avatar American International Group, Inc. Finance, Insurance, And Real Estate
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    2 0 0 5 A N N U A L R E P O R T American International Group, Inc.


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    About AIG Contents American International Group, Inc. (AIG), world 1 Financial Highlights leaders in insurance and financial services, is the leading 2 Letter to Shareholders international insurance organization, with operations 11 AIG: Making a Difference in more than 130 countries and jurisdictions. AIG 28 AIG at a Glance companies serve commercial, institutional and individual 30 Review of Operations customers through the most extensive worldwide 44 Reconciliation in Accordance with Regulation G property-casualty and life insurance networks of any 45 Five Year Summary of Consolidated Operations insurer. In addition, AIG companies are leading providers 46 Five Year Summary of Selected Financial Information of retirement services, financial services and asset 47 Supplemental Financial Information management around the world. 48 Board of Directors 49 Corporate Directory Annual Report on Form 10-K Inside Back Cover Shareholder Information Photographs of AIG colleagues from around the world appear throughout this Annual Report, both on the cover and in the body of the text. Their dedication, commitment and professionalism set them apart in the industry. AIG colleagues stay close to their customers and work hard for them. They are our most important asset.


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    Financial Highlights (in millions, except per share data and ratios) 2005 2004 % Change Net income $ 10,477 $ 9,839 6.5 Realized capital gains, net of tax 201 85 – FAS 133 gains, excluding realized capital gains (losses), net of tax 1,530 315 – Cumulative effect of an accounting change, net of tax – (144) – Adjusted net income (a) 8,746 9,583 (8.7) Net income, per common share – diluted 3.99 3.73 7.0 (a) Adjusted net income, per common share – diluted 3.33 3.64 (8.5) Book value per common share 33.24 30.69 8.3 (b) Revenues $108,905 $ 97,666 11.5 Assets 853,370 801,145 6.5 Shareholders’ equity 86,317 79,673 8.3 General Insurance combined loss and expense ratio 104.69 100.30 General Insurance combined loss and expense ratio, excluding catastrophe losses 97.63 97.56 (a) Excludes realized capital gains, which include pricing net investment gains, the cumulative effect of an accounting change and FAS 133 gains. (b) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services GAAP premiums, net investment income, Financial Services interest, lease and finance charges, Asset Management advisory and management fees and net investment income from guaranteed investment contracts, and realized capital gains (losses). Net Income Revenues Assets Shareholders’ Equity (billions of dollars) (billions of dollars) (billions of dollars) (billions of dollars) 108.9 10.48 853.4 86.3 801.1 9.84 97.7 79.7 69.2 675.6 8.11 79.4 58.3 561.6 66.2 490.6 49.9 60.0 5.73 4.09 ’01(c) ’02(d) ’03(e) ’04(f) ’05(g) ’01 ’02 ’03 ’04 ’05 ’01 ’02 ’03 ’04 ’05 ’01 ’02 ’03 ’04 ’05 (c) 2001 includes catastophe losses of $581 million, restructuring charges of $1.38 billion, and FAS 133 losses of $115 million. (d) 2002 includes General Insurance loss reserve charge of $1.34 billion and FAS 133 gains of $20 million. (e) 2003 includes FAS 133 losses of $697 million. (f) 2004 includes $729 million in catastrophe losses, $144 million related to the cumulative effect of an accounting change, $553 million for a change in estimate for asbestos and environmental exposures, and $315 million of FAS 133 gains. (g) 2005 includes $2.11 billion in catastrophe losses, $1.19 billion for General Insurance fourth quarter reserve charge, $1.15 billion of settlement charges, and $1.53 billion of FAS 133 gains. AIG 2005 Annual Report ■ 1


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    Dear Fellow Shareholders: I n what has been a most eventful and into the future. In February, 2006, we In a presentation to the financial challenging year for AIG, I am pleased announced that AIG would take a fourth community in September, 2005, I laid out to report that your company is finan- quarter 2005 after-tax charge to net a series of AIG priorities and key growth cially very strong and well positioned for income related to an increase in our strategies. They were: staying customer the future. Through the dedication and General Insurance net reserve for losses focused; continuing our geographic expan- hard work of thousands of AIG employees, and loss expenses. This charge was the sion; expanding distribution; identifying we have accomplished a great deal since result of a careful review of our actuarial new business opportunities; developing my last letter to you in June, 2005. We analyses and the results of an outside additional acquisitions or strategic finished the year with solid earnings and a study conducted by Milliman Inc. alliances; focusing on driving down costs strong balance sheet, despite the most Despite many distractions, the AIG through the use of technology; emphasiz- devastating series of catastrophes our family remained intensely focused on ing new product development; and industry has ever