AIG 2005 Annual Report Download - page 97

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
intense industry competition with regard to living benefit resulted in significantly lower net flows for total domestic
product features and heightened compliance procedures over Retirement Services than in the prior year. AIG expects that
selling practices. AIG’s introduction of more competitive net flows will remain lower than in prior years as long as an
guaranteed minimum withdrawal features was delayed until late environment of lackluster equity market performance persists
in the fourth quarter due to filing delays associated with the and the yield curve remains flat. The following table reflects
Restatements. During 2005, the interest yield curve flattened the net flows for Domestic Retirement Services:
and, as a result, competing bank products such as certificates of Domestic Retirement Services — Net Flows(a)
deposit and other money market instruments with shorter December 31,
durations than AIG’s individual fixed annuity products became (in millions) 2005 2004 2003
more attractive. The following table reflects deposit amounts Group retirement products(b) $ 628 $ 1,706 $ 2,756
Individual fixed annuities 1,759 6,169 8,679
for Domestic Retirement Services: Individual variable annuities (336) 1,145 927
Domestic Retirement Services — Deposits Individual fixed annuities - runoff (2,508) (2,084) (1,967)
December 31, Total $ (457) $ 6,936 $10,395
(in millions) 2005 2004 2003 (a) Net flows are defined as deposits received, less benefits, surrenders,
Group retirement products* $ 6,436 $ 6,502 $ 5,918 withdrawals and death benefits.
Individual fixed annuities 7,337 9,947 11,384 (b) Includes mutual funds.
Individual variable annuities 3,319 4,126 3,412
Individual fixed annuities - runoff 200 253 350 The majority of the growth in Life Insurance & Retirement
Services GAAP premiums in Foreign Life operations was
Total $ 17,292 $ 20,828 $21,064
attributable to the life insurance and personal accident &
* Includes mutual funds.
health lines of business. Globally, AIG’s deep and diverse
In 2005, AIG experienced a significant increase in surrender distribution, which includes bancassurance, worksite marketing,
rates in all product lines. Group retirement products exper- direct marketing, and strong agency organizations, provides a
ienced higher surrenders as the average participant age powerful platform for growth. This growth was most significant
increased and a greater percentage of these participants are in Japan, where AIG has benefited from a flight to quality and
near retirement age and/or termination of service from their development of multiple distribution channels. In Southeast
employers. Individual fixed annuities surrender rates are higher Asia, AIG maintains significant market share by offering an
in 2005 primarily due to the shape of the interest yield curve attractive and diverse product line, distributed by its strong
and the general aging of the in-force reserves. However, less agency force. There has been a continuing trend in Southeast
than 20 percent of the individual fixed annuity reserves are Asia, as the insurance market continues to develop, for clients
available to surrender without charge. The increase in individ- to purchase investment-oriented products at the expense of
ual variable annuity surrender rates primarily reflects the higher traditional term or whole life products. For GAAP reporting
shock-lapse that occurred following expiration of the surrender purposes, only revenues from policy charges for insurance,
charge period on certain 3-year and 7-year contracts (including administration, and surrender charges are reported as GAAP
a large closed block of acquired business). Reflecting a premiums. This product mix shift contributed to the single
widespread industry phenomenon, this lapse rate, much of digit growth rate in Foreign Life Insurance & Retirement
which was anticipated when the products were issued, has Services GAAP premiums.
recently been affected by investor demand to exchange existing Also in Japan, AIG Edison Life has improved the quality
policies for new-generation contracts with living benefits or and productivity of its sales force resulting in higher sales and
lower fees. In addition, partial withdrawals on certain variable improved new business persistency. AIG Star Life is growing
annuity products have increased as AIG has introduced first year premiums as a result of new product introductions
features designed to generate a stream of income to the and an expanded agency force, and is benefiting from growth
participants. The following chart shows the amount of reserves in the bank annuity market.
by surrender charge category as of December 31, 2005. However, in March of 2006, Japanese tax authorities are
Domestic Retirement Services expected to announce a reduction in the amount of premium
Reserves Subject to Surrender Charges policyholders may deduct from their Japanese tax returns for
Group Individual Individual certain accident and health products. These products are
Retirement Fixed Variable
(in millions) Products*Annuities Annuities generally sold by independent agents to corporate clients and
Zero or no surrender charge $39,831 $ 9,324 $ 9,765 thus represent a specific niche market segment and not the
Greater than 0% - 4% 11,248 10,815 8,386 mainstream accident and health products sold by AIG in
Greater than 4% 2,648 31,183 10,035 Japan. A reduction in the amount of tax deduction related to
Non-Surrenderable 892 3,148 81
these products will make them less attractive to the market
Total $54,619 $54,470 $28,267 and will reduce the level of future sales. In addition, a portion
* Excludes mutual funds. of existing policies may be canceled, and depending on the
A continued increase in the level of surrenders in any of duration of those policies and other factors, could result in a
these businesses could increase the amortization of deferred write-off of deferred acquisition costs. At the current time,
acquisition costs in future years and will negatively affect fee management does not believe that such losses, should they
income earned on assets under management. The combination
of reduced sales and increased surrenders and withdrawals
AIG m Form 10-K 45