AIG 2006 Annual Report Download

Download and view the complete annual report

Please find the complete 2006 AIG annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 244

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172
  • 173
  • 174
  • 175
  • 176
  • 177
  • 178
  • 179
  • 180
  • 181
  • 182
  • 183
  • 184
  • 185
  • 186
  • 187
  • 188
  • 189
  • 190
  • 191
  • 192
  • 193
  • 194
  • 195
  • 196
  • 197
  • 198
  • 199
  • 200
  • 201
  • 202
  • 203
  • 204
  • 205
  • 206
  • 207
  • 208
  • 209
  • 210
  • 211
  • 212
  • 213
  • 214
  • 215
  • 216
  • 217
  • 218
  • 219
  • 220
  • 221
  • 222
  • 223
  • 224
  • 225
  • 226
  • 227
  • 228
  • 229
  • 230
  • 231
  • 232
  • 233
  • 234
  • 235
  • 236
  • 237
  • 238
  • 239
  • 240
  • 241
  • 242
  • 243
  • 244

Putting Strategies Into Action
American
International
Group, Inc.
2006
Annual
Report

Table of contents

  • Page 1
    American International Group, Inc. 2006 Annual Report Putting Strategies Into Action

  • Page 2
    ...-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. Contents Financial Highlights Letter to Shareholders AIG: Putting Strategies Into Action AIG at a Glance Review...

  • Page 3
    ... effect of an accounting change and FAS 133 gains (losses). (b) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services GAAP premiums, net investment income, Financial Services interest, lease and finance charges, Asset Management net investment income from...

  • Page 4
    ... pace with net cash provided for investment by our insurance operations and cash generated from our investment portfolio, every day we invest an average of nearly $200 million. At year end, shareholders' equity was $101.68 billion, an increase of 17.8 percent over 2005. Total revenues in 2006 were...

  • Page 5
    ... like China. We secured licenses to offer group insurance throughout our China operations and to offer both life and general insurance in Guangdong province and life insurance in Jiangsu province, two of the top three Chinese provinces in terms of total economic activity. AIG 2006 Annual Report

  • Page 6
    ... to generate new business through innovative product and services offerings. For instance, our AIG Passport service, introduced in 2006, allows corporate clients to purchase locally admitted directors and officers liability insurance to cover their international risks in more than 75 countries and...

  • Page 7
    ... its focus internationally. Meanwhile, AIG Consumer Finance Group is developing operations in India. Imperial A.I. Credit Companies, North America's largest financier of insurance premiums, is broadening its portfolio in the high-net-worth market. Asset Management AIG Asset Management operating...

  • Page 8
    ... Vice Chairman Global Economic Strategies Pictured in front of United Nations Headquarters in New York City. expansion. Based in Zurich, the bank established a branch office in Hong Kong and applied for a branch office license in Singapore, consistent with its focus on high-net-worth individuals...

  • Page 9
    ... provides hands-on services to New Yorkers in need. AIG finds significant opportunity in emerging markets such as Vietnam, where it has thriving life and general insurance businesses. In 2006, the company expanded its general insurance license, which allows it to sell property-casualty coverages...

  • Page 10
    ... in global finance has been a great asset to AIG, and we are grateful for his contributions. We will miss Pei and, on behalf of the Board and management, I would like to thank him for his 10 years of service to our company. Thomas R. Tizzio, Senior Vice Chairman, General Insurance, retired in 2006...

  • Page 11
    ...to capitalize on the enormous opportunities presented by AIG's unparalleled global network, broad and innovative product range, major business portfolios, multiple distribution channels and the creativity and professionalism that 106,000 employees bring to AIG day after day. Annual Repor t 2006 AIG...

  • Page 12
    10 AIG 2006 Annual Repor t

  • Page 13
    ... in China have grown substantially and now span a range of insurance, financial services and investment activities. AIG has the most extensive worldwide property-casualty and life insurance network of any insurer, with operations in more than 130 countries and jurisdictions. Annual Repor t 2006 AIG...

  • Page 14
    ... portfolio of complementary businesses in General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management. These businesses have attractive positions in vibrant markets throughout the world, including (from left) Brazil, India, Taiwan, France and Japan. Japan...

  • Page 15
    .... Our strategy of combining local expertise and global network resources is a key driver of success and is tremendously beneficial to our customers worldwide. We help them achieve cross-border goals. We help them take advantage of opportunities on the world stage. AIG's business presence extends...

  • Page 16
    ... in General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management. The extensive product range that emanates from these businesses generates strong revenue streams throughout the world. Through this broad range, AIG is poised to act quickly to market changes and...

  • Page 17
    ... needs of 76 million baby boomers in the United States, and millions more around the world, who are preparing for and entering retirement. AIG companies throughout the world are well positioned to respond to opportunities that will arise from major global economic trends. Annual Repor t 2006 AIG 15

  • Page 18
    ... to make it easier for our customers to access AIG's extensive range of products and services. The AIG Strategic Relationship Group emphasizes cross-selling between AIG's investment and insurance businesses. Group managers are pictured at the home office in New York. 16 AIG 2006 Annual Repor t

  • Page 19
    ... relationships with clients. In AIG's commercial General Insurance operations, these strategies align key personnel with customer segments based on size - major, commercial and small to medium-sized enterprises - and key industries, such as construction, energy and real estate, to name a few...

  • Page 20
    18 AIG 2006 Annual Repor t

  • Page 21
    ...strong capital position, we create value for our shareholders and investors and provide our 69 million customers throughout the world with a sense of confidence and security. AIG's Asset Management businesses include institutional and retail asset management, private banking, broker-dealer services...

  • Page 22
    ... safer environment. AIG's Asset Management businesses make private equity investments in projects and technologies that support socially responsible causes. Over the years, the AIG companies have invested in a wide has been dedicated to promoting a corporate culture that values integrity, diversity...

  • Page 23
    ... moved towards developing "green funds" that invest in projects and technology to benefit the environment. Investing in the countries throughout the world where we do business is a core strategy and one with a long tradition at AIG. Our investments support important nation-building and educational...

  • Page 24
    ...Insurance AIG's General Insurance operations include the largest U.S. underwriters of commercial and industrial insurance, the most extensive international propertycasualty network, a personal lines business with an emphasis on auto insurance and high-net-worth clients, a mortgage guaranty insurance...

  • Page 25
    ... of markets around the world and expertise in a wide range of asset classes. • AIG Global Investment Group (AIGGIG) manages equities, fixed income, private equity, hedge funds of funds and real estate investments for institutional, individual and high-net-worth investors around the world. AIGGIG...

  • Page 26
    ... business segment. Cross selling is a key strategy and has been effective with many national segment customers purchasing three or more products from DBG companies. In recent years, the risks that directors and officers in corporate America face have increased markedly worldwide and National Union...

  • Page 27
    ... such as real estate, life sciences, agriculture and higher education drives customer value and serves as a continued source of Domestic Brokerage Group- Gross Premiums Written by Line of Business Total = $31.3 billion Workers' Compensation Management/ Professional Liability Property Programs...

  • Page 28
    ...risk management strategy, the group is one of the premier providers of insurance products and services for high-net-worth individuals and their families. AIG Private Client Group benefits from strong broker support, high brand recognition and innovative loss prevention programs. 26 AIG 2006 Annual...

  • Page 29
    ...into 12 international markets, entered the private education loan guaranty business, expanded its own second lien operation to include new customers and product lines and invested in or acquired several businesses complementary to the domestic credit market. In 2006, UGC had a strong increase in net...

  • Page 30
    ... and Casualty Company Limited, the largest property-casualty insurer in China, continues to increase the number of jointly developed A&H products for the local market. These products are currently being offered to customers throughout the distribution network of 4,500 sales offices. Operations...

  • Page 31
    ... of products and services along customer segment lines with an emphasis on increasing new business while maximizing client retention. Many products have been launched for small to medium-sized customers, including property-casualty packages and group personal accident products. Strategies focused...

