AIG 2006 Annual Report Download - page 78

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
2005 reflected the negative effect of $3.28 billion (pre-tax) in stemming from deferred tax adjustments in Foreign Life of
catastrophe-related losses incurred that year. Net income in 2005 $190 million ($124 million after tax), an increase in insurance
also reflected the charges related to regulatory settlements, as operating expenses of $61 million ($40 million after tax) within
described in Item 3. Legal Proceedings, and the fourth quarter Foreign Life for corrections of expense allocations to certain par
charge resulting from the annual review of General Insurance loss fund accounts, and a $79 million ($51 million after tax) charge
and loss adjustment reserves. related to purchases of life insurance policies for AIG’s life
settlements portfolio that were issued by AIG subsidiaries.
During 2006, AIG identified and recorded out of period
2005 and 2004 Comparison
adjustments related to the accounting for certain interests in unit
Revenues grew 12 percent in 2005 compared to 2004 primarily investment trusts in accordance with FIN 46(R), ‘‘Consolidation of
due to the growth in net premiums earned from General Insurance Variable Interest Entities’’ and APB Opinion No. 18, ‘‘The Equity
operations as well as growth in both General Insurance and Life Method of Accounting for Investments in Common Stock.’’ These
Insurance & Retirement Services net investment income and Life investments had previously been accounted for as available for
Insurance & Retirement Services GAAP premiums. Hedging activi- sale securities, with changes in market values being reflected in
ties for AIGFP that did not qualify for hedge accounting treatment other comprehensive income, net of deferred income taxes.
under FAS 133 caused an increase in Financial Services revenues Beginning with the second quarter of 2006, the changes in
of $2.01 billion in 2005 and a decrease of $122 million in 2004. market values are included in net investment income. The
AIG’s income before income taxes, minority interest and adjustments decreased unrealized appreciation (depreciation) of
cumulative effect of accounting changes increased 2 percent in investments — net of reclassification adjustments, and the related
2005 compared to 2004. Life Insurance & Retirement Services, deferred income tax benefit (expense), in the Consolidated
Financial Services and Asset Management operating income gains Statement of Comprehensive Income (Loss) by approximately
accounted for the increase over 2004 in both pretax income and $659 million and approximately $231 million, respectively, and
net income. Offsetting these gains was the effect of the charges increased net investment income by $844 million, increased
related to regulatory settlements. Incurred policy losses and benefits (related to certain participating
policyholder funds) by $71 million, increased Income taxes by
Remediation and Other Items $231 million and increased minority interest expense by $114
million in the Consolidated Statement of Income. There was no
Throughout 2006, as part of its continuing remediation efforts,
effect on Total shareholders’ equity at December 31, 2006 or
AIG recorded out of period adjustments. The net effect of out of
December 31, 2005.
period adjustments relating to prior years increased 2006 net income
Results for 2006 were negatively affected by a one-time
by $65 million. The more significant adjustments included increases
charge relating to the Starr tender offer ($54 million before and
in unit investment trust income of $773 million ($428 million after
after tax) and an additional allowance for losses in AIG Credit
tax) (more fully described below) and other expenses of $356 million
Card Company (Taiwan) ($94 million before and after tax).
($231 million after tax), and a decrease in revenues for certain
The effective income tax rate increased from 28.0 percent for
derivative transactions of $300 million ($145 million after tax).
2005 to 30.1 percent for 2006, reflecting changes in the sources
During the fourth quarter, as part of its ongoing remediation
of foreign taxable income, the effect of the phase out of synfuel
efforts, AIG recorded out of period adjustments. These adjust-
tax credits, the effect of consolidating certain limited partnerships
ments collectively increased net income in the fourth quarter by
and a reduction in the proportion of total income derived from tax
$56 million but were offset by fourth quarter charges to expense
exempt income, which was partially offset by the aforementioned
within Domestic Life for the adverse ruling in the Superior National
out of period income tax adjustments.
arbitration of $125 million ($81 million after tax) and a charge of
There were no significant catastrophe-related losses for the
$66 million ($43 million after tax) in connection with the exit of
year ended December 31, 2006.
the financial institutions credit life business. The more significant
out of period adjustments included the following: a decrease in The following table summarizes the net effect of
income tax expense of $181 million relating to AIG’s ongoing catastrophe-related losses for the years ended
remediation of internal controls over income tax accounting, an December 31, 2005 and 2004.
increase in other expenses of $167 million ($109 million after
(in millions) 2005 2004
tax) relating to AIG’s remediation of internal controls over
reconciliation of certain balance sheet accounts, an increase in Pretax* $3,280 $1,155
incurred policy losses and benefits of $103 million ($67 million Net of tax and minority interest 2,109 729
after tax) in Domestic General Insurance for corrections of certain
* Includes $312 million and $96 million in catastrophe-related losses from
reserves for losses and loss expenses, a reduction in incurred
partially owned companies in 2005 and 2004, respectively.
policy benefits in the Foreign Life participating policyholder fund
28 AIG 2006 Form 10-K