
|
|
|
1,602 |
|
|
Aircraft Finance
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
118 |
|
|
Asset Management
|
|
|
252 |
|
|
|
23 |
|
|
|
59 |
|
|
|
|
|
|
|
170 |
|
Other commercial
commitments(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Markets(d)
|
|
|
14,585 |
|
|
|
4,414 |
|
|
|
1,515 |
|
|
|
2,616 |
|
|
|
6,040 |
|
|
Aircraft
Finance(e)
|
|
|
797 |
|
|
|
|
|
|
|
|
|
|
|
183 |
|
|
|
614 |
|
|
Life Insurance & Retirement
Services(f)
|
|
|
4,281 |
|
|
|
1,008 |
|
|
|
1,306 |
|
|
|
1,080 |
|
|
|
887 |
|
|
Asset Management
|
|
|
1,193 |
|
|
|
934 |
|
|
|
176 |
|
|
|
47 |
|
|
|
36 |
|
|
Life Settlement
|
|
|
252 |
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
DBG(g)
|
|
|
873 |
|
|
|
245 |
|
|
|
188 |
|
|
|
440 |
|
|
|
|
|
|
Parent Company
|
|
|
200 |
|
|
|
58 |
|
|
|
118 |
|
|
|
24 |
|
|
|
|
|
|
Total
|
|
$ |
27,400 |
|
|
$ |
8,891 |
|
|
$ |
4,112 |
|
|
$ |
4,627 |
|
|
$ |
9,770 |
|
|
|
|
(a) |
Primarily AIG SunAmerica construction guarantees connected to
affordable housing investments. |
(b) |
Represents reimbursement obligations under letters of credit
issued by commercial banks. |
|
|
(c) |
Excludes commitments with respect to pension plans. The
annual pension contribution for 2006 is expected to be
approximately $70 million for U.S. and
non-U.S. Plans. |
|
|
(d) |
Primarily liquidity facilities provided in connection with
certain municipal swap transactions and collateralized bond
obligations. |
(e) |
Primarily in connection with options to acquire aircraft. |
(f) |
Primarily AIG SunAmerica commitments to invest in
partnerships. |
(g) |
Primarily commitments to invest in limited partnerships. |
Rating triggers have been defined by one
independent rating agency to include clauses or agreements the
outcome of which depends upon the level of ratings maintained by
one or more rating agencies. Rating triggers generally relate to
events which (i) could result in the termination or
limitation of credit availability, or require accelerated
repayment, (ii) could result in the termination of business
contracts or (iii) could require a company to post
collateral for the benefit of counterparties.
AIG believes that any of its or its subsidiaries
contractual obligations that are subject to ratings
triggers or financial covenants relating to ratings
triggers would not have a material adverse effect on its
financial condition or liquidity.
As a result of the downgrades of AIGs long-term senior
debt ratings, AIG was required to post approximately
$1.16 billion of collateral with counterparties to
municipal guaranteed investment agreements and financial
derivatives transactions. In the event of a further downgrade,
AIG will be required to post additional collateral. It is
estimated that, as of the close of business on October 31,
2006 based on AIGs outstanding municipal guaranteed
investment agreements and financial derivatives transactions as
of such date, a further downgrade of AIGs long-term senior
debt ratings to Aa3 by Moodys or
AA by S&P would permit counterparties to
call for approximately $1.1 billion of additional
collateral. Further, additional downgrades could result in
requirements for substantial additional collateral, which could
have a material effect on how AIG manages its liquidity. The
actual amount of additional collateral that AIG would be
required to post to counterparties in the event of such
downgrades depends on market conditions, the market value of the
outstanding affected transactions and other factors prevailing
at the time of the downgrade. Any additional obligations to post
collateral will increase the demand on AIGs liquidity.
85
American International Group, Inc. and Subsidiaries
Shareholders Equity
AIGs consolidated shareholders equity increased
during the first nine months of 2006 and twelve months of 2005
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
(in millions) |
|
2006 | |
|
2005 | |
|
Beginning of year
|
|
|
$86,317 |
|
|
|
$79,673 |
|
|
Net income
|
|
|
10,609 |
|
|
|
10,477 |
|
|
Unrealized appreciation (depreciation) of investments, net of
taxes
|
|
|
(852 |
) |
|
|
(1,978 |
) |
|
Cumulative translation adjustment, net of taxes
|
|
|
623 |
|
|
|
(540 |
) |
|
Dividends to shareholders
|
|
|
(1,260 |
) |
|
|
(1,615 |
) |
|
Other*
|
|
|
717 |
|
|
|
300 |
|
|
End of period
|
|
|
$96,154 |
|
|
|
$86,317 |
|
|
* Reflects the effects of employee stock transactions
and in 2006 also reflects the cumulative effect of accounting
changes.
(See also the discussion under Operating Review and
Liquidity herein and the Consolidated Statement of
Comprehensive Income.)
AIG has in the past reinvested most of its unrestricted earnings
in its operations and believes such continued reinvestment in
the future will be adequate to meet any foreseeable capital
needs. However, AIG may choose from time to time to raise
additional funds through the issuance of additional securities.
Stock Purchase
During 2006, AIG did not purchase any shares of its common stock
under its existing share repurchase authorization. AIG from time
to time may buy shares of its common stock in the open market
for general corporate purposes, including to satisfy its
obligations under various employee benefit plans. At
September 30, 2006, an additional 36,542,700 shares
could be purchased under the then current authorization by
AIGs Board of Directors.
Dividends from Insurance Subsidiaries
Payments of dividends to AIG by its insurance subsidiaries are
subject to certain restrictions imposed by regulatory
authorities. With respect to AIGs domestic insurance
subsidiaries, the payment of any dividend requires formal notice
to the insurance department in which the particular insurance
subsidiary is domiciled. Under the laws of many states, an
insurer may pay a dividend without prior approval of the
insurance regulator when the amount of the dividend is below
certain regulatory thresholds. To enhance their current capital
positions, dividends from the DBG companies were suspended in
the fourth quarter of 2005, and AIG has taken various other
actions. See Regulation and Supervision below.