  • Page 32
    ... price and crediting interest rate competition. Last year, AIA made significant progress tapping into new markets. AIA Singapore, the country's largest life insurer in terms of total premium, utilized multiple distribution channels to target high-net-worth individuals. AIA Singapore also teamed...

  • Page 33
    ... the largest multi-country presence of any insurer. In 2006, ALICO concentrated on expanding distribution, including increasing its cross-marketing initiatives and agency force. Also in 2006, ALICO expanded its focus to develop products to meet the needs of the region's affluent and high-net-worth...

  • Page 34
    .... AIG American General is a leading life insurance provider in the United States with a portfolio that includes fixed and variable universal life insurance; whole and term life insurance; fixed, indexed and immediate annuities; structured settlements; accident and health insurance; and group and...

  • Page 35
    ... Life Insurance Payout Annuities (a) Group Life/Health Home Service Individual Annuities-Runoff (b) 25.2% 23.5% 18.4% 13.1% 10.6% 4.3% 4.1% 0.8% (a) Includes structured settlements, single premium immediate annuities and terminal funding annuities. (b) Primarily represents runoff annuity business...

  • Page 36
    ...IG's Financial Services businesses specialize in aircraft and equipment leasing, capital markets, consumer finance and insurance premium finance. These businesses complement AIG's core insurance operations and achieve a competitive advantage by capitalizing on opportunities throughout AIG's global...

  • Page 37
    ... market. In 2006, Imperial A.I. Credit Companies' sustained investment in technology to support its customer focused strategy enabled it to extend its leadership position as the largest financier of insurance premiums in North America. Its life insurance financing business, focused on high-net-worth...

  • Page 38
    ... fund assets, in addition to AIG insurance company invested assets. Businesses in the group include retail mutual funds, broker-dealer services, private banking and spread-based investments. Global Wealth Management was formed early in 2006 to focus on managing money for high-net-worth clients...

  • Page 39
    ... assets of AIG SunAmerica and AIG VALIC variable annuities sold to individuals and groups throughout the United States. The company continues to demonstrate strong performance across several mutual fund classes as a result of its strategy to expand its internal portfolio manager investment team...

  • Page 40
    ... return throughout the economic cycle, without undue risk or volatility. Domestic General Insurance portfolios consist principally of highly rated tax-exempt municipal bonds, together with a modest-about 15 percent-allocation to public and private equity, hedge fund and other partnership investments...

  • Page 41
    ... to maintain private market valuations. (in millions) December 31, 2006 General Insurance Life Insurance & Retirement Services Financial Services Asset Management Other Total Percent of Total Cash and Invested Assets: Fixed maturities Equity securities Mortgage loans on real estate, policy...

  • Page 42
    ... General Insurance combined ratio, excluding current year catastrophe-related losses, change in estimate for asbestos and environmental reserves, and reserve charge Life Insurance & Retirement Services revenues: GAAP premiums Net investment income Realized capital gains (losses) Total Life Insurance...

  • Page 43
    ... . (b) Represents a net benefit (expense) for the cumulative effect of adoption of accounting pronouncements related to FAS 123R "Share-Based Payment" in 2006; the adoption of the American Institute of Certified Public Accountants Statement of Position 03-1, "Accounting and Reporting by Insurance...

  • Page 44
    ... 2006 total cash and invested assets. (b) Represents General Insurance net reserves for losses and loss expenses at year end. (c) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services GAAP premiums, net investment income, Financial Services interest, lease...

  • Page 45
    ...Return on equity (ROE) is net income, expressed as a percentage of average shareholders' equity. (f) See Note 11 of Notes to Financial Statements. (g) Market capitalization is based on the number of AIG shares outstanding multiplied by the closing price per share at December 31 on the New York Stock...

  • Page 46
    American International Group, Inc. and Subsidiaries Supplemental Financial Information Consolidated(a) 2006 2005 (in millions, except ratios) Years Ended December 31, General Insurance Operating Results Gross premiums written Net premiums written Net premiums earned Underwriting profit (loss)(b)...

  • Page 47
    ..., single premium immediate annuities and terminal funding annuities. Primarily represents runoff annuity business sold through discontinued distribution relationships. Net Investment Income (billions of dollars) 2006 General Insurance and Life Insurance & Retirement Services Revenues* Total = $99...

  • Page 48
    ... Inc. Retired Deputy Police Commissioner New York City Police Department Edmund S.W. Tse Senior Vice Chairman, Life Insurance American International Group, Inc. Frank G. Zarb Senior Advisor Hellman & Friedman LLC Former Chairman National Association of Securities Dealers, Inc. and The Nasdaq Stock...

  • Page 49
    ... and Chief Financial Officer Senior Vice President Claims Charlene M. Hamrah Vice President and Director of Investor Relations Gordon Knight Vice President Domestic General Insurance Richard W. Scott Senior Vice President Investments Philip M. Jacobs Vice President and Director of Taxes Mark...

  • Page 50
    ... Vice President Life Insurance Abdlatif Al-Hamad Director General and Chairman of the Board of Directors Arab Fund for Economic and Social Development Edward E. Matthews Matthew E. Winter Senior Vice President Life Insurance Retired Senior Vice Chairman American International Group, Inc. New York...

  • Page 51
    ..., New York (Address of principal executive offices) 10270 (Zip Code) Registrant's telephone number, including area code (212) 770-7000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, Par Value $2.50 Per Share...

  • Page 52
    ... and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules...

  • Page 53
    ... Lease Finance Corporation (ILFC) AIG Financial Products Corp. and AIG Trading Group Inc. and their respective subsidiaries (collectively, AIGFP) American General Finance, Inc. (AGF) AIG Consumer Finance Group, Inc. (AIGCFG) Imperial A.I. Credit Companies Asset Management General Insurance American...

  • Page 54
    ... the general development of the business of AIG on a consolidated basis, the contributions made to AIG's consolidated revenues and operating income and the assets held, in the periods indicated, by its General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management...

  • Page 55
    ... that are hedging available for sale securities and borrowings. (k) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services GAAP premiums, net investment income, Financial Services interest, lease and finance charges, Asset Management net investment income...

  • Page 56
    ... in AIG's consolidated financial statements. Personal Lines AIG's Personal Lines operations provide automobile insurance through AIG Direct, a mass marketing operation, the Agency Auto Division and 21st Century Insurance Group (21st Century), as well as a broad range of coverages for high net-worth...

  • Page 57
    ...monitored in terms of the respective local or functional currency. Therefore, no assumption is included for changes in currency rates. See also Note 1(b) of Notes to Consolidated Financial Statements. Management reviews the adequacy of established loss reserves through the utilization of a number of...

  • Page 58
    ... thereof including those with respect to asbestos and environmental claims. See also Management's Discussion and Analysis of Financial Condition and Results of Operations. (in millions) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net Reserves Held $20,496 $20,901 $25,418 $25...

  • Page 59
    ... to asbestos and environmental claims. See also Management's Discussion and Analysis of Financial Condition and Results of Operations. (in millions) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Net Reserves Held Discount (in Reserves Held) Net Reserves Held (Undiscounted) Paid...

  • Page 60
    ... structured settlements), endowment and accident and health policies. Retirement savings products consist generally of fixed and variable annuities. There was no significant adverse effect on AIG's Life Insurance & Retirement Services results of operations from economic conditions in any one state...

  • Page 61
    ...and customized interest rate, currency, equity, commodity, energy and credit products with top-tier corporations, financial institutions, governments, agencies, institutional investors, and high-net-worth individuals throughout the world. AIGFP also invests in a diversified portfolio of securities...

  • Page 62
    ...including AIG Global Investment Corp., AIG Global Real Estate and AIG Private Bank. AIG SunAmerica sells and manages mutual funds and provides financial advisory services through independent-contractor registered representatives. AIGGIG manages invested assets on a global basis for AIG subsidiaries...

