AIG 2006 Annual Report Download - page 126

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
Special Purpose Vehicles and Off Balance Sheet Arrangements with an aggregate purchase price of $8 billion. AIG or its
subsidiaries from time to time may buy shares of its common
AIG transacts with special purpose vehicles (SPVs) in the ordinary stock in the open market for general corporate purposes, including
course of business. Many of these SPVs are included in the to satisfy its obligations under various employee benefit plans.
consolidated financial statements but some are off balance sheet. During 2006, ILFC purchased 17,000 shares of AIG common
AIG has guidelines with respect to the formation of and stock at an average cost of $72.18 per share to satisfy its
investment in SPVs and off balance sheet arrangements. In obligations under an employee benefit plan. See Capital Re-
addition, AIG has expanded the responsibility of its Complex sources and Liquidity — Liquidity for a discussion of possible
Structured Financial Transaction Committee (CSFT) to include the share repurchases in 2007.
review of any transaction that could subject AIG to heightened
legal, reputational, regulatory, accounting or other risk. See Dividends from Insurance Subsidiaries
Item 9A. Controls and Procedures — Management’s Report on
Internal Control Over Financial Reporting for a further discussion Payments of dividends to AIG by its insurance subsidiaries are
of the CSFT. subject to certain restrictions imposed by regulatory authorities.
For additional information related to AIG’s activities with With respect to AIG’s domestic insurance subsidiaries, the
respect to VIEs and certain guarantees, see Notes 1 and 18 of payment of any dividend requires formal notice to the insurance
Notes to Consolidated Financial Statements. department in which the particular insurance subsidiary is
domiciled. Under the laws of many states, an insurer may pay a
Shareholders’ Equity dividend without prior approval of the insurance regulator when
the amount of the dividend is below certain regulatory thresholds.
AIG’s consolidated shareholders’ equity increased during Other foreign jurisdictions may restrict the ability of AIG’s foreign
2006 and 2005 as follows: insurance subsidiaries to pay dividends. The most significant
(in millions) 2006 2005 foreign insurance regulatory jurisdictions include Bermuda, Japan,
Hong Kong, Taiwan, the United Kingdom, Thailand and Singapore.
Beginning of year $ 86,317 $79,673
Largely as a result of the restrictions, approximately 90 percent of
Net income 14,048 10,477
consolidated shareholders’ equity was restricted from immediate
Unrealized appreciation (depreciation)
transfer to AIG parent at December 31, 2006. See Regulation and
of investments, net of tax 1,735 (1,978)
Supervision herein. AIG cannot predict how recent regulatory
Cumulative translation adjustment,
investigations may affect the ability of its regulated subsidiaries to
net of tax 936 (540)
pay dividends. To AIG’s knowledge, no AIG company is currently on
Dividends to shareholders (1,690) (1,615)
Other* 331 300 any regulatory or similar ‘‘watch list’’ with regard to solvency. See
also Liquidity herein, Note 12 of Notes to Consolidated Financial
End of year $101,677 $86,317
Statements and Item 1A. Risk Factors — Liquidity.
* Reflects the effects of employee stock transactions and in 2006 also
reflects the cumulative effect of accounting changes, including the Regulation and Supervision
adoption of FAS 158. See Note 1(hh) of Notes to Consolidated Financial
Statements. AIG’s insurance subsidiaries, in common with other insurers, are
AIG has in the past reinvested most of its unrestricted subject to regulation and supervision by the states and jurisdic-
earnings in its operations and believes such continued reinvest- tions in which they do business. In the U.S., the NAIC has
ment in the future will be adequate to meet any foreseeable developed Risk-Based Capital (RBC) requirements. RBC relates an
capital needs. However, AIG may choose from time to time to individual insurance company’s statutory surplus to the risk
raise additional funds through the issuance of additional inherent in its overall operations.
securities. In preparing both its 2004 and 2005 audited statutory
In February 2007, AIG’s Board of Directors adopted a new financial statements for its Domestic General Insurance compa-
dividend policy, to take effect with the dividend to be declared in nies, AIG agreed with the relevant state regulatory authorities on
the second quarter of 2007, providing that under ordinary the statutory accounting treatment of the various items requiring
circumstances, AIG’s plan will be to increase its common stock adjustment or restatement. With respect to the 2004 audited
dividend by approximately 20 percent annually. statutory financial statements, these adjustments and restate-
ments reduced previously reported General Insurance statutory
surplus at December 31, 2004 by approximately $3.5 billion, to
Share Repurchases
approximately $20.6 billion. With respect to the 2005 audited
During 2006, AIG did not purchase any shares of its common statutory financial statements, the state regulators permitted the
stock under its existing share repurchase authorization. At Domestic General Insurance companies to record a $724 million
December 31, 2006, an additional 36,542,700 shares could be reduction to opening statutory surplus as of January 1, 2005.
purchased under the then current authorization by AIG’s Board of AIG’s insurance subsidiaries file financial statements prepared
Directors. In February 2007, AIG’s Board of Directors increased in accordance with statutory accounting practices prescribed or
the repurchase program by authorizing the repurchase of shares
76 AIG 2006 Form 10-K