AIG 2007 Annual Report Download - page 140

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
2006, AGF recorded a net loss of $89 million on its derivatives allowance for losses related to industrywide credit deterioration in
that did not qualify for hedge accounting under FAS 133, including the Taiwan credit card market, increased cost of funds, and higher
the related foreign exchange losses, compared to a net gain of operating expenses in connection with expansion into new
$69 million in 2005. AGF’s net charge-off ratio improved to markets and distribution channels and new product promotions,
0.95 percent in 2006 from 1.19 percent in 2005. The improve- resulting in lower operating income in 2006 compared to 2005.
ment in the net charge-off ratio in 2006 was primarily due to
positive economic fundamentals. The U.S. economy continued to Asset Management Operations
expand during the year, and the unemployment rate remained low, AIG’s Asset Management operations comprise a wide variety of
which improved the credit quality of AGF’s portfolio. AGF’s investment-related services and investment products. Such ser-
delinquency ratio remained relatively low, although it increased to vices and products are offered to individuals, pension funds and
2.06 percent at December 31, 2006 from 1.93 percent at institutions (including AIG subsidiaries) globally through AIG’s
December 31, 2005. AGF reduced the hurricane Katrina portion of Spread-Based Investment business, Institutional Asset Manage-
its allowance for finance receivable losses to $15 million at ment and Brokerage Services and Mutual Funds businesses. Also
December 31, 2006 after the reevaluation of its remaining included in Asset Management operations are the results of
estimated losses. AGF’s allowance ratio was 2.01 percent at certain SunAmerica sponsored par tnership investments.
December 31, 2006 compared to 2.20 percent at December 31, The revenues and operating income for this segment are
2005. affected by the general conditions in the equity and credit
Revenues from the foreign consumer finance operations in- markets. In addition, net realized gains and performance fees are
creased by approximately 13 percent in 2006 compared to 2005. contingent upon various fund closings, maturity levels and market
Loan growth, particularly in Poland and Argentina, was the primary conditions.
driver behind the higher revenues. Higher revenues were more
than offset, however, by AIGCFG’s $47 million share of the
Asset Management Results
Asset Management results were as follows:
Percentage Increase/(Decrease)
(in millions) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005
Revenues:
Spread-Based Investment business $2,023 $2,713 $2,973 (25)% (9)%
Institutional Asset Management* 2,900 1,240 1,026 134 21
Brokerage Services and Mutual Funds 322 293 257 10 14
Other Asset Management 380 297 326 28 (9)
Total $5,625 $4,543 $4,582 24% (1)%
Operating income:
Spread-Based Investment business $ (89) $ 732 $1,194 —% (39)%
Institutional Asset Management* 784 438 387 79 13
Brokerage Services and Mutual Funds 100 87 66 15 32
Other Asset Management 369 281 316 31 (11)
Total $1,164 $1,538 $1,963 (24)% (22)%
* Includes the effect of consolidating the revenues and operating loss of warehoused investments totaling $778 million and $164 million, respectively, in
2007, a portion of which is offset in minority interest expense.
creases were higher partnership income, increased gains on real
2007 and 2006 Comparison
estate investments and a gain on the sale of a portion of AIG’s
Asset Management revenues increased in 2007 compared to investment in Blackstone Group, L.P. in connection with its initial
2006 primarily due to increased partnership income, management public offering.
fees, carried interest and the effect of consolidating several In order to better align financial reporting with the manner in
warehoused investments. AIG consolidates the operating results which AIG’s chief operating decision makers manage their busi-
of warehoused investments until such time as they are sold or nesses, beginning in 2007, net realized capital gains and losses,
otherwise divested. and foreign exchange transaction gains and losses, which were
Asset Management operating income decreased in 2007 previously reported as part of AIG’s Other category, are now
compared to 2006, due to foreign exchange, interest rate and included in Asset Management revenues and operating income. In
credit-related mark to market losses and other-than-temporary addition, revenues and operating income related to foreign
impairment charges on fixed income investments. These other- investment-type contracts, which were historically reported as a
than-temporary impairment charges were due primarily to changes component of the Spread-Based Investment business, are now
in market liquidity and spreads. Partially offsetting these de-
86 AIG 2007 Form 10-K