  • Page 63
    ... surplus in relation to the risks inherent in its business. Thus, inadequately capitalized general and life insurance companies may be identified. The RBC formula develops a risk-adjusted target level of statutory surplus by applying certain factors to various asset, premium and reserve items...

  • Page 64
    American International Group, Inc. and Subsidiaries Competition AIG's Insurance, Financial Services and Asset Management businesses operate in highly competitive environments, both domestically and overseas. Principal sources of competition are insurance companies, banks, investment banks and other...

  • Page 65
    ...'s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Reinsurance. Adjustments to Life Insurance & Retirement Services Deferred Policy Acquisition Costs Interest rate ï¬,uctuations and other events may require AIG subsidiaries to accelerate the amortization...

  • Page 66
    American International Group, Inc. and Subsidiaries operations, including by exposing AIG's businesses to the following: ) widespread claim costs associated with property, workers compensation, mortality and morbidity claims; ) loss resulting from the cash ï¬,ows from invested assets being less ...

  • Page 67
    ... securities, direct private equities, limited partnerships, hedge funds and real estate are relatively illiquid. These asset classes represented nine percent of the carrying value of AIG's total cash and invested assets as of December 31, 2006. If AIG requires significant amounts of cash on short...

  • Page 68
    ... in connection with the accounting, financial reporting and insurance brokerage practices of AIG and its subsidiaries, as well as claims relating to the underpayment of certain workers compensation premium taxes and other assessments. The 2005 financial statements included in this Annual Report on...

  • Page 69
    ... by AIG of its workers compensation premium taxes and related fees and assessments. In addition, AIG paid a $100 million fine to the State of New York. As part of these settlements, AIG has agreed to retain, for a period of three years, an independent consultant who will conduct a review that...

  • Page 70
    ... above. The named defendants include current and former officers and directors of AIG, as well as Marsh, SICO, Starr, ACE Limited and subsidiaries (ACE), General Reinsurance Corporation, PwC, and certain employees or officers of these entity defendants. Plaintiffs assert claims for breach of...

  • Page 71
    ... of insurance brokerage services for a variety of insurance needs. The broker defendants are alleged to have placed insurance coverage on the plaintiffs' behalf with a number of insurance companies named as defendants, including AIG subsidiaries. The Commercial Complaint also named ten brokers...

  • Page 72
    ... on the New York Stock Exchange Composite Tape, for each quarter of 2006 and 2005. 2006 High Dividends Low Paid High 2005 Dividends Low Paid Period Average Price Total Number Paid of Shares per (a)(b) Purchased Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs...

  • Page 73
    ...reï¬,ect relative stock market capitalization. FIVE-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURNS Value of $100 Invested on December 31, 2001 $250 $200 $150 $100 $50 $0 2001 2002 2003 Years Ending 2004 2005 2006 AMERICAN INTERNATIONAL GROUP S&P 500 INDEX 2001 NEW PEER GROUP 2002 2003 OLD...

  • Page 74
    ... Cumulative effect of accounting changes, net of tax Net income Dividends declared per common share Total assets Long-term debt and commercial paper(f) Guaranteed by AIG Liabilities connected to trust preferred stock Matched/not guaranteed by AIG Total liabilities Shareholders' equity $ 74,083 25...

  • Page 75
    ... Segment Risk Management Insurance Operations Financial Services Asset Management Economic Capital Recent Accounting Standards 67 68 69 69 76 77 79 86 86 86 87 88 89 90 91 91 94 97 97 98 Cautionary Statement Regarding Projections and Other Information About Future Events This Annual Report on Form...

  • Page 76
    ... retirement services operations as well. AIG's Financial Services businesses include commercial aircraft and equipment leasing, capital markets operations and consumer finance, both in the United States and abroad. AIG also provides asset management services to institutions and individuals. As part...

  • Page 77
    ... 2005 Comparison The 4 percent growth in revenues in 2006 was primarily attributable to the growth in net premiums earned and net investment income from General Insurance operations and growth in Life Insurance & Retirement Services GAAP premiums and net investment income. Revenues in the Financial...

  • Page 78
    ...Services net investment income and Life Insurance & Retirement Services GAAP premiums. Hedging activities for AIGFP that did not qualify for hedge accounting treatment under FAS 133 caused an increase in Financial Services revenues of $2.01 billion in 2005 and a decrease of $122 million in 2004. AIG...

  • Page 79
    ...-related losses in 2006. 2006 2005 2004 Revenues : General Insurance(b)(c) $ 49,206 Life Insurance & Retirement Services(c)(d) 50,163 Financial Services(e)(f) 8,010 Asset Management(g) 5,814 Other(h) 1 Total $113,194 Operating Income(a)(i)(j): General Insurance(c) $ 10,412 Life Insurance...

  • Page 80
    ... reported and/or settled. Liquidity AIG manages liquidity at both the subsidiary and parent company levels. At December 31, 2006, AIG's consolidated invested assets, primarily held by its subsidiaries, included $26.8 billion in cash and short-term investments. Consolidated net cash provided from...

  • Page 81
    ... net cash ï¬,ows: based upon current lease rates, projected future lease rates and estimated terminal values of each aircraft based on third party information. Deferred Policy Acquisition Costs (General Insurance): ( Operating Review Recoverability and eligibility: based upon the current terms...

  • Page 82
    ... ratios) 2006 2005 2004 Net premiums written: Domestic General DBG Transatlantic Personal Lines Mortgage Guaranty Foreign General(a) Total Net premiums earned: Domestic General DBG Transatlantic Personal Lines Mortgage Guaranty Foreign General(a) Total Net investment income(b): Domestic General...

  • Page 83
    ...-related losses for 2005 and 2004 by reporting unit were as follows: 2005 Insurance Related Losses Net Reinstatement Premium Cost Insurance Related Losses 2004 Net Reinstatement Premium Cost (in millions) Reporting Unit: DBG Transatlantic Personal Lines Mortgage Guaranty Foreign General Total...

  • Page 84
    .... General Insurance net investment income increased $1.67 billion in 2006 to $5.7 billion on higher levels of invested assets, strong cash ï¬,ows, slightly higher yields and increased partnership income, and included increases from out of period adjustments of $490 million related to the accounting...

  • Page 85
    ... Personal Lines net premiums written and net premiums earned for 2005 increased compared to 2004 as a result of strong growth in the Private Client Group and Agency Auto divisions due to increased agent/broker appointments, greater market penetration and enhanced product offerings. AIG direct...

  • Page 86
    American International Group, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations expense ratio remained ï¬,at as premium growth covered increased expenses related to expansion internationally and continued investment in risk management ...

  • Page 87
    ... for future investment income. The DBG net loss reserve of $44.0 billion is comprised principally of the business of AIG subsidiaries participating in the American Home/National Union pool (11 companies) and the surplus lines pool (Lexington, Starr Excess Liability Insurance Company and Landmark...

  • Page 88
    ... total general insurance reserves consists of approximately $3.33 billion from business assumed from the American Home/National Union pool and an additional $467 million relating to Foreign General Insurance business. Discounting of Reserves At December 31, 2006, AIG's overall General Insurance net...

  • Page 89
    American International Group, Inc. and Subsidiaries (in millions) 2006 2005 2004 Prior Accident Year Development by Major Class of Business: Excess casualty (DBG) D&O and related management liability (DBG) Excess workers compensation (DBG) Reinsurance (Transatlantic) Asbestos and environmental ...

  • Page 90
    ... this development with rate increases and policy form and coverage changes to better contain future loss costs in this class of business. In the year-end 2004 loss reserve review, AIG's actuaries responded to the adverse development for D&O and related management liability classes by increasing the...

  • Page 91
    ...projections included all accident years through 2005. Loss reserves pertaining to D&O and related management liability classes of business are included in the Other liability claims made line of business, as presented in the table on page 37. assumption for excess workers compensation was increased...

