AIG 2007 Annual Report Download - page 84

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
AIG patiently builds relationships in markets around the world
Overview of Operations and Business Results
where it sees long-term growth opportunities. For example, the
AIG identifies its reportable segments by product or service line, fact that AIG has the only wholly owned foreign life insurance
consistent with its management structure. AIG’s major product operations in China, operating in 19 cities, is the result of
and service groupings are General Insurance, Life Insurance & relationships developed over nearly 30 years. AIG’s more recent
Retirement Services, Financial Services and Asset Management. extensions of operations into India, Vietnam, Russia and other
Through these operating segments, AIG provides insurance, emerging markets reflect the same growth strategy. Moreover, AIG
financial and investment products and services to both busi- believes in investing in the economies and infrastructures of
nesses and individuals in more than 130 countries and jurisdic- these countries and growing with them. When AIG companies
tions. This geographic, product and service diversification is one enter a new jurisdiction, they typically offer basic protection and
of AIG’s major strengths and sets it apart from its competitors. savings products. As the economies evolve, AIG’s products evolve
AIG’s Other category consists of items not allocated to AIG’s with them, to more sophisticated and investment-oriented models.
operating segments. Growth for AIG may be generated internally as well as through
AIG’s subsidiaries serve commercial, institutional and individ- acquisitions which both fulfill strategic goals and offer adequate
ual customers through an extensive property-casualty and life return on capital. In October 2007, AIG expanded its Foreign
insurance and retirement services network. In the United States, General Insurance operations in Germany through the acquisition
AIG companies are the largest underwriters of commercial and of W¨urttembergische und Badische Versicherungs-AG (W¨uBa). In
industrial insurance and are among the largest life insurance and January 2007, American General Finance, Inc. (AGF) expanded its
retirement services operations as well. AIG’s Financial Services operations into the U.K. through the acquisition of Ocean Finance
businesses include commercial aircraft and equipment leasing, and Mortgages Limited, a finance broker for home owner loans in
capital markets operations and consumer finance, both in the the U.K.
United States and abroad. AIG also provides asset management
services to institutions and individuals. As part of its Spread- Outlook
Based Investment activities, and to finance its operations, AIG
General Trends
issues various debt instruments in the public and private markets.
AIG’s operating performance reflects implementation of various In mid-2007, the U.S. residential mortgage market began to
long-term strategies and defined goals in its various operating experience serious disruption due to credit quality deterioration in
segments. A primary goal of AIG in managing its General a significant portion of loans originated, particularly to non-prime
Insurance operations is to achieve an underwriting profit. To and subprime borrowers; evolving changes in the regulatory
achieve this goal, AIG must be disciplined in its risk selection, environment; a slower residential housing market; increased cost
and premiums must be adequate and terms and conditions of borrowings for mortgage participants; and illiquid credit
appropriate to cover the risks accepted and expenses incurred. markets.
AIG has commenced a realignment to simplify its Foreign AIG participates in the U.S. residential mortgage market in
General Insurance operations, many of which were historically several ways: AGF originates principally first-lien mortgage loans
conducted through branches of U.S. companies. On October 8, and to a lesser extent second-lien mortgage loans to buyers and
2007, AIU Insurance Company announced the conversion of its owners of residential housing; United Guaranty Corporation (UGC)
existing China branches into AIG General Insurance Company provides first loss mortgage guaranty insurance for high loan-to-
China Limited, the first non-Chinese owned general insurance value first- and second-lien residential mortgages; AIG insurance
company established in China. This subsidiary assumed the and financial services subsidiaries invest in mortgage-backed
existing business portfolio, assets and liabilities of the China securities and CDOs, in which the underlying collateral is
branches. On October 15, 2007, AIG General Insurance (Taiwan) composed in whole or in part of residential mortgage loans; and
Co., Ltd. (AIGGI Taiwan) announced the completion of its merger AIGFP provides credit protection through credit default swaps on
with AIU Insurance Company Taiwan Branch. On December 1, certain super senior tranches of collateralized debt obligations
2007, Landmark Insurance Company Limited, a U.K. subsidiary, (CDOs), a significant majority of which have AAA underlying or
assumed all of the insurance liabilities of the U.K. branch of New subordinate layers.
Hampshire Insurance Company and changed its name to AIG U.K. Disruption in the U.S. residential mortgage market may also
Ltd. On January 1, 2008, AIU Insurance Company ceased increase claim activity in the financial institution segment of AIG’s
participating in the Domestic General Insurance pooling arrange- D&O and professional liability classes of business. However,
ment. These ongoing simplification efforts are expected to result based on its review of information currently available, AIG believes
in better utilization of capital and a lower effective tax rate. overall loss activity for the broader D&O and professional liability
A central focus of AIG operations in recent years has been the classes is likely to remain within or near the levels observed
development and expansion of distribution channels. In 2007, AIG during the last several years, which include losses related to
continued to expand its distribution channels, which now include stock options backdating as well as to the U.S. residential
banks, credit card companies, television-media home shopping, mortgage market.
affinity groups, direct response, worksite marketing and The operating results of AIG’s consumer finance and mortgage
e-commerce. guaranty operations in the United States have been and are likely
30 AIG 2007 Form 10-K