Furthermore, AIG cannot predict how recent regulatory
investigations may affect the ability of its regulated
subsidiaries to pay dividends.
With respect to AIGs foreign insurance subsidiaries, the
most significant insurance regulatory jurisdictions include
Bermuda, Japan, Hong Kong, Taiwan, the United Kingdom, Thailand
and Singapore.
AIG cannot predict whether the regulatory investigations
currently underway or future regulatory issues will impair
AIGs financial condition, results of operations or
liquidity. To AIGs knowledge, no AIG company is currently
on any regulatory or similar watch list with regard
to solvency. (See also the discussion under
Liquidity herein.)
Regulation and Supervision
AIGs insurance subsidiaries, in common with other
insurers, are subject to regulation and supervision by the
states and jurisdictions in which they do business. In the U.S.
the National Association of Insurance Commissioners
(NAIC) has developed Risk-Based Capital
(RBC) requirements. RBC relates an individual insurance
companys statutory surplus to the risk inherent in its
overall operations.
AIGs insurance subsidiaries file financial statements
prepared in accordance with statutory accounting practices
prescribed or permitted by domestic and foreign insurance
regulatory authorities. The principal differences between
statutory financial statements and financial statements prepared
in accordance with U.S. GAAP for domestic companies are
that statutory financial statements do not reflect deferred
policy acquisition costs, some bond portfolios may be carried at
amortized cost, assets and liabilities are presented net of
reinsurance, policyholder liabilities are valued using more
conservative assumptions and certain assets are non-admitted.
In connection with the filing of the 2005 statutory financial
statements for AIGs domestic General Insurance companies,
AIG agreed with the relevant state insurance regulators on the
statutory accounting treatment of various items. The regulatory
authorities have also permitted certain of the domestic and
foreign insurance subsidiaries to support the carrying value of
their investments in certain non-insurance and foreign insurance
subsidiaries by utilizing the AIG audited consolidated financial
statements to satisfy the requirement that the
U.S. GAAP-basis equity of such entities be audited. In
addition, the regulatory authorities have permitted the domestic
General Insurance companies to utilize audited financial
statements prepared on a basis of accounting other than
86
American International Group, Inc. and Subsidiaries
U.S. GAAP to value investments in joint ventures, limited
partnerships and hedge funds. These permitted practices did not
affect the domestic General Insurance companies compliance
with minimum regulatory capital requirements.
Statutory capital of each company continued to exceed minimum
company action level requirements following the adjustments, but
AIG nonetheless contributed an additional $750 million of
capital into American Home effective September 30, 2005 and
contributed a further $2.25 billion of capital in February
2006 for a total of approximately $3 billion of capital
into Domestic General Insurance subsidiaries effective
December 31, 2005. To enhance their current capital
positions, dividends from the DBG companies were suspended in
the fourth quarter of 2005. AIG believes it has the capital
resources and liquidity to fund any necessary statutory capital
contributions. AIG will review the capital position of its
insurance company subsidiaries with various rating agencies and
regulators to determine if additional capital contributions or
other actions are warranted.
As discussed above, various regulators have commenced
investigations into certain insurance business practices. In
addition, the OTS and other regulators routinely conduct
examinations of AIG and its subsidiaries, including AIGs
consumer finance operations. AIG cannot predict the ultimate
effect that these investigations and examinations, or any
additional regulation arising therefrom, might have on its
business. Federal, state or local legislation may affect
AIGs ability to operate and expand its various financial
services businesses, and changes in the current laws,
regulations or interpretations thereof may have a material
adverse effect on these businesses. See Risk
Factors Regulatory Investigations in
Item 1A. of Part I of AIGs 2005 Annual Report on
Form 10-K for a
further discussion of the effect these investigations may have
on AIGs businesses.
AIGs U.S. operations are negatively affected under
guarantee fund assessment laws which exist in most states. As a
result of operating in a state which has guarantee fund
assessment laws, a solvent insurance company may be assessed for
certain obligations arising from the insolvencies of other
insurance companies which operated in that state. AIG generally
records these assessments upon notice. Additionally, certain
states permit at least a portion of the assessed amount to be
used as a credit against a companys future premium tax
liabilities. Therefore, the ultimate net assessment cannot
reasonably be estimated. The guarantee fund assessments net of
credits for the first nine months of 2006 were $74 million.
AIG is also required to participate in various involuntary pools
(principally workers compensation business) which provide
insurance coverage for those not able to obtain such coverage in
the voluntary markets. This participation is also recorded upon
notification, as these amounts cannot reasonably be estimated.
A substantial portion of AIGs General Insurance business
and a majority of its Life Insurance & Retirement
Services business are conducted in foreign countries. The degree
of regulation and supervision in foreign jurisdictions varies.
Generally, AIG, as well as the underwriting companies operating
in such jurisdictions, must satisfy local regulatory
requirements. Licenses issued by foreign authorities to AIG
subsidiaries are subject to modification and revocation. Thus,
AIGs insurance subsidiaries could be prevented from
conducting future business in certain of the jurisdictions where
they currently operate. AIGs international operations
include operations in various developing nations. Both current
and future foreign operations could be adversely affected by
unfavorable political developments up to and including
nationalization of AIGs operations without compensation.
Adverse effects resulting from any one country may affect
AIGs results of operations, liquidity and financial
condition depending on the magnitude of the event and AIGs
net financial exposure at that time in that country.
Foreign operations are individually subject to local solvency
margin requirements that require maintenance of adequate
capitalization, which AIG complies with by country. In addition,
certain foreign locations, notably Japan, have established
regulations that can result in guarantee fund assessments. These
have not had a material effect on AIGs financial condition
or results of operations.
Liquidity
AIGs liquidity is primarily derived from the operating
cash flows of its General and Life Insurance &
Retirement Services operations. Management believes that
AIGs liquid assets, its net cash provided by operations,
and access to the capital markets will enable it to meet any
anticipated cash requirements.