  • Page 92
    American International Group, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations including changes in claims handling, exposure and policy forms, current and future estimates of monetary inï¬,ation and social inï¬,ation and increases in ...

  • Page 93
    ... used by AIG more for pricing analysis than for loss reserve analysis. Loss development methods utilize the actual loss development patterns from prior accident years to project the reported losses to an ultimate basis for subsequent accident years. Loss development methods generally are most...

  • Page 94
    ... in the reported losses for many of the more recent accident years. Beginning with the year-end 2005 loss reserve review, AIG's actuaries began to utilize claims projections provided by AIG claims staff to help determine the loss development factors for this class of business. General Liability: AIG...

  • Page 95
    American International Group, Inc. and Subsidiaries business, due to significant changes and growth in AIG's general liability and products liability business over the years. Commercial Automobile Liability: AIG generally utilizes loss development methods for all but the most recent accident year...

  • Page 96
    ... up claim analysis, loss evaluation reports from on-site field adjusters, and market share estimates. AIG's loss reserve analyses do not calculate a range of loss reserve estimates. Because a large portion of the loss reserves from AIG's General Insurance business relates to longer-tail casualty...

  • Page 97
    ... because AIG's actuaries are generally able to use loss development projections for all but the most recent accident year's reserves, so there is limited need to rely on loss cost trend assumptions for primary workers compensation business. However, for primary workers compensation business the...

  • Page 98
    ... was focused around a report year projection of aggregate losses for both asbestos and environmental reserves. Additional tests such as market share analyses were also per formed. Ground-up analyses take into account policyholder-specific and claim-specific information that has been gathered...

  • Page 99
    ... that was first completed in 2005. All asbestos accounts for which there was a significant change in estimated losses in the 2006 review were analyzed to determine the appropriate reserve net of reinsurance. AIG also completed a top-down report year projection of its indicated asbestos and...

  • Page 100
    ... Group, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Continued A summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims separately and combined at December 31, 2006, 2005...

  • Page 101
    ..., structured settlements and terminal funding annuities. Home service operations include an array of life insurance, accident and health and annuity products sold primarily through career agents. In addition, home service includes a small block of runoff property and casualty coverage. Retirement...

  • Page 102
    American International Group, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Life Insurance & Retirement Services Results Continued Life Insurance & Retirement Services results for 2006, 2005 and 2004 were as follows: GAAP Premiums Net ...

  • Page 103
    ... Insurance & Retirement Services results for 2006, 2005 and 2004 were as follows: GAAP Premiums Net Investment Income Realized Capital Gains (Losses) Total Revenues Operating Income (in millions) 2006 Japan and Other: Life insurance(a) Personal accident Group products Individual fixed annuities...

  • Page 104
    American International Group, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (in millions) Continued GAAP Premiums Net Investment Income Realized Capital Gains (Losses) Total Revenues Operating Income 2004 Japan and Other: Life ...

  • Page 105
    ... dividend reserves mentioned above. Operating income includes the Life Insurance & Retirement Services segment's equal share of the results of AIG Credit Card Company (Taiwan), which amounted to a loss of $47 million in 2006 compared to a gain of $26 million in 2005. Personal accident revenues grew...

  • Page 106
    ...Domestic Life Insurance results, presented on a sub-product basis for 2006, 2005 and 2004 were as follows: GAAP Premiums Net Investment Income Realized Capital Gains (Losses) Total Revenues Operating Income (Loss) (in millions) 2006 Life insurance(a) Home service Group life/health Payout annuities...

  • Page 107
    ... charge related to a workers compensation quota share reinsurance agreement with Superior National. In addition, in 2004, as part of the business review of group life/health, approximately $68 million was incurred for reserve strengthening and allowances for receivables. Payout annuities operating...

  • Page 108
    ... Financial Condition and Results of Operations Domestic Retirement Services Results Continued Domestic Retirement Services results, presented on a sub-product basis for 2006, 2005 and 2004 were as follows: GAAP Premiums Net Investment Income Realized Capital Gains (Losses) Total Revenue Operating...

  • Page 109
    American International Group, Inc. and Subsidiaries money market instruments with shorter durations than AIG's individual fixed annuity products became more attractive. Total Domestic Retirement Services operating income for 2005 of $2.2 billion increased 5 percent compared to 2004 operating ...

  • Page 110
    ... net investment income includes real estate income, income on non-partnership invested assets, securities lending and Life Insurance & Retirement Services' equal share of the results of AIG Credit Card Company (Taiwan). (b) Includes the effect of out of period adjustments relating to the accounting...

  • Page 111
    ... for Life Insurance & Retirement Services products arises from the deferral of those costs that vary with, and are directly related to, the acquisition of new or renewal business. Policy acquisition costs for life insurance products are generally deferred and amortized over the premium paying period...

  • Page 112
    ... by changes in market returns because separate account revenues, primarily composed of mortality and expense charges and asset management fees, are a function of asset values. DAC for both insurance-oriented and investment-oriented products as well as retirement services products is reviewed for...

  • Page 113
    ... markets, consumer finance and insurance premium finance. Aircraft Leasing Financial Services Results Financial Services results for 2006, 2005 and 2004 were as follows: (in millions) 2006 (a) 2005 2004 Revenues : Aircraft Leasing(b) Capital Markets(c)(d) Consumer Finance(e) Other Total...

  • Page 114
    ...oriented operation, current and past revenues and operating results may not provide a basis for predicting future performance. AIG's Capital Markets opera- tions derive substantially all their revenues from hedged financial positions entered into in connection with counterparty transactions rather...

  • Page 115
    ... real estate generally having a maximum term of 360 months, and are considered nonconforming. The real estate loans may be closed-end accounts or open-end home equity lines of credit and may be fixed rate or adjustable rate products. AGF does not offer mortgage products For m 10-K 2006 AIG...

  • Page 116
    ... companies are shared between Financial Services and Life Insurance & Retirement Services according to their ownership percentages. While products vary by market, the businesses generally provide credit cards, unsecured and secured non-real estate loans, term deposits, savings accounts, retail sales...

  • Page 117
    ...Global Real Estate Investment Corp. and AIG Private Bank. AIG Private Bank offers banking, trading and investment management services to private client and high net worth individuals and institutions globally. Within the alternative investment asset class, AIGGIG offers hedge and private equity fund...

  • Page 118
    ... income. AIG's unaffiliated client assets under management, including both retail mutual funds and institutional accounts, increased 21 percent from year-end 2005 to $75 billion, resulting in higher management fee income. Increased realized capital gains on real estate investments from 2005 also...

  • Page 119
    ... payable Total AIGCFG Commercial paper Loans and mortgages payable Total AIG Finance Taiwan Limited commercial paper Other Subsidiaries Variable Interest Entity debt: A.I. Credit AIGGIG AIG Global Real Estate Investment AIG SunAmerica ALICO Total Total borrowings not guaranteed by AIG Total Debt...

  • Page 120
    ... debt securities from time to time to meet its financing needs and those of certain of its subsidiaries for general corporate purposes, as well as for the MIP. In July 2006, AIG filed and had declared effective a post-effective amendment to its universal shelf registration statement to sell up...

  • Page 121
    ... operating lease payments, although such hedges did not qualify for hedge accounting treatment under FAS 133. ILFC had a $4.3 billion Export Credit Facility for use in connection with the purchase of approximately 75 aircraft delivered through 2001. This facility was guaranteed by various...

  • Page 122
    ... Review - Financial Services Operations and Liquidity herein. AIGCFG AIGCFG has a variety of funding mechanisms for its various markets, including: retail and wholesale deposits; short-term and long-term bank loans and intercompany subordinated debt. AIG Credit Card Company (Taiwan), a consumer...

