AIG 2007 Annual Report Download - page 118

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
Life Insurance & Retirement Services total revenues in 2007 enhancements and conversions, resulted in a net increase to
reflect growth in premiums and other considerations compared to operating income of $19 million during 2007. However, this net
2006 due principally to strong life insurance production in the increase resulted from a number of items that had varying effects
Foreign Life Insurance & Retirement Services operations, a on the results of operations of certain operating units and lines of
growing block of U.K. single premium investment-oriented products business. These adjustments resulted in an increase of $183 mil-
and higher policyholder charges related to universal life and sales lion in operating income for Foreign Life Insurance & Retirement
of payout annuities in the Domestic Life Insurance operations. Services and decreases in operating income of $52 million and
Overall growth in premiums and other considerations was damp- $112 million for Domestic Life Insurance and Domestic Retire-
ened by a continuing shift to interest sensitive products and the ment Services, respectively. In addition, the related adjustments
suspension of new sales on certain products in Japan resulting significantly affected both acquisition costs and incurred policy
from an industry wide review by the tax authorities. Net invest- losses and benefits in the Consolidated Statement of Income.
ment income increased in 2007 compared to 2006 due to higher Operating income in 2006 included an increase of $169 mil-
partnership and mutual fund income as well as higher policyholder lion for an out of period adjustment related to the accounting for
investment income and trading gains and losses (together, UCITS and an increase of $163 million for an out-of-period
policyholder trading gains). Policyholder trading gains are offset by adjustment related to corrections of par policyholder dividend
a charge to incurred policy losses and benefits expense. Policy- reserves and allocations between participating and non-participat-
holder trading gains increased due to higher levels of assets and ing accounts, both of which were related to remediation efforts. In
generally reflect the trend in equity markets. Policyholder trading addition, operating income in 2006 included charges to Domestic
gains were $2.9 billion in 2007 compared to $2.0 billion in 2006. Life Insurance operations of $125 million for the adverse Superior
Net investment income in 2006 included an increase of $240 mil- National arbitration ruling, $66 million related to the exit of the
lion for an out of period adjustment related to the accounting for domestic financial institutions credit life business and $55 million
UCITS. related to other litigation.
Operating income in 2007 was significantly adversely affected
by net realized capital losses which totaled $2.4 billion, net of an 2006 and 2005 Comparison
out-of-period adjustment of $158 million related to foreign ex- Life Insurance & Retirement Services revenues in 2006 increased
change remediation activities, compared to net realized capital compared to 2005. Growth in premiums and other considerations
gains of $88 million in 2006. Other factors affecting operating was dampened by the effect of foreign exchange, most notably by
income include trading account losses of $150 million in the U.K. the weakening Japanese Yen. Net investment income was higher
associated with certain investment-linked products, the adverse in 2006 compared to 2005 due to higher partnership and mutual
effect of $108 million related to SOP 05-1, which was adopted in fund income, which in 2006 included a positive out-of-period
2007, additional claim expense of $67 million relating to an adjustment of $240 million related to the accounting for UCITS.
industry wide regulatory review of claims in Japan (compared to Operating income grew by $1.2 billion from 2005, reflecting higher
additional claim expense of $26 million in 2006) and a $118 mil- revenues, including net realized capital gains, and out-of-period
lion charge related to remediation activities in Asia. Incurred reductions of policy benefits expense of $163 million in 2006
policyholder benefits increased $36 million in 2007 related to a resulting from corrections of par policyholder dividend reserves
closed block of Japanese business with guaranteed benefits. and allocations between participating and non-participating ac-
Partially offsetting these factors was a $52 million recovery in counts, both of which were related to remediation efforts. In
2007 related to the Superior National arbitration. SOP 05-1 addition, operating income in 2006 included charges for Domestic
generally requires DAC related to group contracts to be amortized Life Insurance of $125 million for the adverse Superior National
over a shorter duration than in prior periods and also requires arbitration ruling, $66 million related to the exit of the domestic
that DAC be expensed at the time an individual policy is financial institutions credit life business and $55 million related to
terminated or lapses, even if reinstated shortly thereafter. The other litigation.
effect of SOP 05-1 was most significant to the group products line
in the Domestic Life Insurance operations.
Changes in actuarial estimates, including DAC unlockings and
refinements to estimates resulting from actuarial valuation system
64 AIG 2007 Form 10-K