At September 30, 2006, AIGs consolidated invested
assets included $24.14 billion of cash and short-term
investments. Consolidated net cash provided by operating
activities in the first nine months of 2006 amounted to
$6.0 billion.
During the second quarter of 2006, AIG began presenting cash
flows related to the origination and sale of finance receivables
held for sale as cash flows within operating activities in the
Consolidated Statement of Cash Flows. Previously these amounts
were presented as cash flows within investing activities. In
addition, certain intercompany transactions included in Finance
receivables held for sale originations and purchases
and Finance receivable principal payments received in the
Consolidated Statement of Cash Flows were not eliminated in
2005. After evaluating the effect of these items during the
second quarter of 2006, AIG has revised the 2005 presentation to
conform to the 2006 presentation. See Note 11 of Notes to
the Consolidated Financial Statements.
87
American International Group, Inc. and Subsidiaries
The liquidity of the combined insurance operations is derived
both domestically and abroad. The combined insurance operating
cash flow is derived from two sources, underwriting operations
and investment operations. Cash flow includes periodic premium
collections, including policyholders contract deposits,
cash flows from investment operations and paid loss recoveries
less reinsurance premiums, losses, benefits, and acquisition and
operating expenses. Generally, there is a time lag from when
premiums are collected and, when as a result of the occurrence
of events specified in the policy, the losses and benefits are
paid. Investment income cash flow is primarily derived from
interest and dividends received and includes realized capital
gains net of realized capital losses. (See also the discussions
under Operating Review: General Insurance Operations
and Life Insurance & Retirement Services
Operations herein.)
With respect to General Insurance operations, if paid losses
accelerated beyond AIGs ability to fund such paid losses
from current operating cash flows, AIG might need to liquidate a
portion of its General Insurance investment portfolio and/or
arrange for financing. Potential events causing such a liquidity
strain could be the result of several significant catastrophic
events occurring in a relatively short period of time.
Additional strain on liquidity could occur if the investments
sold to fund such paid losses were sold into a depressed market
place and/or reinsurance recoverable on such paid losses became
uncollectible or collateral supporting such reinsurance
recoverable significantly decreased in value. (See also the
discussions under Operating Review: General Insurance
Operations herein.)
With respect to Life Insurance & Retirement Services
operations, if a substantial portion of the Life
Insurance & Retirement Services operations bond
portfolio diminished significantly in value and/or defaulted,
AIG might need to liquidate other portions of its Life
Insurance & Retirement Services investment portfolio
and/or arrange financing. Potential events causing such a
liquidity strain could be the result of economic collapse of a
nation or region in which Life Insurance & Retirement
Services operations exist, nationalization, terrorist acts, or
other such economic or political upheaval. In addition, a
significant rise in interest rates leading to a significant
increase in policyholder surrenders could also create a
liquidity strain. (See also the discussions under
Operating Review: Life Insurance & Retirement
Services Operations herein.)
In addition to the combined insurance pretax operating cash
flow, AIGs insurance operations held $12.75 billion
in cash and short-term investments at September 30, 2006.
Operating cash flow and the cash and short-term balances held
provided AIGs insurance operations with a significant
amount of liquidity. AIG subsidiaries have also issued debt
securities to meet capital needs. In December 2005,
Transatlantic issued $750 million of debt securities in a
public offering, of which $450 million were purchased by other
AIG subsidiaries. Transatlantic contributed the proceeds of the
offering to a reinsurance company subsidiary.
This liquidity is available, among other things, to purchase
predominately high quality and diversified fixed income
securities and, to a lesser extent, marketable equity
securities, and to provide mortgage loans on real estate, policy
loans and collateral loans. This cash flow coupled with proceeds
of approximately $91 billion from the maturities, sales and
redemptions of fixed income securities and from the sale of
equity securities was used to purchase approximately
$110 billion of fixed income securities and marketable
equity securities during the first nine months of 2006.
AIGs major Financial Services operating subsidiaries
consist of AIGFP, ILFC, AGF, AIGCFG and AI Credit. Sources of
funds considered in meeting the liquidity needs of AIGFPs
operations include guaranteed investment agreements, issuance of
long-term and short-term debt, proceeds from maturities and
sales of securities available for sale, securities sold under
repurchase agreements, and securities and spot commodities sold
but not yet purchased. ILFC, AGF, AIGCFG and AI Credit all
utilize the commercial paper markets, retail and wholesale
deposits, bank loans and bank credit facilities as sources of
liquidity. ILFC and AGF also fund in the domestic and
international capital markets without reliance on any guarantee
from AIG. An additional source of liquidity for ILFC is the use
of export credit facilities. AIGCFG also uses wholesale and
retail bank deposits as sources of funds. On occasion, AIG has
provided equity capital to ILFC, AGF and AIGCFG and provides
intercompany loans to AIGCFG. An AIG subsidiary purchased
additional shares of ILFC in the amount of $400 million
during the third quarter of 2005. Cash flow provided from
operations is a major source of liquidity for AIGs primary
Financial Services operating subsidiaries.
AIG, the parent company, funds its short-term working capital
needs through commercial paper issued by AIG Funding. As of
September 30, 2006, AIG Funding had $4.48 billion of
commercial paper outstanding with an average maturity of
27 days. As additional liquidity, AIG parent has a
$2 billion inter-company revolving credit facility provided
by certain of its subsidiaries, a $1.625 billion 364-day
revolving bank credit facility that expires in July 2007, a
$1.625 billion five year revolving bank credit facility
that expires in July 2011 and a $3 billion 364-day
revolving credit facility that expires in November 2006, of
which $511 million is currently available as back-up
liquidity. AIG parents primary sources of cash flow are
dividends and loans from its subsidiaries. AIG parents
primary uses of cash flow are for debt service, capital
contributions to subsidiaries and the payment of dividends to
shareholders. On November 9, 2006, AIG intends to redeem
its Zero Coupon Convertible Senior Debentures that were issued
on November 9, 2001. The aggregate redemption price payable
by AIG is approximately $1.07 billion. See also Note 9
of Notes to Consolidated Fi-
88
American International Group, Inc. and Subsidiaries
nancial Statements in AIGs 2005 Annual Report on
Form 10-K/A for additional information on debt maturities
for AIG and its subsidiaries.