suffered. We entered our business objectives, continuing to investing for growth. These priorities seek a number of important new overseas innovate with new products and services to achieve growth in our franchise by cap- markets that will provide good growth to meet our customers’ needs around the italizing on the unmatched global network opportunities in the years ahead; we made world. No other insurance and financial and capabilities that already distinguish major advances in our corporate gover- services organization has the combination AIG from our competitors. I believe we nance and management practices; and we of depth of talented staff, entrepreneurial made significant progress in each of these conducted an extensive internal review culture, leading worldwide market posi- areas during the past year. of our accounting and reporting policies tions, extensive distribution capabilities In this letter, I will review AIG’s and procedures. Most importantly, in and diversity of major businesses that AIG financial performance for 2005, discuss our early 2006, we resolved our regulatory has built over the years. In all of our successes in addressing the regulatory, issues with the Securities and Exchange principal business sectors, we have strong corporate governance and accounting Commission, the United States growth opportunities. As an example of issues and talk about the opportunities and Department of Justice, the Office of the our global leadership and emerging market challenges facing us in the coming year. New York Attorney General and the New focus, in 2005 AIG announced new li- I will also focus on what I believe to be York State Department of Insurance. censes and operations in Lithuania, Latvia, AIG’s most important asset – our talented, We also added experienced and talented the Republic of Georgia and Vietnam. dedicated and professional group of 97,000 individuals to our Board of Directors, and employees around the world. They were we have in place the strategies for our critical to our performance and accom- major businesses that will serve AIG well plishments in 2005, and they are the key to our future. 2 Letter to Shareholders


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    AIG is financially very strong and well positioned for the future. 2005 Results A IG’s net income totaled $10.48 billion in 2005, an increase of 6.5 percent over net income for 2004. On a per share basis, AIG earned $3.99 in 2005, up 7.0 percent from the $3.73 per share earned in the preceding year. This performance was achieved after a $1.15 billion after-tax charge resulting from settlements with our regulators and a $1.19 billion after-tax charge in the fourth quarter related to an increase in the General Insurance net reserve for losses and loss expenses. AIG also reported a record $2.11 bil- lion in after-tax catastrophe losses, net of reinsurance recoverables, primarily from Hurricanes Katrina, Rita and Wilma in the Southeast United States. In 2004, AIG incurred $729 million in after-tax catastrophe losses. Taken together, the years 2004 and 2005 were the two worst Martin J. Sullivan years for catastrophes in the insurance President and industry’s history. Chief Executive Officer Hurricane Katrina was the most costly natural disaster the insurance industry has ever experienced. In its aftermath, and under the most difficult of conditions, our top priorities were to respond to our customers who had sustained devastating loss of life and property, and to ensure the well-being of our employees in the region. Katrina’s wake of destruction was unprecedented, but AIG’s financial AIG 2005 Annual Report ■ 3


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    Our total shareholders’ equity at year-end 2005 was $86.32 billion. strength and claims management expertise nesses – General Insurance, Life Insurance Accounting Issues and Corporate Governance A enabled us to respond to a catastrophe of & Retirement Services, Financial Services s has been widely reported this magnitude. I am extremely proud of and Asset Management. All are global during the past year, AIG con- AIG’s actions, including our employees’ businesses, and all are well positioned in ducted an extensive internal outstanding and generous response to the their domestic and overseas markets. review, carried out in conjunction with victims of Hurricane Katrina and the other AIG’s franchise is unmatched. Our entre- outside counsel and our independent disasters. Their financial support through preneurial culture also sets AIG apart from accounting firm. With the filing of our the AIG Disaster Relief Fund was others – something that has characterized 2004 Annual Report on Form 10-K/A, we matched by personal commitment through the organization from its earliest days – restated our financial statements for the volunteer efforts and personal sacrifices on and this will not change. Our network of years ended December 31, 2004, 2003 and behalf of AIG colleagues and customers in 714,000 agents and brokers around the 2002, along with affected Selected need. AIG matched our employees’ contri- world produce business from a worldwide Consolidated Financial Data for 2001 and butions to the Fund on a dollar-for-dollar customer base of some 65 million cus- 2000, and