AIG 2007 Annual Report Download - page 88

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
interest rate and foreign currency exchange rate disruptions. each fund’s per formance as of the balance sheet date. Future
Reported results may be volatile due to certain hedges not fund performance may negatively affect previously recognized
qualifying for hedge accounting treatment. carried interest.
In the Institutional Asset Management business, carried inter- For a description of important factors that may affect the
est, computed in accordance with each fund’s governing agree- operations and initiatives described above, see Item 1A. Risk
ment, is based on the investment’s performance over the life of Factors.
each fund. Unrealized carried interest is recognized based on
Consolidated Results
The following table summarizes AIG’s consolidated revenues, income before income taxes, minority interest and
cumulative effect of accounting changes and net income for the years ended December 31, 2007, 2006 and 2005:
Percentage Increase/(Decrease)
Years Ended December 31,
(in millions) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005
Total revenues $110,064 $113,387 $108,781 (3)% 4%
Income before income taxes, minority interest and
cumulative effect of accounting changes 8,943 21,687 15,213 (59) 43
Net income $ 6,200 $ 14,048 $ 10,477 (56)% 34%
Income before income taxes, minority interest and cumulative
Effect of Credit Market Events in the Fourth Quarter of
effect of accounting changes declined in 2007 due to the losses
2007
described above, partially offset by the favorable effects in 2007
AIG reported a net loss of $8.4 billion before tax ($5.2 billion of the application of hedge accounting under Statement of
after tax) in the fourth quarter of 2007 as a result of severe Financial Accounting Standards No. 133, ‘‘Accounting for Deriva-
credit market disruption. Contributing to this loss was an tive Instruments and Hedging Activities’’ (FAS 133). In 2007,
$11.5 billion pre-tax charge for the unrealized market valuation AIGFP applied hedge accounting to certain of its interest rate
loss on AIGFP’s super senior credit default swap portfolio. Net swaps and foreign currency forward contracts hedging its invest-
realized capital losses totaled $2.6 billion before tax in the fourth ments and borrowings. As a result, AIGFP recognized in earnings
quarter of 2007, arising primarily from other-than-temporary the change in the fair value of the hedged items attributable to
impairment charges in AIG’s investment portfolio, with an addi- the hedged risks, substantially offsetting the gains and losses on
tional $643 million impairment charge related to Financial Ser- the derivatives designated as hedges. In 2006, AIGFP did not
vices securities available for sale reported in other income. Also apply hedge accounting to any of its assets and liabilities.
contributing to the operating loss for the fourth quarter was an
operating loss of $348 million before tax from Mortgage Guaranty 2006 and 2005 Comparison
from continued deterioration in the U.S. residential housing
The increase in revenues in 2006 compared to 2005 was
market.
primarily attributable to the growth in Premiums and other
considerations and Net investment income in the General Insur-
2007 and 2006 Comparison
ance and Life Insurance & Retirement Services segments.
AIG’s consolidated revenues decreased in 2007 compared to Revenues in the Financial Services segment declined as a result
2006 as growth in Premiums and other considerations and Net of the effect of hedging activities for AIGFP that did not qualify for
investment income in the General Insurance and Life Insurance & hedge accounting treatment under FAS 133, decreasing revenues
Retirement Services segments were more than offset by higher by $1.8 billion in 2006 and increasing revenues by $2.0 billion in
Net realized capital losses compared to 2006 and an unrealized 2005.
market valuation loss of $11.5 billion on AIGFP’s super senior Income before income taxes, minority interest and cumulative
credit default swap portfolio recorded in other income. Net effect of accounting changes increased in 2006 compared to
realized capital losses of $3.6 billion in 2007 included other-than- 2005, reflecting higher General Insurance and Life Insurance &
temporary impairment charges of the fair value of investments of Retirement Services operating income. These increases were
$4.1 billion, primarily related to the significant disruption in the partially offset by lower Financial Services operating income
residential mortgage and credit markets, and foreign currency reflecting the effects of hedging activities that did not qualify for
related losses of $500 million. Similarly, AIG recorded in other hedge accounting treatment under FAS 133. Results in 2005
income, other-than-temporary impairment charges of $643 million reflected the negative effect of $3.3 billion (pre-tax) in catastro-
related to its Financial Services securities available for sale phe-related losses incurred that year. Net income in 2005 also
reported in other income. Total other-than-temporar y impairment reflected the charges related to regulatory settlements, as
charges in 2006 were $944 million. See Invested Assets — Other- described in Item 3. Legal Proceedings, and the fourth quarter
than-temporary impairments herein.
34 AIG 2007 Form 10-K