Special Purpose Vehicles and Off Balance Sheet
Arrangements
AIG uses special purpose vehicles (SPVs) and off balance sheet
arrangements in the ordinary course of business. As a result of
recent changes in accounting, a number of SPVs and off balance
sheet arrangements have been reflected in AIGs
consolidated financial statements. In January 2003, FASB issued
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46 addressed the
consolidation and disclosure rules for nonoperating entities
that are now defined as Variable Interest Entities (VIEs). In
December 2003, FASB issued a revision to Interpretation
No. 46 (FIN 46(R)).
AIG has guidelines with respect to the formation of and
investment in SPVs and off balance sheet arrangements. In
addition, AIG has expanded the responsibility of its Complex
Structured Financial Transaction Committee (CSFT) to include the
review of any transaction that could subject AIG to heightened
legal, reputational, regulatory, accounting or other risk. See
Managements Report on Internal Control Over
Financial Reporting in Item 9A. of Part II
included in AIGs 2005 Annual Report on Form 10-K for
a further discussion of the CSFT.
For additional information related to AIGs activities with
respect to VIEs and certain guarantees see Recent
Accounting Standards herein and also Note 8 of Notes
to Consolidated Financial Statements. Also, for additional
disclosure regarding AIGs commercial commitments
(including guarantors), see Contractual Obligations and
Other Commercial Commitments herein.
Derivatives
Derivatives are financial instruments among two or more parties
with returns linked to or derived from some
underlying equity, debt, commodity or other asset, liability, or
index. Derivatives payments may be based on interest rates and
exchange rates and/or prices of certain securities, commodities,
financial or commodity indices, or other variables. The more
significant types of derivative arrangements in which AIG
transacts are swaps, forwards, futures and options. In the
normal course of business, with the agreement of the original
counterparty, these contracts may be terminated early or
assigned to another counterparty.
The overwhelming majority of AIGs derivatives activities
are conducted by the Capital Markets operations, thus permitting
AIG to participate in the derivatives dealer market acting
primarily as principal. In these derivative operations, AIG
structures transactions that generally allow its counterparties
to obtain or hedge exposure to changes in interest and foreign
currency exchange rates, credit events, securities prices
and certain commodities and financial or commodity indices.
AIGs customers such as corporations, financial
institutions, multinational organizations, sovereign entities,
government agencies and municipalities use
derivatives to hedge their own market exposures. For example, a
futures, forward or option contract can be used to protect the
customers assets or liabilities against price fluctuations.
A counterparty may default on any obligation to AIG, including a
derivative contract. Credit risk is a consequence of extending
credit and/or carrying trading and investment positions. Credit
risk exists for a derivative contract when that contract has a
positive fair value to AIG. To help manage this risk,
AIGFPs credit department operates within the guidelines
set by the AIG Credit Risk Committee. This committee establishes
the credit policy, sets limits for counterparties and provides
limits for derivative transactions with counterparties having
different credit ratings. In addition to credit ratings, this
committee takes into account other factors, including the
industry and country of the counterparty. Transactions which
fall outside these pre-established guidelines require the
specific approval of the AIG Credit Risk Committee. It is also
AIGs policy to establish reserves for potential credit
impairment when necessary.
In addition, AIGFP utilizes various credit enhancements,
including letters of credit, guarantees, collateral, credit
triggers, credit derivatives, and margin agreements to reduce
the credit risk relating to its outstanding financial derivative
transactions. AIGFP requires credit enhancements in connection
with specific transactions based on, among other things, the
creditworthiness of the counterparties, and the
transactions size and maturity.
AIGs Derivatives Review Committee provides an independent
review of any proposed derivative transaction or program except
those derivative transactions entered into by AIGFP with third
parties. The committee examines, among other things, the nature
and purpose of the derivative transaction, its potential credit
exposure, if any, and the estimated benefits.
Managing Risk
Market Risk
Market risk is the risk of loss of fair value resulting from
adverse fluctuations in interest rates, foreign currencies,
equities and commodity prices. AIG has exposures to these risks.
AIG analyzes market risk using various statistical techniques
including Value at Risk (VaR). VaR is a summary statistical
measure that applies the estimated volatility and correlation of
market factors to AIGs market positions. The output from
the VaR calculation is the maximum loss that could occur over a
defined period of time given a certain probability. While VaR
models are relatively sophisticated, the quantitative market
risk information generated is limited by the assumptions and
parameters established in creating the related models. AIG
believes that statistical models alone do
89
American International Group, Inc. and Subsidiaries
not provide a reliable method of monitoring and controlling
market risk. Therefore, such models are tools and do not
substitute for the experience or judgment of senior management.
Insurance
AIG has performed a separate VaR analysis for the General
Insurance and Life Insurance & Retirement Services segments
and for each market risk within each segment. For purposes of
the VaR calculation, the insurance assets and liabilities from
GICs are included in the Life Insurance & Retirement
Services segment. For the calculations in the analyses the
financial instrument assets included are the insurance
segments invested assets, excluding real estate and
investment income due and accrued, and the financial instrument
liabilities included are reserve for losses and loss expenses,
unearned premiums, future policy benefits for life and accident
and health insurance contracts and other policyholders
funds.
AIG calculated the VaR with respect to the net fair value of
each of AIGs insurance segments as of September 30,
2006 and December 31, 2005. The VaR number represents the
maximum potential loss as of those dates that could be incurred
with a 95 percent confidence (i.e., only five percent of
historical scenarios show losses greater than the VaR figure)
within a one-month holding period. AIG uses the historical
simulation methodology that entails repricing all assets and
liabilities under explicit changes in market rates within a
specific historical time period. AIG uses the most recent three
years of historical market information for interest rates,
foreign exchange rates, and equity index prices. For each
scenario, each transaction was repriced. Portfolio, business
unit and finally AIG-wide scenario values are then calculated by
netting the values of all the underlying assets and liabilities.
