AIG 2005 Annual Report Download - page 106

Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
Financial Services operations for 2005, 2004 and 2003 were AIGFP’s 2005 results were adversely affected by customer
uncertainty surrounding the negative actions of the rating
as follows:
agencies and the ongoing investigations, as well as the negative
(in millions) 2005 2004 2003 effect on its structured notes business of AIG being unable to
fully access the capital markets during 2005.
Revenues(a):
Financial market conditions in 2004 compared with 2003
Aircraft Finance(b) $ 3,578 $ 3,136 $ 2,897
Capital Markets(c)(d) 3,260 1,278 595 were characterized by interest rates which were broadly
Consumer Finance(e) 3,613 2,978 2,642 unchanged across fixed income markets globally, a tightening
Other 74 103 108 of credit spreads and higher equity valuations. Capital Markets
results in 2004 compared with 2003 reflected a shift in product
Total $10,525 $ 7,495 $ 6,242
activity to respond to these conditions.
Operating income The most significant component of Capital Markets operat-
(loss)(a):ing expenses is compensation, which was approximately
Aircraft Finance $ 679 $ 642 $ 672 $481 million, $497 million and $616 million in 2005, 2004
Capital Markets(d) 2,661 662 (188) and 2003, respectively. The amount of compensation was not
Consumer Finance(f) 901 808 623 affected by gains and losses not qualifying for hedge accounting
Other, including treatment under FAS 133.
intercompany
ILFC continued to see net improvements in lease rates, an
adjustments 35 68 75
increase in demand for the newer, modern, fuel efficient
Total $ 4,276 $ 2,180 $ 1,182 aircraft comprising the bulk of ILFC’s fleet, and an increasing
(a) Includes the effect of hedging activities that do not qualify for hedge level of interest from traditional buyers, third-party investors
accounting treatment under FAS 133, including the related foreign and debt providers for the purchase of aircraft from ILFC’s
exchange gains and losses. For 2005, 2004 and 2003, the effect was
$(34) million, $(27) million and $49 million, respectively, in operating extensive lease portfolio. During 2005, ILFC’s revenues and
income for Aircraft Finance and $2.01 billion, $(122) million and operating income also increased as a result of adding more
$(1.01) billion in both revenues and operating income for Capital aircraft to its fleet and earning higher revenues on existing
Markets.
aircraft. However, these increases were offset by increasing
(b) Revenues are primarily from ILFC aircraft lease rentals. interest rates, fewer aircraft sales, and leasing related and other
(c) Revenues, shown net of interest expense, are primarily from hedged reserves.
financial positions entered into in connection with counterparty transac-
tions and the effect of hedging activities that do not qualify for hedge During the fourth quarter of 2004, ATA Airlines and
accounting treatment under FAS 133 described in (a) above. related entities (ATA) filed for protection under Chapter 11 of
(d) Certain transactions entered into by AIGFP generate tax credits and the U.S. Bankruptcy Code. On the basis of estimates of the
benefits which are included in income taxes in the consolidated statement probable outcome of the ATA bankruptcy, ILFC recorded pre-
of income. The amount of such tax credits and benefits for the years
ended December 31, 2005, 2004 and 2003 are $67 million, tax charges aggregating $54 million in the fourth quarter of
$107 million and $123 million, respectively. 2004 to write down the value of the ATA securities and
(e) Revenues are primarily finance charges. guarantees.
(f) Includes $62 million of catastrophe related losses for 2005. Consumer Finance operations, both domestically and inter-
nationally, did very well with increased revenues and operating
Financial Services Results income. Domestically, the Consumer Finance operations had a
record year in 2005. The relatively low interest rate environ-
Financial Services operating income increased in 2005 com- ment contributed to a high level of mortgage refinancing
pared to 2004 as well as 2004 compared to 2003. Fluctuations activity. Real estate finance receivables increased 21 percent
in revenues and operating income from quarter to quarter are during 2005. Despite high energy costs, the U.S. economy
not unusual because of the transaction-oriented nature of continued to expand during the year improving consumer
Capital Markets operations and the effect of hedging activities credit quality. Both AGF’s charge-off ratio and delinquency
that do not qualify for hedge accounting under FAS 133. ratio improved over prior years. However, AGF incurred
Capital Markets operating income was also negatively affected charges of approximately $62 million for the estimated effect of
in 2004 by the costs of the PNC settlement. See Item 3. Legal Hurricane Katrina on customers in the Gulf Coast areas
Proceedings. affected by the storm. A new bankruptcy law went into effect
To the extent the Financial Services subsidiaries, other than in October 2005. Consumers, including some of AGF’s
AIGFP, use derivatives to economically hedge their assets or customers, filed for personal bankruptcy protection under the
liabilities with respect to their future cash flows, and such old law in record numbers in third quarter 2005 ahead of the
hedges do not qualify for hedge accounting treatment under new law’s effective date. AGF does not anticipate a significant
FAS 133, the changes in fair value of such derivatives are effect on its earnings from this new law because 80 percent of
recorded in realized capital gains (losses) or other revenues. its finance receivables are real estate loans with adequate
Financial market conditions in 2005 compared with 2004 collateral and conservative loan-to-value ratios.
were characterized by a general flattening of interest rate yield Foreign Consumer Finance operations performed well, as the
curves across fixed income markets globally, some tightening of operations in Poland, Argentina and AIG Federal Savings
credit spreads and equity valuations that were slightly higher. Bank recorded strong earnings growth. The Hong Kong
54 AIG m Form 10-K