AIG 2006 Annual Report Download - page 109

American International Group, Inc. and Subsidiaries
money market instruments with shorter durations than AIG’s In 2006, surrender rates increased for individual fixed annui-
individual fixed annuity products became more attractive. ties, group retirement products and individual variable annuities.
Total Domestic Retirement Services operating income for 2005 The increase in surrender rate for fixed annuities continues to be
of $2.2 billion increased 5 percent compared to 2004 operating driven by the shape of the yield curve and general aging of the in-
income of $2.1 billion. Total revenues for the group retirement force block; however, less than 20 percent of the individual fixed
products increased 5 percent in 2005 compared to 2004 while annuity reserves as of December 31, 2006 were available to be
operating income increased 7 percent, primarily due to higher surrendered without charge. Surrender rates for group retirement
variable annuity fee income and lower realized capital losses. products increased only slightly as a result of successful retention
Individual fixed annuity total revenues were up 6 percent in 2005 efforts. In 2006, new products were introduced to retain assets
primarily due to an increase in net investment income, partially and AIG has retained or attracted over $1 billion in assets.
offset by higher realized capital losses. Operating income for Individual variable annuity surrender rates for 2006 primarily
individual fixed annuities increased primarily due to the increase in reflect higher shock-lapses that occur following expiration of the
net investment income from growth in average reserves and surrender charge period on certain 3-year and 7-year contracts,
higher surrender charges, partially offset by the higher level of although the trend moderated during the year. Reflecting a
realized capital losses. Individual variable annuities total revenues widespread industry phenomenon, this lapse rate, much of which
were up 9 percent in 2005, primarily driven by higher variable was anticipated when the products were issued, has recently been
annuity fees resulting from the increase in the equity markets in affected by investor demand to exchange existing policies for new-
the fourth quarter of 2004 and an increase in realized capital generation contracts with living benefits or lower fees. In addition,
gains. The 7 percent growth in individual variable annuities income the high lapse rates are in part due to the surrenders within
was consistent with the overall growth in reserves. In 2005, the certain acquired blocks of business.
individual annuities runoff operating income increased $22 million A further increase in the level of surrenders in any of these
even though the underlying reserves decreased. The higher businesses or in the individual fixed annuities runoff block could
income in 2005 was due to lower interest crediting rates and accelerate the amortization of DAC and negatively affect fee
lower DAC amortization due to lower surrenders. income earned on assets under management.
The following table presents the net flows by line of
Domestic Retirement Services Supplemental Data business for 2006, 2005 and 2004:
The following table presents deposits for 2006, 2005 and Net Flows(a)
2004: (in millions) 2006 2005 2004
(in millions) 2006 2005 2004 Group retirement products(b) $ 467 $ 628 $ 1,706
Individual fixed annuities (2,697) 1,288 5,936
Group retirement products:
Individual variable annuities (114) (336) 1,145
Annuities $ 5,464 $ 5,532 $ 5,555
Individual fixed annuities — runoff (1,009) (818) (714)
Mutual funds 1,361 904 947
Individual fixed annuities 5,330 6,861 9,713 Total $(3,353) $ 762 $ 8,073
Individual variable annuities 4,266 3,319 4,126
(a) Net flows are defined as deposits received less benefits, surrenders,
Individual fixed annuities — runoff 56 67 77 withdrawals and death benefits.
Total $16,477 $16,683 $20,418 (b) Includes mutual funds.
The combination of lower deposits and higher surrenders in the
The following table presents the amount of reserves by
individual fixed annuity and individual fixed annuity-runoff blocks,
surrender charge category as of December 31, 2006:
which include closed blocks of business from acquired companies
Group Individual Individual or terminated distribution relationships, resulted in negative net
Retirement Fixed Variable
(in millions) Products* Annuities Annuities flows for 2006. The continuation of the current interest rate and
competitive environment could prolong this trend.
Zero or no surrender charge $42,741 $10,187 $11,467
0% — 2% 6,921 4,503 4,869
Greater than 2% — 4% 4,573 6,422 4,830
Greater than 4% 2,842 28,109 9,836
Non-Surrenderable 877 3,464 91
Total $57,954 $52,685 $31,093
* Excludes mutual funds.
Form 10-K 2006 AIG 59