AIG Annual Report 2007 (pdf document) free file download at fliiby.com

"Annual Report A M E R I C A N I N T E R N A T I O N A L G R O U P, I N C . ABOUT AIG American International Group, Inc. (AIG), a world leader in insurance and ﬁnancial services, is the leading international insurance organization, with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, ﬁnancial services and asset management around the world. AIG’s common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo. CONTENTS Financial Highlights Letter to Shareholders AIG: What We See AIG at a Glance Review of Operations Reconciliation in Accordance with Regulation G Five Year Summary of Consolidated Operations Five Year Summary of Selected Financial Information Supplemental Financial Information Board of Directors Corporate Directory Annual Report on Form 10-K Shareholder Information Inside Back Cover 1 2 11 24 26 42 43 44 46 50 51 ABOUT THE COVER AIG headquarters at 70 Pine Street is an Art Deco landmark and the tallest skyscraper in Lower Manhattan. In 1976, AIG purchased the 66-story building, which is crowned with a glass-enclosed observatory that offers a panoramic view of New York City and its surroundings. Today, it is an icon of AIG’s global stature in the insurance and ﬁnancial services businesses. FINANCIAL HIGHLIGHTS (in millions, except per share data and ratios) 2007 2006 % Change Net income(a) Net realized capital gains (losses), net of tax Capital Markets other-than-temporary impairments, net of tax(b) FAS 133 gains (losses), net of tax Cumulative effect of an accounting change, net of tax Adjusted net income (c) Net income, per common share —diluted Adjusted net income, per common share —diluted(c) Book value per common share Revenues(d)(e)(f) Assets Shareholders’ equity General Insurance combined loss and expense ratio General Insurance combined loss and expense ratio, excluding catastrophe losses $ 6,200 (2,386) (418) (304) — 9,308 2.39 3.58 37.87 $ 110,064 1,060,505 95,801 90.33 89.73 $ 14,048 33 — (1,424) 34 15,405 5.36 5.88 39.09 $ 113,387 979,410 101,677 89.06 89.06 (55.9) — — — — (39.6) (55.4) (39.1) (3.1) (2.9) 8.3 (5.8) Net Income (a) (billions of dollars) Net Income per Common Share—Diluted (dollars) Book Value per Common Share (dollars) 14.0 39.09 5.36 33.24 30.69 37.87 9.8 8.1 10.5 3.73 3.07 6.2 3.99 26.54 2.39 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Revenues (d)(e) (f ) (billions of dollars) Assets (billions of dollars) Shareholders’ Equity (billions of dollars) 108.8 97.8 79.6 113.4 110.1 853.0 1,060.5 979.4 86.3 79.7 69.2 801.0 675.6 101.7 95.8 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 Certain reclassifications have been made to prior period amounts to conform to the current period presentation. (a) In 2007 and 2006, includes out of period increases (decreases) of $(399) million and $65 million, respectively. (b) Represents Capital Markets other-than-temporary impairments on securities available for sale. (c) In 2007 and 2006, includes out of period increases (decreases) of $(261) million and $85 million, respectively. (d) In 2007 and 2006, includes other-than-temporary impairment charges of $4.7 billion and $944 million, respectively. Also in 2007 and 2006, includes gains (losses) of $(1.44) billion and $(1.87) billion, respectively, from hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. (e) In 2006, includes a $730 million increase in revenue for out of period adjustments related to the accounting for UCITS. (f) In 2007, includes an unrealized market valuation loss of $11.5 billion on AIGFP's super senior credit default swap portfolio. AIG 2007 Annual Report 1 DEAR FELLOW SHAREHOLDERS: Martin J. Sullivan President and Chief Executive Ofﬁcer We remain conﬁdent in our strategy to leverage our ﬁnancial strength and global franchise to continue our growth in both emerging and developed markets. fter a promising start, 2007 had a disappointing conclusion, both in terms of our results and share price performance. The U.S. credit crisis, recession fears and record-high oil prices caused economic disruption and uncertainty. In addition, some of our businesses did not meet expectations. Nevertheless, the fundamental strength of our core operations is intact, and we made important advances in key markets. We remain conﬁdent in our strategy to leverage our ﬁnancial strength and global franchise to continue our growth in both emerging and developed markets. Although it appears economic conditions will not be any better in 2008, we continue to see many opportunities to deliver quality insurance and ﬁnancial products and services to customers around the world. A 2007 Results AIG reported net income of $6.20 billion, or $2.39 per diluted share for 2007, compared to $14.05 billion, or $5.36 per diluted share for 2006. Full year 2007 adjusted net