  • Page 123
    ... the rating agencies to denote relative position within such generic or major category. Moody's Short-term Debt S&P Fitch Moody's(a) Senior Long-term Debt S&P(b) Fitch(c) AIG AIG Financial Products Corp.(d) AIG Funding, Inc.(d) ILFC American General Finance Corporation American General Finance, Inc...

  • Page 124
    American International Group, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations These credit ratings are current opinions of the rating agencies. As such, they may be changed, suspended or withdrawn at any time by the rating agencies as a ...

  • Page 125
    ... of credit: Capital Markets Guarantees: Life Insurance & Retirement Services(b) Aircraft Leasing Asset Management Other commercial commitments(c): Capital Markets(d) Aircraft Leasing(e) Life Insurance & Retirement Services(f) Asset Management(g) Life Settlement DBG(h) Parent Company Total $ 185...

  • Page 126
    ... Consolidated Financial Statements. with an aggregate purchase price of $8 billion. AIG or its subsidiaries from time to time may buy shares of its common stock in the open market for general corporate purposes, including to satisfy its obligations under various employee benefit plans. During 2006...

  • Page 127
    ... and parent company levels. At December 31, 2006, AIG's consolidated invested assets, primarily held by its subsidiaries, included $26.8 billion in cash and short-term investments. Consolidated net cash provided from operating activities in 2006 amounted to $6.8 billion. At the parent company level...

  • Page 128
    ... sale of equity securities was used to purchase approximately $161 billion of fixed income securities and marketable equity securities during 2006. See also Operating Review - General Insurance Operations - General Insurance Net Investment Income and Life Insurance & Retirement Services Operations...

  • Page 129
    ... with investment warehousing. In addition, AIG Global Real Estate maintains several external credit lines in order to fund its ongoing property development and construction related activities. AIG (Parent Company) The liquidity of the parent company is principally derived from its subsidiaries. The...

  • Page 130
    ... of AIG's invested assets by segment, at December 31, 2006 and 2005: Life Insurance & Retirement Services (in millions) General Insurance Financial Services Asset Management Other Total 2006 Fixed maturities: Bonds available for sale, at fair value Bonds held to maturity, at amortized cost...

  • Page 131
    ... equity strategies and to alternative investments, including private equity and hedge funds. These investments have provided a combination of added diversification and attractive long-term returns. General Insurance invested assets grew by $21.3 billion, or 22 percent, during 2006 as bond holdings...

  • Page 132
    ...variable annuity products. AIG manages its exposure resulting from these long-term guarantees through reinsurance or capital market hedging instruments. AIG invests in equities for various reasons, including diversifying its overall exposure to interest rate risk. Available for sale bonds and equity...

  • Page 133
    ... management objective is to minimize interest rate, currency, commodity and equity risks associated with its securities available for sale. That is, when AIGFP purchases a security for its securities available for sale investment portfolio, it simultaneously enters into an offsetting internal hedge...

  • Page 134
    ... the fair value is generally from market exchanges or dealer quotations, with the exception of nontraded securities. AIG considers nontraded securities to mean certain fixed income investments, certain structured securities, direct private equities, limited partnerships, and hedge funds. Nontraded...

  • Page 135
    ... impairment loss exceeded 1.0 percent of consolidated net income for 2006. Excluding the other-than-temporary impairments noted above, the changes in fair value for AIG's available for sale portfolio, which constitutes the vast majority of AIG's investments, were recorded in Accumulated other...

  • Page 136
    ...(v) regular reviews of credit risk exposures in the portfolios of all credit-incurring business units. ( The Financial Risk Committee (FRC) oversees AIG's market risk exposures to interest rates, foreign exchange and equity prices and provides strategic direction for AIG's asset-liability management...

  • Page 137
    ...; and - global securities firms. The CRC reviews quarterly concentration reports in all categories listed above as well as credit trends by risk ratings. The CRC may adjust limits to provide reasonable assurance that AIG does not incur excessive levels of credit risk and that AIG's credit risk pro...

  • Page 138
    ...by AIG business segment (General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management) and also by market risk factor (interest rate, currency and equity). For the insurance segments, assets included are invested assets (excluding real estate and investment income...

  • Page 139
    ...Average High Total AIG Non-Trading Market risk: Diversified Interest rate Currency Equity General Insurance: Market risk: Diversified Interest rate Currency Equity Life Insurance & Retirement Services: Market risk: Diversified Interest rate Currency Equity Non-Trading Financial Services: Market...

  • Page 140
    ... plans for identified deficiencies. Continued business written by Lexington. Concord Re was capitalized with approximately $730 million through the issuance of equity securities and loans from third party investors. AIG and its subsidiaries invest in a wide variety of investment vehicles managed...

  • Page 141
    ...and subsidiary). Pooling of AIG's reinsurance risks enables AIG to purchase reinsurance more efficiently at a consolidated level, manage global counterparty risk and relationships and manage global catastrophe risks, both for the General Insurance and Life Insurance & Retirement Services businesses...

  • Page 142
    ... in the table below. Single event modeled property and workers compensation losses to AIG's worldwide portfolio of risk for key geographic areas. Gross values represent AIG's liability after the application of policy limits and deductibles, and net values represent losses after all reinsurance is...

  • Page 143
    ... risk management firm to model loss scenarios associated with an outbreak of Avian Flu. Using a 1 in 100-year return period, AIG estimates its after-tax net losses under its life insurance policies due to Avian Flu at less than 1 percent of consolidated shareholders' equity as of December 31, 2006...

  • Page 144
    ..., energy and credit products with top-tier corporations, financial institutions, governments, agencies, institutional investors and high-net-worth individuals throughout the world. The senior management of AIG defines the policies and establishes general operating parameters for Capital Markets...

  • Page 145
    ...income securities. At December 31, 2006, the average credit rating of this portfolio was in the AA+ category or the equivalent thereto as determined through rating agencies or internal review. AIGFP has also entered into credit derivative transactions to economically hedge its credit risk associated...

  • Page 146
    ...-prime. Current economic conditions, such as interest rate and employment levels, can have a direct effect on the borrowers' ability to repay 96 AIG 2006 For m 10-K these loans. AGF manages the credit risk inherent in its portfolio by using credit scoring models at the time of credit applications...

  • Page 147
    ... and contract terms and conditions and portfolio diversification by type of project, sponsor, real estate market and country. AIG's exposure to real estate investments is monitored on an ongoing basis by the Asset Management real estate investment committee. Economic Capital Since mid 2005, AIG has...

  • Page 148
    ... process will increasingly provide assistance in management's decision-making concerning capital management and capital allocation, mergers, acquisitions and divestitures, risk retention, reinsurance and hedging strategies and product development and pricing. Continued Recent Accounting Standards...

  • Page 149
    ...Condition and Results of Operations. Item 8. Financial Statements and Supplementary Data American International Group, Inc. and Subsidiaries Index to Financial Statements and Schedules Page Page Report of Independent Registered Public Accounting Firm Consolidated Balance Sheet at December 31, 2006...

  • Page 150
    ... to the consolidated financial statements, AIG changed its accounting for certain hybrid financial instruments, life settlement contracts and share based compensation as of January 1, 2006, and certain employee benefit plans as of December 31, 2006. Internal Control Over Financial Reporting Also...

  • Page 151
    ...Public Accounting Firm reconcile the differences to the deferred income tax balances. These control deficiencies resulted in adjustments to income tax expense, income taxes payable and deferred income tax asset and liability accounts in the 2006 annual and interim consolidated financial statements...

  • Page 152
    ... sale, at fair value (cost: 2006 - $2,485; 2005 - $2,282) Mortgage loans on real estate, net of allowance (2006 - $55; 2005 - $54) Policy loans Collateral and guaranteed loans, net of allowance (2006 - $9; 2005 - $10) Financial services assets: Flight equipment primarily under operating leases, net...

  • Page 153
    American International Group, Inc. and Subsidiaries Consolidated Balance Sheet December 31, (in millions, except share data) Continued 2006 2005 Liabilities: Reserve for losses and loss expenses Unearned premiums Future policy benefits for life and accident and health insurance contracts ...

