AIG 2006 Annual Report Download - page 108

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
Domestic Retirement Services Results
Domestic Retirement Services results, presented on a sub-product basis for 2006, 2005 and 2004 were as follows:
Net Realized
GAAP Investment Capital Gains Total Operating
(in millions) Premiums Income (Losses) Revenue Income
2006
Group retirement products $ 386 $2,279 $(144) $2,521 $1,017
Individual fixed annuities 122 3,581 (257) 3,446 1,036
Individual variable annuities 531 202 5 738 193
Individual annuities — runoff* 18 426 (8) 436 77
Total $1,057 $6,488 $(404) $7,141 $2,323
2005
Group retirement products $ 351 $2,233 $ (67) $2,517 $1,055
Individual fixed annuities 97 3,346 (214) 3,229 858
Individual variable annuities 467 217 4 688 189
Individual annuities — runoff* 22 430 — 452 62
Total $ 937 $6,226 $(277) $6,886 $2,164
2004
Group retirement products $ 313 $2,201 $(111) $2,403 $ 987
Individual fixed annuities 55 3,078 (78) 3,055 851
Individual variable annuities 407 239 (17) 629 176
Individual annuities — runoff* 20 458 (1) 477 40
Total $ 795 $5,976 $(207) $6,564 $2,054
* Primarily represents runoff annuity business sold through discontinued distribution relationships.
2006 and 2005 Comparison operating income. Total revenues for individual fixed annuities
were up 7 percent in 2006 and operating income was up
Domestic Retirement Services total deposits decreased slightly for 21 percent primarily driven by higher partnership and yield
2006 compared to 2005. The decrease in total deposits reflects enhancement income. Individual variable annuity total revenues
lower fixed annuity sales that continued to face increased were up 7 percent in 2006, primarily driven by higher variable
competition from bank deposit products and money market funds annuity fees resulting from the increase in the equity markets.
offering very competitive short-term rates in the flat yield curve Offsetting somewhat the growth in total revenues was an increase
environment. This was partially offset by substantially higher in DAC amortization resulting from increased surrender activity in
individual variable annuity sales and group mutual fund deposits. the first half of 2006, with operating income up 2 percent for the
Individual variable annuity deposits grew 29 percent in 2006 from year. In 2006, the individual annuities runoff operating income
2005, reflecting growth in products with living benefit guarantee increased $15 million even though the underlying reserves
features. Group retirement deposits grew 6 percent in 2006, decreased. The higher income in 2006 was primarily due to
reflecting 51 percent growth in group mutual fund sales partially increased net spreads as a result of higher investment yields
offset by a 1 percent sales drop in annuity deposits. Over time, partially offset by increased realized capital losses and lower
this will result in a gradual reduction in overall profit margins of volumes due to the continued runoff of the business.
this business driven by the growth in the lower-margin mutual fund
products relative to the annuity products. Fixed annuity surrender 2005 and 2004 Comparison
rates increased in 2006 compared to 2005 due to products
coming out of their surrender charge period and the increased The Domestic Retirement Services businesses faced a challenging
competition from banks. Individual fixed annuity net flows for environment in 2005, as deposits declined approximately 18 per-
2006 were negative $2.7 billion compared to positive net flows of cent from 2004. The decrease in AIG’s individual variable annuity
$1.3 billion in 2005, reflecting both the lower deposits and higher product sales in 2005 was largely attributable to significant
surrenders, caused by the flat or inverted yield curve. variable annuity sales declines at several of AIG’s largest
Total domestic retirement service operating income for 2006 of distribution firms due to lackluster equity markets, more intense
$2.3 billion increased 7 percent from 2005. Group retirement industr y competition with regard to living benefit product features
products total revenues were flat in 2006 primarily due to and heightened compliance procedures over selling practices.
improvements in partnership income and variable annuity fees AIG’s introduction of more competitive guaranteed minimum
being offset by increased capital losses. The flat revenues, withdrawal features was delayed until late in the fourth quarter of
coupled with higher amortization of deferred acquisition costs 2005 due to filing delays associated with the restatements.
related to internal replacements of existing contracts into new During 2005, the interest yield curve flattened and, as a result,
contracts, resulted in a 4 percent decrease in group retirement competing bank products such as certificates of deposit and other
58 AIG 2006 Form 10-K