The following table presents the period-end, average, high
and low VaRs on a combined basis and of each component of market
risk for each of AIGs insurance segments as of
September 30, 2006 and December 31, 2005. Due to
diversification effects, the combined VaR is always smaller than
the sum of its components.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005* | |
|
|
| |
|
| |
|
|
|
|
For the nine months ended | |
|
As of | |
|
For the year ended | |
|
|
As of September 30, | |
|
September 30, | |
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
| |
|
| |
(in millions) |
|
|
|
Average | |
|
High | |
|
Low | |
|
|
|
Average | |
|
High | |
|
Low | |
|
General Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
$1,703 |
|
|
$ |
1,692 |
|
|
$ |
1,776 |
|
|
$ |
1,617 |
|
|
|
$1,617 |
|
|
$ |
1,585 |
|
|
$ |
1,672 |
|
|
$ |
1,396 |
|
|
|
Interest rate
|
|
|
1,566 |
|
|
|
1,659 |
|
|
|
1,717 |
|
|
|
1,566 |
|
|
|
1,717 |
|
|
|
1,746 |
|
|
|
1,931 |
|
|
|
1,563 |
|
|
|
Currency
|
|
|
200 |
|
|
|
150 |
|
|
|
200 |
|
|
|
119 |
|
|
|
130 |
|
|
|
125 |
|
|
|
139 |
|
|
|
111 |
|
|
|
Equity
|
|
|
535 |
|
|
|
546 |
|
|
|
560 |
|
|
|
535 |
|
|
|
535 |
|
|
|
651 |
|
|
|
727 |
|
|
|
535 |
|
Life Insurance & Retirement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
$4,469 |
|
|
$ |
4,794 |
|
|
$ |
5,276 |
|
|
$ |
4,442 |
|
|
|
$4,515 |
|
|
$ |
4,737 |
|
|
$ |
5,024 |
|
|
$ |
4,515 |
|
|
|
Interest rate
|
|
|
4,218 |
|
|
|
4,619 |
|
|
|
5,032 |
|
|
|
4,218 |
|
|
|
4,382 |
|
|
|
4,488 |
|
|
|
4,750 |
|
|
|
4,382 |
|
|
|
Currency
|
|
|
580 |
|
|
|
548 |
|
|
|
597 |
|
|
|
475 |
|
|
|
541 |
|
|
|
511 |
|
|
|
560 |
|
|
|
442 |
|
|
|
Equity
|
|
|
1,312 |
|
|
|
1,222 |
|
|
|
1,312 |
|
|
|
1,143 |
|
|
|
762 |
|
|
|
953 |
|
|
|
1,024 |
|
|
|
762 |
|
|
|
|
* |
The calculations of Equity VaR for the Life Insurance &
Retirement Services segment shown above for all 2006 periods
include structured exposures and exposures related to
equity-linked guarantees on variable annuity products. These
exposures are not included in the Equity VaR calculations for
the 2005 periods. |
In the Life Insurance & Retirement Services segment,
the Combined VaR is near the low point in the range for 2006 and
is similar to the Combined VaR at the end of 2005. The Equity
VaR increase during 2006 did not cause a corresponding increase
in Combined VaR due to both diversification effects and to
declines in interest rate volatilities, which reduced Interest
Rate VaR during 2006.
Financial Services
AIG generally manages its market exposures within Financial
Services by maintaining offsetting positions. Capital Markets
seeks to minimize or set limits for open or uncovered market
positions. Credit exposure is managed separately. (See the
discussion on the management of credit risk above.)
AIGs Market Risk Management Department provides detailed
independent review of AIGs market exposures, particularly
those market exposures of the Capital Markets operations. This
department determines whether AIGs market risks, as well
as those market risks of individual subsidiaries, are within the
parameters established by AIGs senior management. Well
established market risk management techniques such as
sensitivity analysis are used. Additionally, this department
verifies that specific market risks of each of certain
subsidiaries are managed and hedged by that subsidiary.
ILFC is exposed to market risk and the risk of loss of fair
value and possible liquidity strain resulting from adverse
fluctuations in interest rates. As of September 30, 2006
and December 31, 2005, AIG statistically measured the loss
of fair value through the application of a VaR model. In this
analysis, the net fair value of Aircraft Finance operations was
determined using the financial instrument assets which included
the tax adjusted future flight equipment lease revenue, and the
financial instrument liabilities which included the
90
American International Group, Inc. and Subsidiaries
future servicing of the current debt. The estimated effect of
the current derivative positions was also taken into account.
AIG calculated the VaR with respect to the net fair value of
Aircraft Finance operations using the historical simulation
methodology, as previously described. As of September 30,
2006 and December 31, 2005, the average VaR with respect to
the net fair value of Aircraft Finance operations was
approximately $165 million and $129 million,
respectively. In late 2005, ILFC lengthened the average maturity
of its debt, leading to an increase in its VaR.
Capital Markets operations are exposed to market risk due to
changes in the level and volatility of interest rates, foreign
currency exchange rates, equity prices and commodity prices.
AIGFP hedges its exposure to these risks primarily through
swaps, options, forwards and futures. To economically hedge
interest rate risks, AIGFP may also purchase U.S. and foreign
government obligations.
AIGFP does not seek to manage the market risk of each
transaction through an individual third party offsetting
transaction. Rather, AIGFP takes a portfolio approach to the
management of its market risk exposures. AIGFP values the
predominant portion of its market-sensitive transactions by
marking them to market currently through income. A smaller
portion is priced by estimated fair value based upon an
extrapolation of market factors. There is another limited
portion of transactions where the initial fair value is not
recorded through income currently and gains or losses are
recognized over the life of the transactions. These valuations
represent an assessment of the present values of expected future
cash flows and may include reserves for such risks as are deemed
appropriate by AIGFP and AIG management.
