AIG 2006 Annual Report Download - page 77

American International Group, Inc. and Subsidiaries
AIG’s leadership position in the distribution of annuities through variable annuity markets. The group annuity market is undergoing
banks in Japan, ALICO launched new life products in this a transition from group annuities to mutual fund products that
distribution channel. Although ALICO’s direct marketing activities have lower profit margins.
in Japan could experience a contraction while it re-positions its Globally, heightened regulatory scrutiny of financial services
brand and products in a very competitive market, AIG expects that companies in many jurisdictions has the potential to affect future
further deregulation will provide additional growth opportunities. In financial results through higher compliance costs. This is particu-
addition, AIG expects that the planned integration of AIG Star Life larly true in Japan and Southeast Asia where financial institutions
and AIG Edison Life will provide enhanced distribution opportuni- have received remediation orders affecting consumer and policy-
ties and scale economies with an anticipated completion date of holder rights.
2009. Within Financial Services, demand for ILFC’s modern, fuel
AIG is a leader in direct marketing through sponsors and in the efficient aircraft remains strong, and ILFC plans to increase its
broad market in Japan and Korea, and AIG is investing in fleet by purchasing 83 aircraft in 2007. However, ILFC’s margins
expanding distribution channels in India, Korea and Vietnam. may be adversely affected by further increases in interest rates.
Through new operations in Bahrain designed to comply with AIGFP expects opportunities for growth across its product seg-
Islamic law, AIG is tapping into a growing market. Islamic ments, but AIGFP is a transaction-oriented business, and its
insurance, called Takaful, is an alternative to conventional insur- operating results will depend to a significant extent on actual
ance based on the concept of mutual assistance through pooling transaction flow, which can be affected by market conditions and
of resources. other variables outside its control. AIG continues to explore
Domestically, AIG plans to continue expansion of its Life opportunities to expand its Consumer Finance operations into new
Insurance & Retirement Services businesses through direct foreign markets. Consumer Finance operations overseas were
marketing and independent agent distribution channels. The aging negatively affected in 2006 by industry-wide credit deterioration in
population in the U.S. provides a growth opportunity for a variety the Taiwan credit card market, however, and operating results in
of products, including longevity, guaranteed income and supple- the U.S. could be affected by the residential housing market,
mental accident and health products. Certain other demographic interest rates and unemployment.
groups that have traditionally been underserved provide additional The GIC portfolio, which is reported within the Asset Manage-
growth opportunities. The home service operation, a slow growth ment segment, continues to run off and the MIP has replaced the
business, has not met business objectives, although its cash flow GIC program as AIG’s principal institutional spread-based invest-
has been steady. Domestic group life/health operations continue ment activity. The MIP program is expected to continue to grow in
to face competitors with greater scale in group benefits. At the 2007. Because the asset mix under the MIP does not include the
end of 2006, AIG exited the financial institutions credit life alternative investments utilized in the GIC program, however, AIG
business in the U.S. as a result of competition from bank does not expect that the income growth in the MIP will offset the
products and low profit margins. The individual fixed annuities runoff in the GIC portfolio for the foreseeable future.
business will continue to be challenged due to the interest rate For a description of important factors that may affect the
environment and increased competition from bank products, while operations and initiatives described above, see Item 1A. Risk
lower margin variable annuity products with living benefits will Factors.
continue to be the product of consumer choice in the individual
Consolidated Results
The following table summarizes AIG’s consolidated revenues, income before income taxes, minority interest and
cumulative effect of accounting changes and net income for the years ended December 31, 2006, 2005 and 2004:
Years Ended December 31,
(in millions) 2006 2005 2004
Total revenues $113,194 $108,905 $97,666
Income before income taxes, minority interest and cumulative effect of accounting changes 21,687 15,213 14,845
Net income $ 14,048 $ 10,477 $ 9,839
FAS 133, decreasing revenues by $1.8 billion in 2006 and
2006 and 2005 Comparison
increasing revenues by $2.01 billion in 2005.
The 4 percent growth in revenues in 2006 was primarily Income before income taxes, minority interest and cumulative
attributable to the growth in net premiums earned and net effect of accounting changes increased 43 percent in 2006
investment income from General Insurance operations and growth compared to 2005, reflecting higher General Insurance and Life
in Life Insurance & Retirement Services GAAP premiums and net Insurance & Retirement Services operating income. These in-
investment income. Revenues in the Financial Services segment creases were partially offset by lower Financial Services operating
declined as a result of the effect of hedging activities for AIGFP income reflecting the effects of hedging activities that did not
that did not qualify for hedge accounting treatment under qualify for hedge accounting treatment under FAS 133. Results in
Form 10-K 2006 AIG 27