income, excluding the effect of economically effective hedging activities that did not qualify for hedge accounting treatment under FAS 133, and the related foreign exchange gains and losses, was $9.31 billion, or $3.58 per diluted share, compared to $15.41 billion, or $5.88 per diluted share for 2006. Included in 2007 net income and adjusted net income was a charge of $11.47 billion pretax ($7.46 billion after tax) for unrealized market valuation losses related to the AIG Financial Products Corp. (AIGFP) super senior credit default swap portfolio. Based upon its most current analysis, AIG believes any losses that are realized over time on the super senior credit default swap portfolio of AIGFP will not be material to AIG’s 2 AIG 2007 Annual Report overall ﬁnancial condition, although it is possible that realized losses could be material to AIG’s consolidated results of operations for an individual reporting period. Full year results also include pretax net realized capital losses of $3.59 billion. Consolidated assets increased in 2007 to $1.061 trillion, up from $979.41 billion in 2006. At year end, book value per share stood at $37.87, down from $39.09 at the end of 2006. Shareholders’ equity also declined to $95.80 billion from $101.68 billion at the end of 2006. AIG recorded total revenues during the year of $110.06 billion, 2.9 percent below 2006 revenues. Revenues, shareholders’ equity and book value per share were adversely affected by realized capital losses and the net unrealized market valuation loss recorded by AIGFP. 2007 Highlights We overcame the challenges of 2007 to make progress on several fronts. We were pleased when the China Insurance Regulatory Commission approved our application to establish a Wholly Owned Foreign Enterprise (WOFE) under the name AIG General Insurance Company China Limited (AIG General). Soon after, we opened a new AIG General headquarters in Shanghai and consolidated our Chinese general insurance operations there to capture efﬁciencies and provide a platform to establish new branches in other areas of China. AIA China continued to expand on the provincial licenses granted in 2006, opening 29 new sales and service centers in 2007, for a total of 104 centers in 19 cities. In addition, AIG InvestmentsSM received approval to set up a representative ofﬁce in Tianjin, our ﬁrst operation in China’s third-largest city. In Korea, we obtained preliminary approval from the Financial Supervisory Service to offer mortgage reinsurance through AIG United Guaranty Insurance (Asia) Limited. We signed a memorandum of understanding with the Bank of Investment and Development of Vietnam for the expansion of our business cooperation agreement in that rapidly growing country. The agreement will allow us to expand beyond our existing relationship in life insurance to include a wide range of areas such as general insurance, consumer ﬁnance, asset management and banking services. We are rapidly building a consumer ﬁnance franchise in India to complement our Tata AIG Life and General Insurance partnership. In 2007, we established a presence in housing ﬁnance and consumer durable ﬁnance. In addition, we are strengthening our presence in asset management and real estate development. In the Middle East, American Life Insurance Company (ALICO) received a license to operate a retail life insurance business in the Qatar Financial Centre. ALICO is the ﬁrst life insurance company to receive an expanded license, which is in addition to a wholesale life insurance license ﬁrst obtained in February 2007. Our acquisition of the German insurer Württembergische und Badische Versicherungs-AG (WüBa) reafﬁrmed our commitment to growth in the German marketplace, and greatly enhanced our insurance offerings to small and midsize companies. We advanced our strategy in the auto insurance sector when we acquired the outstanding shares of 21st Century Insurance Group that we did not already own. BusinessWeek named AIG one of the 100 Best Global Brands, a testament to the brand’s growing value in markets all over the world. In 2007, AIG received approval from the China Insurance Regulatory Commission to establish a wholly owned general insurance subsidiary in China (pictured, Shanghai skyline). The AIG Private Client Group’s Wildﬁre Protection Unit® uses the latest ﬁre-mitigation technology to help protect policyholders’ properties in the western United States. AIG 2007 Annual Report 3 We then consolidated 21st Century with AIG’s existing auto platform. The combined operation, aigdirect.comSM, is an organization with the reach and expertise needed to compete more effectively in the U.S. auto insurance marketplace. Through AIG-managed funds, we are a leading investor in the infrastructure business. In 2007, our investments in P&O Ports North America, AMPORTS and MTC Holdings were organized