The recorded values of these transactions may be different from
the values that might be realized if AIGFP were required to sell
or close out the transactions prior to maturity. AIG believes
that such differences are not significant to its financial
condition or liquidity. Such differences would be immediately
recognized in income when the transactions are sold or closed
out prior to maturity.
AIGFP attempts to secure reliable and independent current market
prices, such as published exchange prices, external subscription
services such as from Bloomberg or Reuters or third-party broker
quotes for use in this model. When such prices are not
available, AIGFP use an internal methodology which includes
extrapolation from observable and verifiable prices nearest to
the measurement date of the reporting period. Historically,
actual results have not materially deviated from these models in
any material respect.
Systems used by Capital Markets operations can monitor each
units respective market positions on an intraday basis.
AIGFP operates in major business centers overseas and therefore
is open for business essentially 24 hours a day. Thus, the
market exposure and offset strategies are regularly monitored,
reviewed and coordinated.
AIGFP applies various testing techniques which reflect
significant potential market movements in interest rates,
foreign exchange rates, commodity and equity prices, volatility
levels and the effect of time. These techniques vary by currency
and are regularly changed to reflect factors affecting the
derivatives portfolio. The results from these analyses are
regularly reviewed by AIG management.
As described above, Capital Markets operations are exposed to
the risk of loss of fair value from adverse fluctuations in
interest rate and foreign currency exchange rates and equity and
commodity prices as well as implied volatilities thereon. AIG
statistically measures the losses of fair value through the
application of a VaR model across Capital Markets.
Capital Markets asset and liability portfolios for which the VaR
analyses were performed included over the counter and exchange
traded investments, derivative instruments and commodities.
Because the market risk with respect to securities available for
sale, at market, is substantially hedged, segregation of market
sensitive instruments into trading and other than trading was
not deemed necessary. The VaR calculation is unaffected by the
accounting treatment of hedged transactions under FAS 133.
In the calculation of VaR for Capital Markets operations, AIG
uses the same historical simulation methodology, described under
Insurance above, which entails repricing all assets and
liabilities under explicit changes in market rates within a
specific historical time period.
The following table presents the VaR on a combined basis and
of each component of market risk for Capital Markets operations
as of September 30, 2006 and December 31, 2005. Due to
diversification effects, the combined VaR is always smaller than
the sum of its components.
|
|
|
|
|
|
|
|
|
(in millions) |
|
2006 | |
|
2005 | |
|
Combined
|
|
$ |
19 |
|
|
$ |
22 |
|
Interest rate
|
|
|
9 |
|
|
|
9 |
|
Currency
|
|
|
7 |
|
|
|
3 |
|
Equity
|
|
|
15 |
|
|
|
14 |
|
Commodity
|
|
|
14 |
|
|
|
9 |
|
|
91
American International Group, Inc. and Subsidiaries
The following table presents the average, high and low VaRs
on a combined basis and of each component of market risk for
Capital Markets operations as of September 30, 2006 and
December 31, 2005. Due to diversification effects, the
combined VaR is always smaller than the sum of its
components.
|
|
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|
|
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|
|
|
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|
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|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
(in millions) |
|
Average | |
|
High | |
|
Low | |
|
Average | |
|
High | |
|
Low | |
|
Combined
|
|
$ |
20 |
|
|
$ |
22 |
|
|
$ |
19 |
|
|
$ |
17 |
|
|
$ |
22 |
|
|
$ |
13 |
|
Interest rate
|
|
|
8 |
|
|
|
9 |
|
|
|
7 |
|
|
|
9 |
|
|
|
11 |
|
|
|
6 |
|
Currency
|
|
|
6 |
|
|
|
9 |
|
|
|
3 |
|
|
|
4 |
|
|
|
6 |
|
|
|
3 |
|
Equity
|
|
|
14 |
|
|
|
15 |
|
|
|
12 |
|
|
|
9 |
|
|
|
16 |
|
|
|
5 |
|
Commodity
|
|
|
12 |
|
|
|
16 |
|
|
|
9 |
|
|
|
8 |
|
|
|
10 |
|
|
|
7 |
|
|
Catastrophe Exposures
The nature of AIGs business exposes it to various
catastrophic events in which multiple losses across multiple
lines of business can occur in any calendar year. In order to
control this exposure, AIG uses a combination of techniques,
including setting aggregate limits in key business units,
monitoring and modeling accumulated exposures, and purchasing
catastrophe reinsurance to supplement its other reinsurance
protections.
AIG evaluates catastrophic events and assesses the probability
of occurrence and magnitude of catastrophic events through the
use of third party models generally recognized as industry
standards. Following is an overview of modeled losses associated
with the more significant natural perils. The modeled results
assume that all reinsurers perform their obligations to AIG in
accordance with their terms.
It is important to recognize that there is no standard
methodology to project the possible losses from total property
and workers compensation exposures and that the use of different
models could result in materially different projected losses.
Further, there are no industry standard assumptions to be
utilized in projecting these losses. The use of different
assumptions could materially change the projected losses.
Therefore, these modeled losses may not be comparable to
estimates made by other companies.
These estimates are inherently uncertain and may not reflect
AIGs maximum exposures to these events. It is highly
likely that AIGs losses will vary, perhaps significantly,
from these estimates.
Natural Catastrophe Exposures
The modeled results provided in the table below were based on
the aggregate exceedence probability (AEP) losses which
represent total property and workers compensation losses that
may occur in any single year from one or more natural events.
