AIG 2007 Annual Report Download - page 139

American International Group, Inc. and Subsidiaries
AIGCFG has operations in Argentina, China, Hong Kong, Mexico, AGF’s net finance receivables totaled $25.5 billion at Decem-
Philippines, Poland, Taiwan and Thailand and began operations in ber 31, 2007, an increase of approximately $1.2 billion compared
India in 2007 through the acquisition of a majority interest in a to December 31, 2006, including $19.5 billion of real estate
sales finance lending operation and the acquisition of a mortgage secured loans, most of which were underwritten with full income
lending operation. In addition, in 2007, AIGCFG expanded its verification. The increase in the net finance receivables resulted in
distribution channels in Thailand by acquiring an 80 percent a similar increase in revenues generated from these assets.
interest in a company with a network of over 130 branches for Although real estate loan originations declined in 2007, the
secured consumer lending. AIGCFG is continuously exploring softening of home price appreciation (reducing the equity custom-
expansion opportunities in its existing operations as well as new ers may be able to extract from their homes by refinancing)
geographic locations throughout the world. contributed to an increase in non-real estate loans of 11 percent
Certain of the AIGCFG operations are partly or wholly owned by at December 31, 2007 compared to December 31, 2006. Retail
life insurance subsidiaries of AIG. Accordingly, the financial results sales finance receivables also increased 13 percent compared to
of those companies are allocated between Financial Services and December 31, 2006 due to increased marketing efforts and
Life Insurance & Retirement Services according to their ownership customer demand. AGF’s centralized real estate operations fi-
percentages. While products vary by market, the businesses nance receivables were essentially unchanged while branch
generally provide credit cards, unsecured and secured non-real business segment finance receivables increased by 8 percent
estate loans, term deposits, savings accounts, retail sales finance during 2007.
and real estate loans. AIGCFG originates finance receivables AGF’s allowance for finance receivable losses as a percentage
through its branches and direct solicitation. AIGCFG also of outstanding receivables was 2.36 percent at December 31,
originates finance receivables indirectly through relationships with 2007 compared to 2.01 percent at December 31, 2006.
retailers, auto dealers, and independent agents. Revenues from the foreign consumer finance operations in-
creased by 29 percent in 2007 compared to 2006. Loan growth,
particularly in Poland, Thailand and Latin America, was the
Consumer Finance Results
primary driver of the increased revenues. The increase in
2007 and 2006 Comparison
revenues was more than offset by higher expenses associated
Consumer Finance operating income decreased in 2007 compared with branch expansions, acquisition activities and product promo-
to 2006. Operating income from the domestic consumer finance tion campaigns. Operating income in 2006 reflects AIGCFG’s
operations, which include the operations of AGF and AIG Bank, $47 million share of the allowance for losses related to industry-
decreased by $509 million, or 77 percent, in 2007 compared to wide credit deterioration in the Taiwan credit card market.
2006. In 2007, domestic results were adversely affected by the
weakening housing market and tighter underwriting guidelines, 2006 and 2005 Comparison
which resulted in lower originations of real estate loans as well as
Consumer Finance operating income decreased in 2006 compared
the $178 million charge discussed above.
to 2005. Operating income from domestic consumer finance
AGF’s revenues decreased $95 million or 3 percent during
operations declined by $193 million, or 23 percent as a result of
2007 compared to 2006. Revenues from AGF’s mortgage banking
decreased originations and purchases of real estate loans and
activities decreased $389 million during 2007 compared to 2006,
margin compression resulting from increased interest rates and
which includes the charges relating to the Supervisory Agreement.
flattened yield curves. The foreign operations operating income
The decrease in revenues also reflects a significantly reduced
decreased primarily due to the credit deterioration in the Taiwan
origination volume, lower yields based on market conditions,
credit card market.
tighter underwriting guidelines, reduced margins on loans sold
Domestically, the U.S. housing market deteriorated throughout
and higher warranty reserves, which cover obligations to repur-
2006 and as a result, the real estate loan portfolio decreased
chase loans sold to third-party investors should there be a first
slightly during 2006 due to lower refinancing activity. This lower
payment default or breach of representations and warranties.
refinancing activity also caused a significant decrease in origina-
AGF’s revenues in 2007 also included a recovery of $65 million
tions and whole loan sales in AGF’s mortgage banking operation,
from a favorable out of court settlement.
which resulted in a substantial reduction of revenue and operating
AGF’s operating income decreased in 2007 compared to 2006,
income compared to the prior year. However, softening home
due to reduced residential mortgage origination volumes, lower
prices (reducing the equity customers are able to extract from
revenues from its mortgage banking activities and increases in
their homes when refinancing) and higher mortgage rates contrib-
the provision for finance receivable losses. AGF’s interest expense
uted to customers utilizing non-real estate loans, which increased
increased by $81 million or seven percent as its borrowing rate
10 percent compared to 2005. Retail sales finance receivables
increased in 2007 compared to 2006. During 2007, AGF recorded
also increased 23 percent due to increased marketing efforts and
a net loss of $28 million on its derivatives that did not qualify for
customer demand. Higher revenue resulting from portfolio growth
hedge accounting under FAS 133, including the related foreign
was more than offset by higher interest expense. AGF’s short-
exchange losses, compared to a net loss of $89 million in 2006.
term borrowing rates were 5.14 percent in 2006 compared to
Commencing in the second quarter of 2007, AGF began applying
3.58 percent in 2005. AGF’s long-term borrowing rates were
hedge accounting.
5.05 percent in 2006 compared to 4.41 percent in 2005. During
AIG 2007 Form 10-K 85