  • Page 154
    American International Group, Inc. and Subsidiaries Consolidated Statement of Income Years Ended December 31, (in millions, except per share data) 2006 2005 2004 Revenues: Premiums and other considerations Net investment income Realized capital gains (losses) Other income Total revenues Benefi...

  • Page 155
    American International Group, Inc. and Subsidiaries Consolidated Statement of Shareholders' Equity Years Ended December 31, (in millions, except share and per share data) Amounts 2006 2005 2004 Shares 2006 2005 2004 Common stock: Balance, beginning and end of year Additional paid-in capital: ...

  • Page 156
    ...losses Impairment losses Changes in operating assets and liabilities: General and life insurance reserves Premiums and insurance balances receivable and payable - net Reinsurance assets Capitalization of deferred policy acquisition costs Investment income due and accrued Funds held under reinsurance...

  • Page 157
    ... guaranteed loans issued Finance receivables held for investment - originations and purchases Change in securities lending collateral Net additions to real estate, fixed assets, and other assets Net change in short-term investments Net change in non-AIGFP derivative assets and liabilities Net cash...

  • Page 158
    American International Group, Inc. and Subsidiaries Consolidated Statement of Comprehensive Income Years Ended December 31, (in millions) 2006 2005 2004 Net income Other comprehensive income (loss): Unrealized (depreciation) appreciation of investments - net of reclassification adjustments ...

  • Page 159
    ...Equity in Subsidiary Companies Note 11. Shareholders' Equity and Earnings Per Share Note 12. Commitments, Contingencies and Guarantees Note 13. Fair Value of Financial Instruments Note 14. Stock Compensation Plans Note 15. Employee Benefits Note 16. Benefits Provided by Starr International Company...

  • Page 160
    ... current year's presentation. This revision did not have any effect on consolidated pre-tax income, net income or shareholders' equity. In 2006 AIG determined that certain products that were historically reported as separate account assets under SOP 03-1 should have been reported as general account...

  • Page 161
    .... Earnings from hedge funds and limited partnership investments accounted for under the equity method. Incurred policy losses and benefits: Incurred policy losses for short duration insurance contracts consist of the estimated ultimate cost of settling claims incurred within the reporting period...

  • Page 162
    ... securities, AIG generally amortizes the discount or reduced premium over the remaining life of the security in a prospective manner based on the amount and timing of future estimated cash ï¬,ows. (f) Mortgage Loans on Real Estate - net, Policy, Collateral and Guaranteed Loans - net: Mortgage loans...

  • Page 163
    .... (h) Financial Services - Securities Available for Sale, at fair value: These securities are held to meet long-term investment objectives and are accounted for as available for sale, carried at current fair values and recorded on a trade-date basis. This portfolio is hedged using interest rate...

  • Page 164
    ...hedge funds from information provided by the general partner or manager of each of these investments, the accounts of which generally are audited on an annual basis. Also included in other invested assets are real estate held for investment, aircraft asset investments held by non-financial services...

  • Page 165
    ... Acquired (VOBA) is determined at the time of acquisition and is reported on the consolidated balance sheet with DAC. This value is based on present value of future pre-tax profits discounted at current yields applicable at time of purchase. For products accounted under FAS 60, VOBA is amortized...

  • Page 166
    ... compensation cost over the requisite service period for each separately vesting tranche of the award. AIG's share-based plans generally provide for accelerated vesting after the participant turns 65 and retires. For awards (aa) Future Policy Benefits for Life and Accident and Health Contracts...

  • Page 167
    ...certain structured note liabilities and structured investments in AIG's available for sale portfolio that existed at December 31, 2005. The effect of this adoption resulted in an $11 million after-tax ($18 million pre-tax) decrease to opening retained earnings as of January 1, 2006, representing the...

  • Page 168
    ...its management structure. These segments and their respective operations are as follows: General Insurance: AIG's General Insurance subsidiaries are multiple line companies writing substantially all lines of commercial property and casualty insurance and various personal lines both domestically and...

  • Page 169
    ... and casualty products with an emphasis on specialty risks. AIG's Personal Lines operations provide automobile insurance through AIG Direct, a mass marketing operation, Agency Auto Division and 21st Century Insurance Group (21st Century), as well as a broad range of coverages for high net-worth...

  • Page 170
    ... no significant catastrophe-related losses in 2006. (b) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services GAAP premiums, net investment income, Financial Services interest, lease and finance charges, Asset Management net investment income from spread...

  • Page 171
    ... in 2006. Catastrophe-related losses for 2005 and 2004 by reporting unit were: 2005 Insurance Related Losses Net Reinstatement Premium Cost Insurance Related Losses 2004 Net Reinstatement Premium Cost (in millions) Reporting Unit: DBG Transatlantic Personal Lines Mortgage Guaranty Foreign General...

  • Page 172
    ..., Inc. and Subsidiaries Notes to Consolidated Financial Statements 2. Segment Information Continued Continued The following table summarizes AIG's Life Insurance & Retirement Services operations by major internal reporting unit for the years ended December 31, 2006, 2005 and 2004: Life Insurance...

  • Page 173
    ... Segment Information Continued The following table summarizes AIG's Financial Services operations by major internal reporting unit for the years ended December 31, 2006, 2005 and 2004: Financial Services Aircraft Leasing Capital Markets(a) Consumer Finance Total Reportable Segment Consolidation and...

  • Page 174
    ... $549 million in 2006, 2005 and 2004, respectively. (b) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services GAAP premiums, net investment income, Financial Services interest, lease and finance charges, Asset Management net investment income with respect...

  • Page 175
    American International Group, Inc. and Subsidiaries 3. Federal Income Taxes Continued It is management's belief that there are substantial arguments in support of the positions taken by AIG, AIG Retirement Services Inc., and SunAmerica Life in their Letters of Protest and Tax Court litigation. ...

  • Page 176
    ... net deferred tax liability as of December 31, 2006 and 2005 were as follows: (in millions) 2006 2005 Deferred tax assets: Loss reserve discount Unearned premium reserve reduction Loan loss and other reserves Investment in foreign subsidiaries and joint ventures Adjustment to life policy reserves...

  • Page 177
    ... subsidiary). It also allows AIG to pool its insurance risks and purchase reinsurance more efficiently at a consolidated level, manage global counterparty risk and relationships and manage global life catastrophe risks. AIG's Domestic Life Insurance & Retirement Services operations utilize internal...

  • Page 178
    ... to manage net amounts at risk in excess of retention limits. AIG's Domestic Life Insurance companies also cede excess, noneconomic reserves carried on a statutory-basis only on certain term and universal life insurance policies and certain fixed annuities to an offshore affiliate. AIG generally...

  • Page 179
    ... of these liabilities are classified in the Spread-Based Investment Business for segment reporting purposes. Certain products are subject to experience adjustments. These include group life and group medical products, credit life contracts, accident and health insurance contracts/riders attached...

  • Page 180
    ..., policyholder liabilities are valued using more conservative assumptions and certain assets are non-admitted. Fixed maturities Equity securities Short-term investments Interest on mortgage, policy and collateral loans Other invested assets Total investment income Investment expenses Net investment...

  • Page 181
    American International Group, Inc. and Subsidiaries 8. Investment Information Continued (c) Realized Gains and Losses: The realized capital gains (losses) and increase (decrease) in unrealized appreciation of AIG's consolidated available for sale investments were as follows: Years Ended December ...

  • Page 182
    American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. Investment Information Continued Continued The following table presents the amortized cost and estimated fair values of fixed maturity securities available for sale and held to maturity at December ...

  • Page 183
    ...sale to economically hedge its credit risk. As previously discussed, these economic offsets did not meet the hedge accounting requirements of FAS 133 and, therefore, are recorded in Other income in the Consolidated Statement of Income. (h) Investments in Life Settlement Contracts: In June 2006, AIG...

