AIG 2005 Annual Report Download - page 107

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
businesses experienced solid loan and earnings growth in a respectively. The increase in contribution percentage in 2005
strengthening economy. compared to 2004 and 2003 was primarily due to the
Financial Services operating income represented 28 percent fluctuation in earnings resulting from derivatives that did not
of AIG’s consolidated income before income taxes, minority qualify for hedge accounting under FAS 133 and the reduction
interest and cumulative effect of accounting changes in 2005. in General Insurance operating income in 2005.
This compares to 15 percent and 10 percent in 2004 and 2003,
Financial Services Invested Assets
The following table is a summary of the composition of AIG’s Financial Services invested assets at December 31, 2005 and
2004. See also the discussions under ‘‘Operating Review — Financial Services Operations’’, ‘‘Capital Resources’’ and
‘‘Derivatives’’ herein.
20042005
Invested Percent of Invested Percent of
(dollars in millions) Assets Total Assets Total
Flight equipment primarily under operating leases, net of accumulated depreciation $ 36,245 24.1% $ 32,130 21.6%
Finance receivables, net of allowance 27,995 18.6 23,574 15.9
Unrealized gain on swaps, options and forward transactions 18,695 12.4 22,670 15.3
Securities available for sale, at market value 37,511 24.9 31,225 21.0
Trading securities, at market value 6,499 4.3 2,746 1.8
Securities purchased under agreements to resell, at contract value 14,519 9.7 26,272 17.7
Trading assets 1,204 0.8 3,433 2.3
Spot commodities 92 0.1 534 0.4
Other, including short-term investments 7,615 5.1 5,982 4.0
Total $150,375 100.0% $148,566 100.0%
As previously discussed, the cash used for the purchase of risk of loss resulting from adverse fluctuations in interest rates.
flight equipment is derived primarily from the proceeds of Over half of the loan balance is related to real estate loans
ILFC’s debt financings. The primary sources for the repayment which are substantially collateralized by the related properties.
of this debt and the interest expense thereon are the cash flow With respect to credit losses, the allowance for finance
from operations, proceeds from the sale of flight equipment and receivable losses is maintained at a level considered adequate
the rollover and refinancing of the prior debt. During 2005, to absorb anticipated credit losses existing in that portfolio.
ILFC acquired flight equipment costing $6.19 billion. See also Capital Markets derivative transactions are carried at
the discussion under ‘‘Operating Review — Financial Services market value or at estimated fair value when market prices are
Operations’’ and ‘‘Capital Resources’’ herein. not readily available. AIGFP reduces its economic risk
At December 31, 2005, ILFC had committed to purchase exposure through similarly valued offsetting transactions in-
338 new and used aircraft deliverable from 2006 through 2015 cluding swaps, trading securities, options, forwards and futures.
at an estimated aggregate purchase price of $23.3 billion and The estimated fair values of these transactions represent
had options to purchase 16 new aircraft at an estimated assessments of the present value of expected future cash flows.
aggregate purchase price of $1.5 billion. As of March 10, 2006, These transactions are exposed to liquidity risk if AIGFP were
ILFC has entered into leases for all of the new aircraft to be required to sell or close out the transactions prior to maturity.
delivered in 2006, 65 of 85 of the new aircraft to be delivered AIG believes that the effect of any such event would not be
in 2007 and 11 of 155 of the new aircraft to be delivered significant to AIG’s financial condition or its overall liquidity.
subsequent to 2007. ILFC will be required to find customers for See also the discussion under ‘‘Operating Review — Financial
any aircraft currently on order and any aircraft to be ordered, Services Operations’’ and ‘‘Derivatives’’ herein.
and it must arrange financing for portions of the purchase price AIGFP uses the proceeds from the issuance of notes, bonds
of such equipment. ILFC has been successful to date both in and GIA borrowings to invest in a diversified portfolio of
placing its new aircraft on lease or under sales contract and securities, including securities available for sale, at market, and
obtaining adequate financing, but there can be no assurance derivative transactions. The funds may also be temporarily
that such success will continue in future environments. invested in securities purchased under agreements to resell.
AIG’s Consumer Finance operations provide a wide variety The proceeds from the disposal of the aforementioned securi-
of consumer finance products, including real estate mortgages, ties available for sale and securities purchased under agree-
credit cards, consumer loans, retail sales finance and credit- ments to resell have been used to fund the maturing GIAs or
related insurance to customers both domestically and overseas, other AIGFP financings, or invest in new assets. See also the
particularly in emerging markets. These products are funded discussion under ‘‘Capital Resources’’ herein.
through a combination of deposits and various borrowings Securities available for sale is predominately a portfolio of
including commercial paper and medium term notes. AIG’s fixed income securities, where the individual securities have
Consumer Finance operations are exposed to credit risk and
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