quarterly financial information basis, and, in sum, the AIG Disaster Relief tomers. Finally, our financial strength, for 2004 and 2003. We also restated the Fund collected a total of $8.6 million in which is the bedrock of this company, pro- first three quarters of 2005. These actions 2005. In addition, AIG’s claims personnel vides us with a multitude of opportunities are consistent with AIG’s commitment to turned in excellent performance in coming around the globe. correct all material errors and to provide to the aid of our policyholders along the In recent months, we have made greater transparency in the company’s Gulf Coast. progress in stabilizing AIG’s ratings. financial statements and accounting in AIG’s total shareholders’ equity at Currently, Standard & Poor’s rates AIG’s the future. December 31, 2005 was $86.32 billion, an long-term debt “AA”, and most of our Other important changes have increase of 8.3 percent from year-end financial strength ratings are “AA+”. occurred in our corporate governance 2004. AIG remains among the most Moody’s rates AIG’s long-term debt “Aa2”, procedures. Our Board of Directors has strongly capitalized organizations in our and our financial strength ratings are adopted a majority voting guideline and a industry. Cash flow from our insurance either “Aa1” or “Aa2”. Fitch rates AIG’s mandatory retirement age of 73. The operations and our balance sheet remain long-term debt “AA” and our financial Board has also put in place another very strong. AIG invests an average of strength ratings are “AA+”. A.M. Best guideline to reflect its view that at least $200 million a day, and the majority of rates AIG’s insurance companies “A+”. two-thirds of AIG’s Board should be our portfolio consists of high quality fixed At these levels, AIG’s ratings are among independent, as defined by the New York income assets. Worldwide revenues in the highest of any insurance and financial Stock Exchange, and approved a change 2005 were $108.91 billion. For 2005, AIG services organization in the world. in AIG’s bylaws to provide that the role achieved a return on equity of 12.3 percent. of Chairman should be separate from that AIG’s ability to report solid earnings of the CEO, and that the Chairman and cash flow in the face of difficult should be selected from the independent external and internal issues reflects the Directors. We are also providing greater diversity and strength of our major busi- information in our financial statements and continue to build an open and 4 Letter to Shareholders


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    Left to right: Martin J. Sullivan President and Chief Executive Officer Win J. Neuger Executive Vice President and Chief Investment Officer Kristian P. Moor Executive Vice President Domestic General Insurance Edmund S.W. Tse Senior Vice Chairman Life Insurance Steven J. Bensinger Executive Vice President and Chief Financial Officer constructive dialogue with our regulators. General Insurance insurance in the United States, with lead- G All of these initiatives reflect “best eneral Insurance, one of AIG’s ing positions in a wide range of products practices”, keep us in the forefront of good core businesses for decades, had including directors and officers liability, corporate governance and enhance AIG’s a good year in 2005 despite the workers compensation, environmental leadership role as one of the world’s costs associated with catastrophes, remedi- coverages, excess casualty, aviation, equip- largest, strongest and best governed com- ation efforts, and the reserve charge. ment breakdown, surplus lines and ocean panies. In addition, the Board has created General Insurance net premiums written marine. Financial strength, claims exper- two new committees to provide a sharper rose 3.1 percent to $41.87 billion. tise and responsiveness continue to be focus on corporate governance and Operating income for the year totaled significant differentiators for DBG. The corporate social responsibility – the $1.98 billion before realized capital gains Group has cross-selling as a key strategy, Regulatory, Compliance and Legal and losses, compared to $2.95 billion as well as expanding distribution into Committee, and the Public Policy and the previous year. regional and national brokers. Social Responsibility Committee. These The Domestic Brokerage Group Our Domestic Personal Lines business steps, taken together, will strengthen (DBG) posted net premiums written had solid results in 2005, outperforming our corporate governance, increase trans- of $23.13 billion and a combined ratio of industry premium growth. The Private parency and improve disclosure. 113.83, including the effect of catastrophe Client Group had strong results, and losses. Excluding such losses, DBG’s serves nearly one-third of the Forbes “400 combined ratio was 105.54, and further Richest Americans.” excluding the fourth quarter reserve charge, it was 96.12. We are the largest provider of commercial property-casualty AIG 2005 Annual Report ■ 5


