AIG 2006 Annual Report Download - page 116

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
with borrower payment options that allow for negative amortization term borrowing rates were 5.14 percent in 2006 compared to
of the principal balance. The secured non-real estate loans are 3.58 percent in 2005. AGF’s long-term borrowing rates were
secured by consumer goods, automobiles or other personal 5.05 percent in 2006 compared to 4.41 percent in 2005. AGF’s
property. Both secured and unsecured non-real estate loans and net charge-off ratio improved to 0.95 percent in 2006 from 1.19
retail sales finance receivables generally have a maximum term of percent in 2005. The improvement in the net charge-off ratio in
60 months. The core of AGF’s originations is sourced through its 2006 was primarily due to positive economic fundamentals. The
branches. However, a significant volume of real estate loans is U.S. economy continued to expand during the year, and the
also originated through broker relationships, and to lesser unemployment rate remained low, which improved the credit
extents, through correspondent relationships and direct mail quality of AGF’s portfolio. AGF’s delinquency ratio remained
solicitations. In the first quarter of 2006, two wholly owned relatively low, although it increased to 2.06 percent at Decem-
subsidiaries of AGF discontinued originating real estate loans ber 31, 2006 from 1.93 percent at December 31, 2005. AGF
through an arrangement with AIG Federal Savings Bank, a reduced the hurricane Katrina portion of its allowance for finance
federally chartered thrift, and began originating such loans under receivable losses to $15 million at December 31, 2006 after the
their own state licenses. reevaluation of its remaining estimated losses. AGF’s allowance
AIG’s foreign consumer finance operations are principally ratio was 2.01 percent at December 31, 2006 compared to
conducted through AIGCFG. AIGCFG operates primarily in emerging 2.20 percent at December 31, 2005.
and developing markets. AIGCFG has operations in Argentina, Revenues from the foreign consumer finance operations in-
China, Hong Kong, Mexico, Philippines, Poland, Taiwan and creased by approximately 19 percent in 2006 compared to 2005.
Thailand. Certain of the AIGCFG operations are owned in part or in Loan growth, particularly in Poland and Argentina, was the primary
whole by Life Insurance subsidiaries. Accordingly, the financial driver behind the higher revenues. Higher revenues were more
results of those companies are shared between Financial Services than offset, however, by AIGCFG’s $47 million share of the
and Life Insurance & Retirement Services according to their allowance for losses related to industry-wide credit deterioration in
ownership percentages. While products vary by market, the the Taiwan credit card market, increased cost of funds, and higher
businesses generally provide credit cards, unsecured and secured operating expenses in connection with expansion into new
non-real estate loans, term deposits, savings accounts, retail markets and distribution channels and new product promotions,
sales finance and real estate loans. AIGCFG originates finance resulting in lower operating income for 2006 compared to 2005.
receivables through its branches and direct solicitation. AIGCFG
also originates finance receivables indirectly through relationships 2005 and 2004 Comparison
with retailers, auto dealers, and independent agents. Revenues and operating income from the Consumer Finance
operations improved in 2005, both domestically and
Consumer Finance Results internationally.
2006 and 2005 Comparison Domestically, the relatively low interest rate environment
contributed to a high level of mortgage refinancing activity. AGF’s
Consumer Finance operating income decreased to $761 million,
real estate loans increased 21 percent during 2005 compared to
or 13 percent, in 2006 compared to 2005. Operating income from
2004. AGF’s short-term borrowing rates rose to 3.58 percent in
domestic consumer finance operations declined as a result of
2005 compared to 2.68 percent in 2004. AGF’s long-term
decreased originations and purchases of real estate loans and
borrowing rates were 4.41 percent in 2005 compared to 4.28 per-
margin compression resulting from increased interest rates and
cent in 2004. Despite high energy costs, the U.S. economy
flattened yield curves. The foreign operations operating income
continued to expand during 2005, improving consumer credit
decreased primarily due to the credit deterioration in the Taiwan
quality. Both AGF’s net charge-off ratio and delinquency ratio
credit card market.
improved in 2005 compared to 2004. AGF’s net charge-off ratio
Domestically, the U.S. housing market deteriorated throughout
improved to 1.19 percent in 2005 from 1.60 percent in 2004.
2006 and ended the year fairly weak compared to recent years.
The improvement in the net charge-off ratio in 2005 was primarily
As a result, the real estate loan portfolio decreased slightly during
due to the improving economy and a higher proportion of average
2006 due to lower refinancing activity. This lower refinancing
net receivables that were real estate loans. AGF’s delinquency
activity also caused a significant decrease in originations and
ratio at December 31, 2005 was 1.93 percent compared to
whole loan sales in AGF’s mortgage banking operation, which
2.31 percent at December 31, 2004. However, AGF incurred
resulted in a substantial reduction of revenue and operating
charges of approximately $62 million for the estimated effect of
income compared to the prior year. However, softening home
hurricane Katrina on customers in the Gulf Coast areas affected
prices (reducing the equity customers are able to extract from
by the storm. At December 31, 2005, AGF’s allowance ratio was
their homes when refinancing) and higher mortgage rates contrib-
2.20 percent compared to 2.26 percent at December 31, 2004.
uted to customers utilizing non-real estate loans, which increased
Foreign consumer finance operations performed well, as the
10 percent compared to 2005. Retail sales finance receivables
operations in Poland and Argentina recorded improved growth in
also increased 23 percent due to increased marketing efforts and
operating income. The Hong Kong businesses experienced im-
customer demand. Higher revenue resulting from portfolio growth
proved loan and earnings growth in a strengthening economy.
was more than offset by higher interest expense. AGF’s short-
66 AIG 2006 Form 10-K