AIG 2005 Annual Report Download - page 98

Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
occur, would be material to AIG’s consolidated financial Life Insurance & Retirement Services operating income
condition, results of operations or liquidity. grew by 12 percent in 2005. Operating income for the AIG
The Foreign Retirement Services business continues its Domestic Life insurance line of business was up 8 percent and
strong growth based upon its success in Japan and Korea by in line with the growth in GAAP premiums for the current
expanding its extensive distribution network and leveraging year, due in part to growth in the business base and improved
AIG’s product expertise. Somewhat offsetting this growth were mortality results, offset by higher losses recorded in 2005 from
the negative effects on customer demand for certain multi- limited partnership investments in synthetic fuel production
currency fixed annuity products in Japan stemming from facilities. Operating income for the home service line of
currency exchange rate fluctuations. AIG is introducing annu- business declined as a result of the continued decline in
ity products in new markets. In January 2005, AIG Star Life premiums in force and higher insurance and acquisition
entered into an agreement with the Bank of Tokyo Mitsubishi, expenses, combined with an increase in property casualty losses
one of Japan’s largest banks, to market a multi-currency fixed related to hurricanes. The group life/health business and
annuity. operating income were affected by non-renewal of cases where
Foreign Life Insurance & Retirement Services operations acceptable margins could not be achieved. In addition, 2005
produced 78 percent, 78 percent and 76 percent of Life results were affected by reserve strengthening related to
Insurance & Retirement Services GAAP premiums in 2005, disability income products totaling $12 million compared to
2004 and 2003, respectively. reserve strengthening of $178 million for Superior National
and $68 million for all other items in 2004. Operating income
AIG transacts business in most major foreign currencies. The for the payout annuities line of business increased 22 percent
following table summarizes the effect of changes in foreign in line with the growth in policy benefit reserves. The group
currency exchange rates on the growth of Life Insurance & retirement products business recorded a modest increase in
Retirement Services GAAP premiums. operating income due primarily to higher variable annuity fee
income and growth in average reserves. Individual fixed
2005 annuity results are higher than last year due primarily to
Growth in original currency 2.7% 13 percent growth in average reserves, higher surrender charges
Foreign exchange effect 2.0 and reductions in acquisition cost amortization expense result-
Growth as reported in U.S. dollars 4.7% ing from increased capital losses realized on bonds. Individual
variable annuity earnings are lower in 2005 when compared to
The growth in net investment income in 2005 and 2004 2004 principally due to favorable deferred acquisition cost
parallels the growth in general account reserves and surplus for amortization variances attributable to changes in assumptions
both Foreign and Domestic Life Insurance & Retirement and realized capital loss activity in 2004.
Services companies. Also, net investment income was posi- Foreign Life Insurance & Retirement Services operating
tively affected by the compounding of previously earned and income of $5.25 billion for 2005 included $84 million of
reinvested net investment income along with the addition of realized capital gains, and for 2004, operating income of
new cash flow from operations available for investment. The $4.85 billion included $372 million of realized capital gains.
global flattening of the yield curve put additional pressure on Underwriting and investment results before the effects of
yields and spreads, which was partially offset with income realized capital gains (losses) increased for all lines of business.
generated from other investment sources, including income On this basis, the life insurance line of business benefited in
from partnerships. Partnership income was $273 million and part from lower amortization of acquisition costs for FAS 97
$192 million for 2005 and 2004, respectively. As of first products, reflective of the increasing investment yields for
quarter 2004, foreign separate accounts were transferred to the those portfolios, particularly in Japan. In Southeast Asia,
general account per Statement of Position 03-1, resulting in operating income growth attributable to life insurance and
increased net investment income volatility. The positive effect deposit-based businesses was partially offset by higher incurred
of Statement of Position 03-1 on Foreign Life Insurance & policy benefit costs for contributions to the participating
Retirement Services net investment income was $1.34 billion policyholder fund in Singapore, totaling $137 million, related
and $271 million for 2005 and 2004, respectively. These to the settlement of a long disputed local tax issue. Growth in
amounts do not affect operating income as they are offset in the personal accident & health line of business is generally in
incurred policy benefits. line with the growth in premiums and reflects stable profit
AIG’s domestic subsidiaries invest in certain limited liability margins. The group products business grew across all segments
companies that invest in synthetic fuel production facilities as a and maintained profit margins. The largest contributor to the
means of generating income tax credits. Net investment income growth in group products is the pension profit center which
includes operating losses of approximately $143 million, enjoyed higher fee income emanating from higher assets under
$121 million and $108 million, respectively, for 2005, 2004 and management in Brazil and Southeast Asia. Growth in individ-
2003 and income taxes includes tax credits and benefits of ual fixed annuities, emanating primarily from Japan, is gener-
approximately $203 million, $160 million and $155 million, ally in line with the growth in reserves and net spread rates
respectively, for 2005, 2004 and 2003 from these investments. were maintained. The individual variable annuity line of
See also Note 12(k) of Notes to Consolidated Financial business also grew in line with the growth in reserves.
Statements ‘‘Commitments and Contingent Liabilities.’’
46 AIG m Form 10-K