  • Page 184
    American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. Investment Information Continued Continued (j) Fair Value of Fixed Maturities and Unrealized Appreciation of Investments - Capital Markets The amortized cost and estimated fair value of Capital ...

  • Page 185
    ... International Group, Inc. and Subsidiaries 8. Investment Information Continued (k) Finance Receivables: Finance receivables, net of unearned finance charges, were as follows: Years Ended December 31, (in millions) 2006 2005 Real estate loans Non-real estate loans Retail sales finance Credit...

  • Page 186
    American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 9. Debt Outstanding Continued Continued Total debt at December 31, 2006 is shown below with year of payment due in each of the next five years and thereafter. (in millions) Total(a) 2007 2008 2009...

  • Page 187
    ... registered under the Securities Act of 1933 (Securities Act). The proceeds from the sale of $2.25 billion of these notes were used for AIG's general corporate purposes and $750 million were used to fund the MIP. In November 2006, AIG filed a shelf registration statement in Japan, providing for the...

  • Page 188
    American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 9. Debt Outstanding Continued Continued AIGFP economically hedges its notes and bonds. AIG guarantees all of AIGFP's debt. (iii) Hybrid financial instrument liabilities: AIGFP's notes and bonds include...

  • Page 189
    ...Facility Total AGF (a) (b) (c) (d) 2,125 $ 4,250 American General Finance Corporation American General Finance, Inc.(d) American General Finance Corporation 2,125 July 2007 Yes 2,125 $ 4,250 July 2010 No Guaranteed by AIG. This facility can be drawn in the form of loans or letters of credit...

  • Page 190
    ... billion in 2004. Capitalized interest was $59 million in 2006, $64 million in 2005 and $59 million in 2004. Cash distributions on the preferred shareholders' equity in subsidiary companies of ILFC and liabilities connected to trust preferred stock of AGC subsidiaries are accounted for as interest...

  • Page 191
    ... arising from employee stock plans were not included in the computation of diluted earnings per share where the exercise price of the options exceeded the average market price and would have been antidilutive. The number of shares excluded were 13 million, 19 million and 7 million for 2006, 2005 and...

  • Page 192
    ... of 2005. The settlements resolved investigations conducted by the SEC, NYAG and DOI in connection with the accounting, financial reporting and insurance brokerage practices of AIG and its subsidiaries, as well as claims relating to the underpayment of certain workers compensation premium taxes and...

  • Page 193
    ... Ohio state employees, suing on behalf of themselves and all purchasers of AIG's publicly traded securities between October 28, 1999 and April 1, 2005. The named defendants are AIG and a number of present and former AIG officers and directors, as well as Starr, SICO, General Reinsurance Corporation...

  • Page 194
    ... of insurance brokerage services for a variety of insurance needs. The broker defendants are alleged to have placed insurance coverage on the plaintiffs' behalf with a number of insurance companies named as defendants, including AIG subsidiaries. The Commercial Complaint also named ten brokers...

  • Page 195
    ... and loss reserves is a complex process for long-tail casualty lines of business, which include excess and umbrella liability, directors and officers liability (D&O), professional liability, medical malpractice, workers compensation, general liability, products liability and related classes, as...

  • Page 196
    ... quoted market prices of comparable investments. Mortgage loans on real estate, policy and collateral loans: Where practical, the fair values of loans on real estate and collateral loans were estimated using discounted cash ï¬,ow calculations based upon AIG's current incremental lending rates for...

  • Page 197
    ..., equity and volatility rates, as applicable. Securities purchased (sold) under agreements to resell (repurchase), at contract value: As these securities (obligations) are short-term in nature, the contract values approximate fair values. Other invested assets: Consisting principally of hedge funds...

  • Page 198
    ... Unrealized gain on swaps, options and forward transactions Trading assets Securities purchased under agreements to resell Finance receivables, net of allowance Securities lending collateral Other invested assets(b) Short-term investments Cash Liabilities: Policyholders' contract deposits Borrowings...

  • Page 199
    ..., recognized as a reduction in stockbased compensation of $46 million, was recorded as a cumulative effect of an accounting change, net of tax. FAS 123R requires AIG to reï¬,ect the cash savings resulting from excess tax benefits in its financial statements as cash ï¬,ow from financing activities...

  • Page 200
    American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 14. Stock Compensation Plans Continued Continued Valuation Methodology In 2004, AIG developed a binomial lattice model to calculate the fair value of stock option grants. In prior years, a Black-Scholes...

  • Page 201
    American International Group, Inc. and Subsidiaries 14. Stock Compensation Plans Continued The following table presents information about stock options outstanding at December 31, 2006: Options Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price Options ...

  • Page 202
    American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 14. Stock Compensation Plans Continued Continued conditions, including but not limited to the participant's termination of employment with AIG prior to normal retirement age. Historically, SICO's Board ...

  • Page 203
    ... time. Annual funding requirements are determined based on the ''projected unit credit'' cost method, which attributes a pro rata portion of the total projected benefit payable at normal retirement to each year of credited service. The HSB Group Inc. (HSB) retirement plan was merged into the AIG...

  • Page 204
    ...represent the present value of postretirement medical and life insurance benefits deemed earned as of December 31, 2006 projected for estimated salary and medical claim rate increases to an assumed date with respect to retirement, termination, disability, or death. (c) Voluntary Savings Plans: AIG...

  • Page 205
    ... the risks associated with these plans. However, the cost of paying for these guarantees is now viewed as a liability for the company in Switzerland. Therefore, the Swiss plans are treated as defined benefit plans. $45 million of the increase is due to the inclusion of new plans during 2006. The...

  • Page 206
    American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 15. Employee Benefits Continued Continued Discount Rate Methodology The projected benefit cash ï¬,ows under the AIG Retirement Plan were discounted using the spot rates derived from the Citigroup ...

  • Page 207
    ... 2006 Fair value of plan assets Less projected benefit obligations Funded status at end of year Amounts recognized in the consolidated balance sheet: Assets Liabilities Total amounts recognized Amounts recognized in Accumulated other comprehensive income: Net loss Prior service cost (credit) Total...

  • Page 208
    ... equity in subsidiary companies and shareholders' equity (a) Included in Other liabilities in the consolidated balance sheet. $979,952 $979,414 Defined benefit pension plan obligations where the projected benefit obligation was in excess of the related plan assets at December 31, 2006 and 2005...

  • Page 209
    ... Actual 2006 Actual 2005 Asset class: Equity securities Debt securities Other Total Other includes cash, insurance contracts and real estate asset classes. Included in equity securities for the U.S. plans at December 31, 2006 and 2005 were 55,680 and 602,680 shares of AIG common stock, with values...

  • Page 210
    American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 15. Employee Benefits Continued Continued expected returns within each asset category. The return with respect to each asset class considers both historical returns and the future expectations for such...

  • Page 211
    ... the years ended 2005 and 2004): Pensions Postretirement Total Non-U.S. Plans U.S. Plans Total Non-U.S. Plans U.S. Plans (in millions) 2006 Components of net periodic benefit cost: Service cost Interest cost Expected return on assets Amortization of prior service cost Amortization of transitional...

  • Page 212
    ... voting shareholders and Board of Directors of SICO, a private holding company whose principal asset is AIG common stock, decided that a portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding managements of all American International companies...

  • Page 213
    ... receive the tax benefits projected at the time of syndication. AIG Retirement Services, Inc. consolidates these investment partnerships as a result of the guarantee provided to the investors. As part of their incentive compensation, certain key SAAHP employees have been awarded residual cash ï¬,ow...

  • Page 214
    ... market interest rate and AIGFP as the derivative counterparty to the VIE is senior to the debt and equity holders. Asset Management and Insurance Activities AIG uses VIEs in connection with certain guaranteed investment contract programs written by its Life Insurance & Retirement Services...

