AIG 2005 Annual Report Download - page 80

Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
Services segment also includes $12 million and $5 million in assets, cash provided by operations and access to short term
catastrophe related losses in 2005 and 2004, respectively. funding through commercial paper and bank credit facilities
will enable it to meet any anticipated cash requirements.
Financial Services Outlook
AIG’s Financial Services subsidiaries engage in diversified From March through June of 2005, the major rating agencies
activities including aircraft and equipment leasing, capital downgraded AIG’s ratings in a series of actions. S&P lowered
markets transactions, consumer finance and insurance premium the long-term senior debt and counterparty ratings of AIG
financing. from ‘AAA’ to ‘AA’ and changed the rating outlook to
Financial Services operating income increased significantly negative. Moody’s lowered AIG’s long-term senior debt rating
in 2005 compared to 2004 and in 2004 compared to 2003, from ‘Aaa’ to ‘Aa2’ and changed the outlook to stable. Fitch
primarily due to the fluctuation in earnings resulting from not downgraded the long-term senior debt ratings of AIG from
qualifying for hedge accounting treatment under FAS 133. ‘AAA’ to ‘AA’ and placed the ratings on Rating Watch
Offsetting this increase in 2004 when compared to 2003 is the Negative.
effect of ILFC’s disposition of approximately $2 billion in The agencies also took rating actions on AIG’s insurance
aircraft through securitizations in the third quarter of 2003 and subsidiaries. S&P and Fitch lowered to ‘AA+’ the insurance
the first quarter of 2004. Fluctuations in revenues and financial strength ratings of most of AIG’s insurance compa-
operating income from quarter to quarter are not unusual nies. Moody’s lowered the insurance financial strength ratings
because of the transaction-oriented nature of Capital Markets generally to either ‘Aa1’ or ‘Aa2’. A.M. Best downgraded the
operations and the effect of not qualifying for hedge account- financial strength ratings for most of AIG’s insurance subsidiar-
ing treatment under FAS 133 for hedges on securities available ies from ‘A++’ to ‘A+’ and the issuer credit ratings from ‘aa+’
for sale and borrowings. The increase in 2005 when compared to ‘aa–’. Many of these companies’ ratings remain on a
to 2004 was partially offset by $62 million in catastrophe negative watch.
related losses in the Consumer Finance operations in 2005. In addition, S&P changed the outlook on ILFC’s ‘AA–’
The charge relating to the PNC settlement, see Item 3. Legal long-term senior debt rating to negative. Moody’s affirmed
Proceedings, had a significant negative effect on results in ILFC’s long-term and short-term senior debt ratings
2004. Consumer Finance operations increased revenues and (‘A1’/‘P-1’). Fitch downgraded ILFC’s long-term senior debt
operating income, both domestically and internationally. rating from ‘AA–’ to ‘A+’ and placed the rating on Rating
Watch Negative and downgraded ILFC’s short-term debt rating
Asset Management from ‘F1+’ to ‘F1’. Fitch also placed the ‘A+’ long-term senior
debt ratings of American General Finance Corporation and
AIG’s Asset Management operations include institutional and
American General Finance, Inc. on Rating Watch Negative.
retail asset management and broker dealer services and spread-
S&P and Moody’s affirmed the long-term and short-term senior
based investment business from the sale of GICs. These
debt ratings of American General Finance Corporation at
products and services are offered to individuals and institutions,
‘A+’/‘A-1’ and ‘A1’/‘P-1’, respectively.
both domestically and overseas.
These debt and financial strength ratings are current
Asset Management operating income increased 6 percent in
opinions of the rating agencies. As such, they may be changed,
2005 when compared to 2004 as a result of the upturn in
suspended or withdrawn at any time by the rating agencies as a
worldwide financial markets and a strong global product
result of changes in, or unavailability of, information or based
portfolio; operating income also increased 61 percent in 2004
on other circumstances. Ratings may also be withdrawn at AIG
when compared to 2003 as a result of the same factors.
management’s request. This discussion of ratings is not a
Capital Resources complete list of ratings of AIG and its subsidiaries. For a
discussion of the effect of these ratings downgrades on AIG’s
At December 31, 2005, AIG had total consolidated sharehold- businesses, see ‘‘Risk Factors — AIG’s Credit Ratings’’ in
ers’ equity of $86.32 billion and total consolidated borrowings Item 1A. Risk Factors.
of $109.85 billion. At that date, $99.42 billion of such Despite industry price erosion in some classes of general
borrowings were either not guaranteed by AIG or were insurance, AIG expects to continue to identify profitable
matched borrowings under obligations of guaranteed invest- opportunities and build attractive new General Insurance
ment agreements (GIAs), liabilities connected to trust pre- businesses as a result of AIG’s broad product line and extensive
ferred stock, or matched notes and bonds payable. distribution networks. In December 2005, AIUO received a
During 2005, AIG repurchased in the open market license from the government of Vietnam to operate a wholly
2,477,100 shares of its common stock. owned general insurance company in Vietnam. This license,
the first general insurance license granted by Vietnam to a
Liquidity U.S.-based insurance organization, permits AIG to operate a
At December 31, 2005, AIG’s consolidated invested assets general insurance company throughout Vietnam. In early 2006,
included $17.24 billion in cash and short-term investments. AIG announced plans to acquire a leading general insurance
Consolidated net cash provided from operating activities in company in Taiwan.
2005 amounted to $25.14 billion. AIG believes that its liquid
28 AIG m Form 10-K