under one management structure. We believe the new entity, Ports America, constitutes the largest and most experienced independent port operator and automotive import/export processor in the United States. In addition to these accomplishments, we made good progress on several other fronts. Customer Focus —We devoted a great deal of attention to our customers as we broadened the implementation of our “Deliver the Firm” strategy. Speciﬁcally, we examined how to realign the way AIG does business so we can deploy our products and services in ways that allow us to meet multiple needs of customers around the world. For our customers, it means more convenience, more choices and even better services. For our employees, it means broader engagement with other AIG businesses and colleagues. For our shareholders, it means tapping the vast potential for new growth and higher returns. Capital Management —The implementation of our economic capital model provides us with a tool to help us allocate our capital efﬁciently. The tool provides one of the metrics we will use with increasing frequency to allocate capital to promising growth areas, judge performance on a consistent basis across our business segments and help us set compensation policy. AIG’s capital position is excellent and we have the ﬂexibility to take advantage of growth opportunities. Innovation —Our reputation as an industry innovator gained widespread recognition when AIG Private Client Group’s Wildﬁre Protection Unit acted swiftly to protect client homes from raging wildﬁres in the western United States. The unit’s response teams treated client homes with a ﬁre retardant in advance of the ﬂames, reducing losses and claims. Meanwhile, AIG Product Development maintained a steady ﬂow of new products, launching one every 14 days on average, with individual businesses launching even more. New offerings ranged from Family Protector, an urban protection package launched in South Africa, to AIG Oilﬁeld Services Insurance, a one-stop coverage solution designed speciﬁcally for independent oil and gas clients. Building our Brand —We made substantial progress in 2007 in strengthening worldwide recognition of the AIG brand. Our success is attributable to greater consistency in the implementation of our brand and judicious investments in brand advertising and sponsorship opportunities. Our sponsorship of the Manchester United Football Club has helped tremendously to increase our recognition worldwide, particularly in key Asian markets. Of course, it has helped build recognition in the United Kingdom as well. The consolidation of our New Hampshire and Landmark businesses under the name AIG UK Limited will allow us to further leverage our Manchester United sponsorship. In Australia and New Zealand, all of our We devoted a great deal of attention to our customers as we broadened the implementation of our “Deliver the Firm”strategy. businesses now market under the AIG brand name. We launched a vigorous branding campaign in India to support our business growth there. National Union Fire Insurance Company of Pittsburgh, Pa., now markets under the name AIG Executive LiabilitySM and AIG VALIC, a leader in the K-12, healthcare and higher education markets, has re-branded as AIG Retirement. It was gratifying to see the growing strength of our brand recognized when BusinessWeek magazine included AIG in its annual list of the world’s top brands, ranking us at 47, the highest rank of any insurer, in our ﬁrst-ever appearance on the list. While we are proud of these successes, we clearly need to improve in several areas. There is no disputing the severity of the U.S. residential mortgage crisis and the dislocation in the credit markets, but that cannot be an excuse for poor performance. We need to reverse higher losses and expenses and work through product and distribution shortcomings in several other businesses. Even though we have made progress increasing the average number of products sold per customer, there is still room for improvement. 4 AIG 2007 Annual Report Group Executive Committee We are addressing these weaknesses through operational and structural investments and improvements, and I can assure you we are doing so with a sense of urgency. Vision and Values General Insurance Martin J. Sullivan 4 President and Chief Executive Ofﬁcer Win J. Neuger 8 Executive Vice President and Chief Investment Ofﬁcer While ﬁnancial strength, quality assets and a solid strategy are critical elements of success, it is also important to synthesize those elements with a set of core values that are shared by all employees. In 2007, we engaged a sampling of employees around the world and formalized a vision and set of values for AIG that will serve as our touchstone for future progress: Our Vision is to be the world’s ﬁrst-choice provider of insurance