  • Page 215
    ...reported in current period earnings (principally in realized capital gains and losses for AIG's insurance operations). AIG had no hedges that were considered fair value hedges or net investment hedges at December 31, 2006. At December 31, 2006, AIG's hedge accounting was limited to cash ï¬,ow hedge...

  • Page 216
    ...the consolidated balance sheet. Notional amounts generally represent those amounts used to calculate contractual cash ï¬,ows to be exchanged and are not paid or received, except for certain contracts such as currency swaps. The timing and the amount of cash ï¬,ows relating to Capital Markets foreign...

  • Page 217
    ... the Consolidated Balance Sheet. (b) Represents the amount of death benefit currently in excess of Account value. The following summarizes GMDB liabilities for guarantees on variable contracts reï¬,ected in the general account. (in millions) 2006 2005 Balance at January 1 Reserve increase Bene...

  • Page 218
    American International Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements 20. Variable Life and Annuity Contracts Continued Continued expense, if actual experience or other evidence suggests that earlier assumptions should be revised. The following assumptions and methodology...

  • Page 219
    ...of 2005 included catastrophe losses of $841 million, regulatory settlement costs of approximately $1.6 billion, and an increase in net reserves of approximately $1.8 billion resulting from the annual review of General Insurance loss and loss adjustment reserves. (c) Diluted earnings per common share...

  • Page 220
    ... Sheet American International Group, Inc. Guarantor (in millions) AGC Issuer Other Subsidiaries Eliminations Consolidated AIG December 31, 2006 Assets: Invested assets Cash Carrying value of subsidiaries and partially owned companies, at equity Other assets Total assets Liabilities: Insurance...

  • Page 221
    ... 22. Information Provided in Connection With Outstanding Debt Continued Condensed Consolidating Statement of Income American International Group, Inc. Guarantor (in millions) AGC Issuer Other Subsidiaries Eliminations Consolidated AIG Year Ended December 31, 2006 Operating income Equity in...

  • Page 222
    ... Financial Statements Continued 22. Information Provided in Connection With Outstanding Debt Continued Condensed Consolidating Statements of Cash Flow American International Group, Inc. Guarantor (in millions) AGC Issuer Other Subsidiaries Consolidated AIG Year Ended December 31, 2006 Net...

  • Page 223
    ...American International Group, Inc. Guarantor AIG Liquidity Corp. (in millions) Other Subsidiaries Eliminations Consolidated AIG December 31, 2006 Assets: Invested assets Cash Carrying value of subsidiaries and partially owned companies, at equity Other assets Total assets Liabilities: Insurance...

  • Page 224
    .... Information Provided in Connection With Outstanding Debt Continued Condensed Consolidating Statement of Income American International Group, Inc. Guarantor AIG Liquidity Corp. (in millions) Other Subsidiaries Eliminations Consolidated AIG Year Ended December 31, 2006 Operating Income Equity...

  • Page 225
    ...Consolidating Statements of Cash Flow American International Group, Inc. Guarantor AIG Liquidity Corp. (in millions) Other Subsidiaries Consolidated AIG Year Ended December 31, 2006 Net cash provided by operating activities Cash ï¬,ows from investing activities: Invested assets disposed Invested...

  • Page 226
    ... the Consolidated Statement of Cash Flows. The more significant line items revised include the change in General and life insurance reserves and DAC within operating activities; Purchases of fixed maturity securities within investing activities; and Proceeds from notes, bonds, loans and mortgages...

  • Page 227
    ...condition as of December 31, 2006 and 2005, and results of its operations and cash ï¬,ows for the years ended December 31, 2006, 2005 and 2004, in conformity with U.S. generally accepted accounting principles (GAAP). Management's Report on Internal Control Over Financial Reporting Management of AIG...

  • Page 228
    ... Domestic Brokerage Group (DBG). Specifically, accounting personnel did not per form timely reconciliations and did not properly resolve reconciling items for premium receivables, reinsurance recoverables and intercompany accounts. During 2006, AIG management developed and implemented a corporate...

  • Page 229
    ... AIG recognizes that improvement in its internal controls over financial reporting and consolidation processes, as well as those over investment accounting, is essential. Over time, AIG intends to reduce its reliance on the manual controls that have been established. AIG is currently developing new...

  • Page 230
    American International Group, Inc. and Subsidiaries Part III Item 10. Directors, Executive Officers and Corporate Governance Except for the information provided in Part I under the heading ''Directors and Executive Officers of AIG'', this item, including information regarding AIG's audit ...

  • Page 231
    ... of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York, on the 1st of March, 2007. AMERICAN INTERNATIONAL GROUP, INC...

  • Page 232
    American International Group, Inc. and Subsidiaries Signature /s / GEORGE L. MILES, JR. (George L. Miles, Jr.) Title Director /s / MORRIS W. OFFIT (Morris W. Offit) Director /s / JAMES F. ORR III (James F. Orr III) Director /s / VIRGINIA M. ROMETTY (Virginia M. Rometty) Director /s / ...

  • Page 233
    ... Life Insurance Company and AIG Financial Products Corp. and its subsidiaries, respectively. The proceeds from GICs and GIAs are invested in a diversified portfolio of securities, primarily investment grade bonds. The assets acquired yield rates greater than the rates on the related policyholders...

  • Page 234
    ... Corp. AIG Asset Management Services, Inc. Brazos Capital Management, L.P. AIG Capital Partners, Inc. AIG Equity Sales Corp. AIG Global Investment Corp. AIG Securities Lending Corp. AIG Global Real Estate Investment Corp. International Lease Finance Corporation AIG Credit Corp. A.I. Credit Consumer...

  • Page 235
    ... Voting Securities held by Immediate Parent(1) AIG Private Bank Ltd. AIG Property Casualty Insurance Group, Inc. AIG Commercial Insurance Group, Inc. AIG Aviation, Inc. AIG Casualty Company AIG Risk Management, Inc. AIU Insurance Company American Home Assurance Company AIG Domestic Claims, Inc. AIG...

  • Page 236
    ... Companies, Inc. AIG Marketing, Inc. American International Insurance Company of Delaware Hawaii Insurance Consultants, Inc. AIG Retirement Services, Inc. SunAmerica Life Insurance Company SunAmerica Investments, Inc. AIG Advisor Group, Inc. Advantage Capital Corporation American General Securities...

  • Page 237
    ... American International Life Assurance Company of New York American International Underwriters Corporation American International Underwriters Overseas, Ltd. A.I.G. Colombia Seguros Generales S.A. AIG Brasil Companhia de Seguros AIG Direct Marketing Company Ltd. Central Insurance Company Limited AIG...

  • Page 238
    ... Global Investment Corp. (5) Also owned 1 percent by AIG Capital Corporation. (6) Also owned 32.77 percent by National Union Fire Insurance Company of Pittsburgh, Pa. (7) Also owned 10 percent by AIG Matched Funding Corp. (8) Also owned 10 percent by a subsidiary of American Life Insurance Company...

  • Page 239
    ... dated March 1, 2007, relating to the financial statements, financial statement schedules, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Annual Report on Form 10...

  • Page 240
    ... J. Sullivan, certify that: 1. I have reviewed this Annual Report on Form 10-K of American International Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the...

  • Page 241
    ... or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 1, 2007 /s/ STEVEN J. BENSINGER Steven J. Bensinger Executive Vice President and Chief Financial Officer For m 10-K 2006 AIG 191

  • Page 242
    ... with this Annual Report on Form 10-K of American International Group, Inc. (the ''Company'') for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the ''Report''), I, Steven J. Bensinger, Executive Vice President and Chief Financial Officer...

  • Page 243
    ... Visit the AIG corporate website at www.aigcorporate.com. Requests for copies of the Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 2006 should be directed to: Investor Relations American International Group, Inc. 70 Pine Street New York, New York 10270...

  • Page 244
    American International Group, Inc. 70 Pine Street New York, NY 10270 www.aig.com AIG2006AR