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    Jacob A. Frenkel (Left) Vice Chairman Global Economic Strategies Frank G. Wisner Vice Chairman External Affairs 77.4 percent to $2.34 billion. The Foreign in individual life insurance issued and in General combined ratio was 85.56, com- term life sales, and is a leader in the pared to 90.81 a year earlier. universal life and structured settlements We have long been leaders in opening markets. AIG American General’s results new insurance markets around the world, reflect our continued commitment to drawing on our heritage, which extends growing the business through proven dis- back to the 1920s in China. Continuing tribution channels, innovative strategies this trend, in December, AIU received a and breadth of product. AIG American license to operate a wholly owned general General has initiatives under way to insurance company in Vietnam, a country increase accident and health sales through of 84 million people. This is the first prop- worksite and direct marketing, while erty-casualty license granted by Vietnam remaining disciplined in underwriting and to a U.S.-based insurer and complements risk selection. the life insurance license granted to Our overseas life network is the most AIG’s Foreign General Insurance American International Assurance extensive of any life insurance organiza- operations had very strong results in 2005. Company, Ltd. (AIA) in 2000. In just five tion, encompassing more than 70 coun- The worldwide network of American years, AIA’s life operations in Vietnam tries, many of which we have served for International Underwriters (AIU) is one have had excellent growth, and we now 50 years or more. AIG’s life insurance that could not be duplicated today, given have more than 19,000 agents serving this companies lead the industry in many its market positions in more than 80 coun- market. Going forward, we believe emerg- countries. We have the proven ability to tries around the world, developed over ing markets such as Vietnam, India and grow greenfield operations and focus the past 86 years. AIU is increasingly a China will provide growth opportunities on a multi-distribution strategy to support multi-distribution organization, utilizing for AIG in both general and life insur- a broad array of protection and savings brokers, agents, direct marketing, associa- ance, as well as in retirement services, products. tions and bancassurance. financial services and asset management. In 2005, both AIA and American Life In Asia, our General Insurance net- Insurance Company (ALICO), our two Life Insurance & Retirement Services work extends throughout Southeast Asia principal overseas life insurance A IG’s Life Insurance & to China, Taiwan, Japan, Korea and India. operations, reported good growth in first Retirement Services businesses We are the number one foreign insurer year premiums, distributing a full range of had a successful year in 2005. in many of these markets. We also have life insurance products through multiple Worldwide Life Insurance & Retirement the largest U.S.-based general insurance distribution channels. In Japan, the Services had GAAP premiums in 2005 of business in the United Kingdom and world’s largest life market outside the $29.40 billion, a gain of 4.7 percent over continental Europe. Foreign General net 2004. Operating income before realized premiums written in 2005 was a record, capital gains (losses) and pricing net totaling nearly $10 billion, and operating investment gains reached $9.06 billion, a income before realized capital gains rose 15.0 percent increase over the prior year. In the United States, AIG American General is one of the most profitable and fastest growing life insurers, ranking first 6 Letter to Shareholders


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    Going forward, we believe emerging markets such as Vietnam, India and China will provide growth opportunities for AIG. United States, AIG companies constitute from the country’s insurance regulators to services business. We have had initial the largest foreign-owned life insurance establish branches in Lithuania and Latvia. success via bancassurance in both Korea operation and the fifth largest of all AIG’s life insurance agency force now and Japan. We believe there are numerous life insurers in the country based on total numbers over 270,000 full-time and part- opportunities to use our expertise in the premiums. time agents and is widely recognized as United States and our successes in Japan First year life premiums and annuities the strongest and most professional in the and Korea to expand AIG’s Retirement had good growth in China. We now have industry. Agency remains our core Services operations into new territories. a 19.9 percent market share of total 2005 distribution system, and we will continue The growing need for private sector retire- life insurance premiums written by foreign to emphasize training to deliver superior ment savings solutions is a global phenom- life insurers in that rapidly expanding customer service. At the same time, we enon, fed in part by the realization that market. In India, our joint venture with are expanding our distribution channels, government programs will not be able to The Tata Group is positioned to take which include banks, credit cards, travel provide for the growing number of senior advantage of opportunities to serve the agents, retailers, worksite marketing, citizens in the years ahead. expanding Indian middle class, which is direct