and ﬁnancial services. Our Values are People, Customer Focus, Performance, Integrity, Respect and Entrepreneurship. Our Vision and Values deﬁne and unite us as an organization. You can read more about our Vision and Values further on in this report. In the United States and abroad, AIG’s General Insurance businesses write substantially all lines of commercial property-casualty insurance and various personal lines. A combination of product diversiﬁcation, distribution strength and underwriting discipline allowed the General Insurance group to achieve higher operating income despite decidedly uneven market conditions. The Domestic Brokerage Group (DBG), which provides commercial insurance products and services to a wide range of businesses in the United States, had a record year, with operating income climbing 25 percent. DBG is the largest property-casualty insurance organization in the United States with market-leading businesses such as AIG Executive Liability, a premier provider of executive and professional liability insurance; Edmund S.W. Tse 5 Senior Vice Chairman Life Insurance Nicholas C. Walsh 6 Executive Vice President Foreign General Insurance Steven J. Bensinger 2 Executive Vice President and Chief Financial Ofﬁcer Jay S. Wintrob12 Executive Vice President Retirement Services Anastasia D. Kelly 3 Executive Vice President General Counsel and Senior Regulatory and Compliance Ofﬁcer William N. Dooley 9 Senior Vice President Financial Services Andrew J. Kaslow1 Rodney O. Martin, Jr.11 Executive Vice President Life Insurance Senior Vice President and Chief Human Resources Ofﬁcer Kristian P. Moor 10 Executive Vice President Domestic General Insurance Brian T. Schreiber 7 Senior Vice President Strategic Planning 7 6 8 3 9 4 10 11 1 2 5 12 AIG 2007 Annual Report 5 Ambassador Frank G. Wisner Vice Chairman External Affairs Dr. Jacob A. Frenkel Vice Chairman Global Economic Strategies Lexington Insurance Company, the leading U.S.-based excess and surplus lines insurer; AIG Excess Casualty®, DBG’s leading commercial umbrella provider; and AIG Environmental®, a pioneer in pollution and eco-friendly liability coverages. AIG’s Domestic Accident & Health Division, which manages specialized accident and health risks for consumer, commercial and afﬁnity group customers, and AIG Worldsource, which provides innovative global liability insurance solutions, as well as HSB Group, Inc., a leading worldwide provider of equipment breakdown and engineered lines insurance, all performed well in 2007 due in part to their execution of unique Deliver the Firm strategies. Integration costs and higher claims activity adversely affected results in our Domestic Personal Lines businesses. However, consolidation and product innovation will improve our market position going forward. AIG Private Client Group, which insures more than one-third of the Forbes 400 Richest Americans, achieved net written premium growth in excess of 37 percent. The group is building on the growing popularity of its Wildﬁre Protection Unit with the deployment of its Hurricane Protection Unit® in coastal regions. Transatlantic Holdings, Inc., a majorityowned holding company of international reinsurers, achieved record net income partly due to higher premium volume and favorable loss experience in its property lines. Signiﬁcant home price deterioration associated with the ongoing U.S. housing crisis resulted in a challenging year for the domestic mortgage insurance business of United Guaranty Corporation (UGC). We expect similar domestic market conditions to last into 2009. Even so, growth in international markets, together with higher persistency that lifted domestic ﬁrst-lien renewal premiums, produced solid growth in net premiums written. With operations today in 15 countries, UGC is prudently pursuing additional international opportunities in promising markets such as Japan, India, Australia and Germany. In addition to the WOFE license it received in China, AIG’s Foreign General Insurance group also launched a new operation in Oman and opened a new branch in Qatar, strengthening its position as the most extensive property-casualty network in the world. Full year results were adversely affected by the losses from the June 2007 U.K. ﬂoods and higher non-catastrophic losses; however, underwriting results were excellent. Foreign General continues to reﬁne its customized product range to meet the requirements of a growing worldwide middle class while developing products for underserved markets. Life Insurance & Retirement Services AIG’s Life Insurance & Retirement Services group carries on a long tradition of excellence it has earned during many years of industry leadership. In 2007, the group had strong top line growth, and momentum is building on the strength o..."

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