The model, which has been updated to reflect 2005 catastrophes,
generally used 2005 exposure data and the current reinsurance
program structure. The values provided were based on
100 year return period losses, which have a 1 percent
likelihood of being exceeded in any single year. Thus, there is
a one percent probability that AIG could incur in any year
losses in excess of the modeled amounts for these perils.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
| |
|
|
% of Consolidated | |
|
|
Net of | |
|
Net, After | |
|
Shareholders Equity | |
Natural Peril |
|
Gross |
|
Reinsurance | |
|
Income Taxes | |
|
at December 31, 2005 | |
| |
Earthquake
|
|
$3,412 |
|
$ |
2,283 |
|
|
$ |
1,484 |
|
|
|
1.7% |
|
Tropical Cyclone*
|
|
$5,336 |
|
$ |
3,907 |
|
|
$ |
2,540 |
|
|
|
2.9% |
|
|
* Includes hurricanes, typhoons and other wind-related
events. |
In addition, AIG also evaluates potential single event
earthquake and hurricane losses that may be incurred. The single
events utilized are a subset of potential events identified and
utilized by
Lloyds1and
referred to as Realistic Disaster Scenarios (RDSs). The purpose
of this analysis was to utilize these RDSs to provide a
reference frame and place into context the model results.
However, it is important to note that the specific events used
for this analysis do not necessarily represent the worst case
loss that AIG could incur from this type of an event in these
regions. The losses associated with the RDSs are included in the
table below.
Single event modeled property and workers compensation losses
to AIGs worldwide portfolio of risk for key geographic
areas. Gross values represent AIGs liability after the
application of policy limits and deductibles, and net values
represent losses after all reinsurance is applied.
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
| |
|
|
Net of | |
Natural Peril |
|
Gross | |
|
Reinsurance | |
| |
Miami Hurricane
|
|
$ |
4,530 |
|
|
$ |
2,911 |
|
Northeast Hurricane
|
|
|
3,732 |
|
|
|
2,498 |
|
San Francisco Earthquake
|
|
|
3,628 |
|
|
|
2,229 |
|
Los Angeles Earthquake
|
|
|
3,285 |
|
|
|
2,145 |
|
Gulf Coast Hurricane
|
|
|
2,581 |
|
|
|
1,391 |
|
Japanese Earthquake
|
|
|
339 |
|
|
|
153 |
|
European Windstorm
|
|
|
135 |
|
|
|
41 |
|
Japanese Typhoon
|
|
|
125 |
|
|
|
105 |
|
|
Because the specific international RDS events do not necessarily
correspond to AIGs international exposures, AIG also runs
simulations against its own exposures where statistical return
period losses associated with the written exposure specific to
AIGs exposures provide the basis for monitoring risk.
Based on these simulations, the 100 year return period for
Japanese Earthquake is $359 million gross, and
$113 million net, the 100 year return period for
European Windstorm is $168 million gross, and
$54 million net, and the 100 year return period for
the Japanese Typhoon is $313 million gross, and
$260 million net.
ACTUAL RESULTS IN ANY PERIOD ARE LIKELY TO VARY, PERHAPS
MATERIALLY, FROM THE MODELED SCENARIOS, AND THE OCCURRENCE OF
ONE OR
|
|
1 |
Lloyds Realistic Disaster Scenarios, Scenario
Specifications, April 2006 |
92
American International Group, Inc. and Subsidiaries
MORE SEVERE EVENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON
AIGS FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
LIQUIDITY.
Measures Implemented to Control Hurricane and Earthquake
Catastrophic Risk
Catastrophic risk from the earthquake and hurricane perils is
proactively managed through reinsurance programs, and aggregate
accumulation monitoring. Catastrophe reinsurance is purchased by
AIG from financially sound reinsurers. Recoveries under this
program, along with other non-catastrophic reinsurance
protections, are reflected in the net values provided in the
tables above. In addition to the catastrophic reinsurance
programs, hurricane and earthquake exposures are also controlled
by monitoring aggregate exposures on a regular basis. The
aggregate exposures are calculated by compiling total liability
within AIG defined hurricane and earthquake catastrophe risk
zones and therefore represent the maximum that could be lost in
any individual zone. These aggregate accumulations are tracked
over time in order to monitor both long and short term trends.
AIGs major property writers, Lexington and The Private
Client Group, have also implemented catastrophe related
underwriting procedures and manage their books at an account
level. Lexington individually models most accounts prior to
binding in order to specifically quantify catastrophic risk for
each account.
Pandemic Influenza
The potential for a pandemic influenza outbreak has received
media attention during the past year. AIG continues to analyze
its exposure to this serious threat and, as such, has engaged an
external risk management firm to model loss scenarios associated
with an outbreak of Avian Flu. Using a 1 in 100 year
return period, AIG estimates its after-tax net losses under its
life insurance policies due to Avian Flu at approximately
0.9 percent of consolidated shareholders equity as of
December 31, 2005. This estimate was calculated over a
3 year period, although the majority of the losses would be
incurred in the first year. The modeled losses calculated were
based on 2005 policy data representing approximately
90 percent of AIGs Individual Life, Group Life, and
Credit Life books of business, net of reinsurance. This estimate
does not include claims that could be made under other policies,
such as business interruption or general liability policies, and
does not reflect estimates for losses resulting from disruption
of AIGs own business operations that may arise out of such
a pandemic. The model used to generate this estimate has only
recently been developed. The reasonableness of the model and its
underlying assumptions cannot readily be verified by reference
to comparable historical events. As a result, AIGs actual
losses from a pandemic influenza outbreak are likely to vary
significantly from those predicted by the model.
Terrorism
Terrorism risk is also monitored to control AIGs exposure.
AIG shares its exposures to terrorism risks under the Terrorism
Risk Insurance Act (TRIA). AIGs current deductible under
TRIA is $3.3 billion and AIG would share 10 percent of
certified terrorism losses in excess of the $3.3 billion.
Recent Accounting Standards
At the March 2004 meeting, the Emerging Issue Task Force
(EITF) reached a consensus with respect to
Issue No. 03-1, The Meaning of Other-Than
Temporary Impairment and Its Application to Certain
Investments. On September 30, 2004, the FASB issued
FASB Staff Position (FSP) EITF Issue 03-1-1, Effective Date
of Paragraphs 10-20 of EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and its Application
to Certain Investments. In November 2005, FASB issued
FSP FAS 115-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments,
which replaces the measurement and recognition guidance set
forth in Issue No. 03-1 and codifies certain existing
guidance on impairment.
