AIG 2005 Annual Report Download - page 109

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
As discussed above, AIG Retirement Services operations are into hedges to manage against increases in short-term interest
reported with Life Insurance operations. Therefore, Asset rates. AIG continues to believe these hedges are economically
Management operations represent the results of AIG’s asset effective but do not qualify for hedge accounting under
management and brokerage services operations, mutual fund FAS 133. As a result, continued increases in short-term
operations and the foreign and domestic GIC operations. interest rates will negatively affect operating income in this
segment. A positive benefit to realized capital gains (losses)
Asset Management revenues and operating income for 2005, will offset any negative trend in operating income. GIC
2004 and 2003 were as follows: revenues include income from SunAmerica partnerships sup-
porting the GIC line of business and are significantly affected
(in millions) 2005 2004 2003
by performance in the equity markets. Thus, revenues, operat-
Revenues: ing income and cash flow attributable to GICs will vary from
Guaranteed Investment one reporting period to the next. The decline in GIC
Contracts $3,547 $3,192 $2,619 operating income compared to 2004 reflects tighter spreads in
Institutional Asset the GIC portfolio, partially offset by improved partnership
Management 1,195 1,049 671 returns. Spread compression has occurred as the base portfolio
Brokerage Services and
yield declined due to an increase in the cost of funds in the
Mutual Funds 257 249 206
short-term floating rate portion of the GIC portfolio, only
Other 326 224 155
partially offset by increased investment income from the
Total $5,325 $4,714 $3,651 floating rate assets backing the portfolio.
Operating income: In September 2005, AIG launched a $10 billion matched
Guaranteed Investment investment program in the Euromarkets under which AIG debt
Contracts(a) $1,185 $1,328 $ 885 securities will be issued. AIG also expects to launch a matched
Institutional Asset investment program in the domestic market which, along with
Management(b) 686 515 227 the Euro program, will become AIG’s principal spread-based
Brokerage Services and investment activity. However, in light of recent developments,
Mutual Funds 66 70 60 the timing of the launch of the domestic program is uncertain.
Other 316 212 144 Because AIG’s credit spreads in the capital markets have
Total $2,253 $2,125 $1,316 widened following the ratings declines, there may be a
(a) The effect of hedging activities that do not qualify for hedge accounting reduction in the earnings on new business in AIG’s institu-
treatment under FAS 133 was $149 million, $313 million and tional spread based funding business.
$230 million for 2005, 2004 and 2003, respectively. Asset Management operating income represented 15 percent
(b) Includes the results of certain AIG managed private equity and real of AIG’s consolidated income before income taxes, minority
estate funds that are consolidated effective December 31, 2003
pursuant to FIN46R, ‘‘Consolidation of Variable Interest Entities’’. interest and cumulative effect of accounting changes in 2005.
For 2005 and 2004, operating income includes $261 million and This compares to 14 percent and 11 percent in 2004 and 2003,
$195 million of third-party limited partner earnings offset in Minority respectively.
interest expense.
At December 31, 2005, AIG’s third-party assets under
Asset Management Results management, including both retail mutual funds and institu-
tional accounts, was approximately $62 billion compared to
Asset Management operating income increased in 2005 as a $51 billion at year end 2004. The aggregate GIC reserve was
result of a diversified global product portfolio. The operating $48.8 billion at December 31, 2005 compared to $53.8 billion
income growth was driven by growth in institutional assets at year end 2004.
under management and the associated fee revenue along with
strong realized gains on sales of real estate investments and Other Operations
performance fees earned on various private equity investments.
The level of gains and performance based fees are contingent Other operations include AIG’s equity in certain partially
upon various fund closings, maturity levels and market owned companies, the distributions on the liabilities connected
conditions, and by their nature, are not predictable. Therefore, to trust preferred stock, as well as the unallocated corporate
the effect on the segment’s future earnings may vary from expenses of the parent holding company and other miscellane-
period to period. The revenues and operating income with ous income and expenses. Other income (loss) amounted to
respect to the segment are largely affected by the general $(2.48) billion, $(560) million and $(1.90) billion in 2005,
conditions in the equity and credit markets. The increases in 2004 and 2003, respectively. AIG’s equity in certain partially
full year segment results were achieved despite the run-off of owned subsidiaries includes $312 million and $96 million in
the existing GIC portfolio and the delay in launching AIG’s catastrophe losses in 2005 and 2004, respectively. Included in
domestic matched investment program. GICs are sold domesti- the 2005 amount is approximately $1.6 billion for the
cally and abroad to both institutions and individuals. These settlements described under Item 3. Legal Proceedings. See also
products are written on an opportunistic basis when market Notes 12(i) and 24 of Notes to Consolidated Financial
conditions are favorable. A significant portion of the GIC Statements.
portfolio consists of floating rate obligations. AIG has entered
AIG m Form 10-K 57