marketing and brokerage. Financial Services increasingly turning to life insurance to Retirement Services is a growth busi- F inancial Services is a core business provide for their families’ futures. Along ness for AIG, both domestically and over- for AIG, one that benefits from our with China and Vietnam, India is one seas. In the United States, AIG VALIC strong financial position and global of the most promising growth markets is the leader in the primary and secondary reach. Our Financial Services operations for life insurance. AIG’s excellent position education market, second in healthcare are leaders in their markets and provide in each of these countries should yield and third in higher education. AIG diversification to AIG’s overall earnings important benefits for us in the future. Annuity Insurance Company is the num- stream. In the Philippines, The Philippine ber one issuer of fixed annuities in the International Lease Finance Corpora- American Life and General Insurance United States. It also had strong operating tion (ILFC) is one of the largest lessors Company, the country’s leading life insurer income growth in 2005, in spite of being of new advanced technology commercial for over half a century, substantially affected by the low interest rate and flat aircraft to airlines around the world. In increased its market share. Nan Shan Life yield curve environment. Finally, AIG 2005, ILFC had operating income of Insurance Company, Ltd. is the second SunAmerica Retirement Markets reported $679.5 million, compared to $642.2 mil- largest life insurer in Taiwan. substantial increases in fee income and lion in 2004. As a lead customer of Boeing Outside of Asia, ALICO reported solid assets under management. and Airbus, ILFC is able to offer its cus- results in the United Kingdom and the International Retirement Services tomers attractive lease terms and delivery Central and Eastern Europe region. In had excellent results. Our strategy is to positions for their fleet expansions and many of the markets of Central and leverage AIG companies’ presence in local modernizations. During the year, ILFC Eastern Europe, AIG’s operations are the markets worldwide to build our retirement experienced strong demand and an overall largest foreign-owned life insurance firming of lease rates and residual values. businesses. During 2005, ALICO’s Polish ILFC’s customer base is well diversified life insurance company received approval geographically and its fleet of more than 750 jet aircraft is one of the most modern of any lessor. AIG 2005 Annual Report ■ 7


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    AIG is committed to being a good global corporate citizen. AIG’s Capital Markets operations Asset Management was the extension by Congress of the F comprise the businesses of AIG Financial or years, AIG has been one of the terrorism insurance legislation that pro- Products Corp. and its subsidiaries largest institutional asset managers vides an essential federal backstop to the (AIGFP), which engage as principal in a in the world, investing AIG’s own private market, which cannot generate customer driven financial transactions general and life insurance investment sufficient capital for what is, ultimately, business. AIGFP offers a wide spectrum of portfolios. Over the past 10 years, AIG an infinite risk. standard and customized financial prod- has also developed its outside client asset AIG also remains actively engaged in ucts, including commodities, credit, cur- management business conducted through encouraging liberalization of world trade rencies, energy, equities and rates. Capital AIG Global Investment Group (AIG- through bilateral, regional and multilateral Markets had operating income in 2005 of GIG). At year-end 2005, these client initiatives. During the year, a number $2.66 billion, compared to $662.4 million assets under management, including insti- of important free trade agreements were in 2004. Excluding the effects of FAS 133, tutional accounts and retail mutual funds, negotiated and adopted. Although the Capital Markets operating income was exceeded $62 billion. Combined with World Trade Organization negotiations $647.3 million in 2005, compared to more than a half-trillion dollars of assets faltered over agricultural issues, we remain $784.7 million in 2004. Fluctuations in AIGGIG manages for AIG’s insurance cautiously optimistic that a multilateral both revenues and operating income for companies, AIG ranks in the top five agreement, including liberalization of this segment are to be expected, given the institutional asset managers in the world. key markets for financial services, will be transactional nature of the business and Asset Management operating income rose reached by year-end 2006. the volatility in reported results emanating 6.0 percent to a record $2.25 billion, and AIG’s Report on Corporate Social Responsibility from the accounting treatment for deriva- new institutional assets in 2005 totaled A IG is firmly committed to being tives under FAS 133. $13.55 billion. a leader in all areas of social In Consumer Finance, a growing busi- Clients choose to invest alongside responsibility. Giving back to ness for AIG globally, operating income AIG companies because of our extensive the communities