On June 1, 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections
(FAS 154). FAS 154 replaces APB Opinion No. 20,
Accounting Changes and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial
Statements.
At the June 2005 meeting, the EITF reached a consensus with
respect to Issue No. 04-5, Determining Whether a
General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners
have Certain Rights.
On June 29, 2005, the FASB issued Statement 133
Implementation Issues No. B38, Embedded Derivatives:
Evaluation of Net Settlement with Respect to the Settlement of a
Debt Instrument through Exercise of an Embedded Put Option or
Call Option and No. B39, Application of
Paragraph 13(b) to Call Options That are Exercisable Only by the
Debtor.
On September 19, 2005, the FASB issued Statement of
Position 05-1, Accounting by Insurance Enterprises
for Deferred Acquisition Costs in Connection with Modifications
or Exchanges of Insurance Contracts.
On February 16, 2006, the FASB issued FAS No. 155,
Accounting for Certain Hybrid Financial Instruments.
On March 27, 2006, the FASB issued FASB FTB 85-4-1,
Accounting for Life Settlement Contracts by
Third-Party
Investors (FSP 85-4-1), an amendment of
FTB 85-4, Accounting for Purchases of Life
Insurance.
On April 13, 2006, the FASB issued FSP FIN 46(R)-6,
Determining the Variability to be Considered in Applying
FASB Interpretation No. 46(R).
93
American International Group, Inc. and Subsidiaries
On July 13, 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109
(FIN 48).
Effective January 1, 2006, AIG adopted the fair value
recognition provisions of Statement of Financial Accounting
Standards No. 123R Share-Based Payments
(FAS 123R). For further discussion of these recent
accounting standards and its application to AIG, see
Note 10 of Notes to Consolidated Financial Statements.
On September 13, 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (SAB 108).
In September 2006, the FASB issued FAS No. 157, Fair
Value Measurements (FAS No. 157).
In September 2006, the FASB issued FAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R) (FAS No. 158).
For further discussion of these recent accounting standards and
its application to AIG, see Note 8 of the Notes to
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Included in Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 4. CONTROLS AND PROCEDURES
In connection with the preparation of this
Form 10-Q, an
evaluation was carried out by AIGs management, with the
participation of AIGs Chief Executive Officer and Chief
Financial Officer, of the effectiveness of AIGs disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and 15d-15(e) under the
Securities Exchange Act of 1934 (Exchange Act)). Disclosure
controls and procedures are designed to ensure that information
required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms and
that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required
disclosures. Based on its evaluation, and in light of the
previously identified material weaknesses in internal control
over financial reporting, as of December 31, 2005,
described within the 2005 Annual Report on
Form 10-K,
AIGs Chief Executive Officer and Chief Financial Officer
concluded that, as of September 30, 2006, AIGs
disclosure controls and procedures were ineffective. In
addition, there has been no change in AIGs internal
control over financial reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) that occurred during the quarter ended
September 30, 2006 that has materially affected, or is
reasonably likely to materially affect, AIGs internal
control over financial reporting.
94
American International Group, Inc. and Subsidiaries
Part II OTHER INFORMATION
The following supplements the significant factors that may
affect our business and operations described under Risk
Factors in Item 1A. of Part I of AIGs 2005
Annual Report on Form 10-K and Item 1A. of
Part II of AIGs Quarterly Report on Form 10-Q
for the quarter ended March 31, 2006.
There are limited suppliers of aircraft and engines.
The supply of jet transport aircraft, which ILFC purchases and
leases, is dominated by two airframe manufacturers, Boeing and
Airbus, and a limited number of engine manufacturers. As a
result, ILFC is dependent on the manufacturers success in
remaining financially stable, producing aircraft and related
components which meet the airlines demands, both in type
and quantity, and fulfilling their contractual obligations to
ILFC. Competition between the manufacturers for market share is
also escalating and may cause instances of deep discounting for
certain aircraft types and may negatively affect ILFCs
competitive pricing.
|
|
ITEM 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds. |
The table below provides information with respect to purchases
of AIG Common stock during the three months ended
September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number | |
|
|
|
|
|
|
Total Number of | |
|
of Shares that May | |
|
|
|
|
|
|
Shares Purchased | |
|
Yet Be Purchased | |
|
|
Total | |
|
Average | |
|
as Part of Publicly | |
|
Under the Plans | |
|
|
Number of | |
|
Price Paid | |
|
Announced Plans | |
|
or Programs | |
Period |
|
Shares Purchased(1) | |
|
per Share | |
|
or Programs | |
|
at End of Month(2) | |
|
July 1 - 31
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
36,542,700 |
|
August 1 - 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,542,700 |
|
September 1 - 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,542,700 |
|
|
Total
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Does not include 41,230 shares delivered or attested to
in satisfaction of the exercise price by holders of AIG employee
stock options exercised during the three months ended
September 30, 2006. |
(2) |
On July 19, 2002, AIG announced that its Board of
Directors had authorized the open market purchase of up to
10 million shares of common stock. On February 13,
2003, AIG announced that the Board had expanded the existing
program through the authorization of an additional
50 million shares. The purchase program has no set
expiration or termination date. |
See accompanying Exhibit Index.
95
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
|
|
|
AMERICAN INTERNATIONAL GROUP, INC. |
|
(Registrant) |
|
|
/s/ Steven J. Bensinger
|
|
|
|
Steven J. Bensinger |
|
Executive Vice President and Chief Financial Officer |
|
|
/s/ David L. Herzog
|
|
|
|
David L. Herzog |
|
Senior Vice President and Comptroller |
|
(Principal Accounting Officer) |
Dated: November 9, 2006
96
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Location |
|
|
|
|
|
11
|
|
Statement re computation of per share earnings |
|
Included in Note (3) of Notes to Consolidated Financial
Statements. |
12
|
|
Statement re computation of ratios |
|
Filed herewith. |
31
|
|
Rule 13a-14(a)/15d-14(a) Certifications |
|
Filed herewith. |
32
|
|
Section 1350 Certifications |
|
Filed herewith. |