we serve is a top priority rose 11.5 percent to $900.7 million. In knowledge of developed and emerging at AIG. Our new Board Public Policy and the United States, American General markets worldwide, as well as our product Social Responsibility Committee will Finance, Inc. is one of the largest con- depth and capital markets expertise. We help oversee and monitor AIG’s continued sumer finance organizations, with the are sharply focused on expanding our progress in this important area and second largest consumer finance network international retail distribution through further enhance our role as a good global in the country, as well as a growing intermediaries, as well as developing new corporate citizen. Recently, AIG has Internet-based business. Overseas, AIG’s products in anticipation of market needs. undertaken a corporate-wide project to consumer finance business was robust Public Policy Issues describe and highlight the activities of in 2005, reporting record operating I n 2005, AIG worked hard on two AIG employees and units throughout the income, with strong results in Poland, public policy issues that helped keep world in the area of corporate social Hong Kong and Argentina. the U.S. economy growing. The first responsibility, including environmental was the successful adoption by Congress initiatives, volunteerism, diversity, philan- of class action reform after many years of thropy and community service. This effort debate. This will help reduce the burden on our economy of excessive litigation and its hidden tax on business. The other 8 Letter to Shareholders


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    is nearing completion and we shortly share to $0.125 per share, and in August, the Professional Ethics Committee for the expect to have available publicly a the dividend was increased by an Financial Analysts Federation. In October, detailed description of all such activities additional 20.0 percent to a new quarterly 2005, the Board elected Michael H. on AIG’s website, www.aig.com. In addi- dividend rate of $0.15 per share. Together, Sutton a Director. Mr. Sutton was Chief tion, a written summary report on these increases, which total 100 percent, Accountant of the Securities and AIG’s corporate social responsibility will reflect AIG’s strong financial position Exchange Commission and later served as be published soon. and the growth we have achieved in our a consultant to the Financial Accounting business. 2005 represents the twentieth Standards Board. AIG Stock Price and Dividends consecutive year in which AIG has raised In January, 2006, the Board elected A IG’s common stock price closed its dividend. Fred H. Langhammer and Robert B. the year at $68.23, compared to Willumstad as Directors. Mr. Langhammer $65.67 at year-end 2004, an Board of Directors and Management Changes served as CEO of The Estée Lauder S increase of 3.9 percent. This compares to a ix new members joined our Board Companies Inc. from 1999 to 2004, and 3.0 percent gain for the S&P 500 Stock of Directors during 2005 and in prior to that was President and Chief Index. During the year, the price of AIG early 2006. The Board now has a Operating Officer. He is currently stock ranged between a high of $73.46 on clear majority of independent Directors Chairman, Global Affairs, of Estée Lauder. February 11 and a low of $49.91 on April with a wide array of business, financial, Mr. Willumstad was formerly President 25. In the period from the April low to regulatory, international and public policy and Chief Operating Officer of Citigroup year end, the price rose 36.7 percent. backgrounds. In March, 2005, the Board Inc. He was a member of the Citigroup Over the past 10 years, AIG’s common elected Stephen L. Hammerman a Management and Business Heads stock, including reinvested dividends, Director. Mr. Hammerman was a senior Committee and of the Citigroup Board of increased 222.2 percent, compared to a executive with Merrill Lynch & Co., Inc. Directors. Mr. Willumstad has spent gain of 138.4 percent for the S&P 500. It from 1978 to 2002, serving as General his entire career in banking and financial is my firm belief that our stock price in the Counsel, Chief Financial Officer and most services. These new Directors bring future will reflect our successful execution recently as Vice Chairman of the Board. outstanding skills and experience to of the growth strategies I have discussed He was also Deputy Commissioner of AIG’s Board. in this letter, as well as the competitive Legal Matters for the New York City Three of AIG’s Directors will not stand strength of AIG’s unparalleled global Police Department, a Director of the for re-election at the company’s forthcom- network, extensive product offerings, and New York Stock Exchange and Chairman ing Annual Meeting of Shareholders: deep bench of talented employees, agents of the National Association of Securities M. Bernard Aidinoff, William S. Cohen and business partners. In addition, we Dealers. and Carla A. Hills. Mr. Aidinoff has intend to manage AIG’s capital to levels In April, 2005, the Board announced provided valued counsel on many matters appropriate to support the risks inherent the election of two additional indepen- over more than two decades on our Board. in our businesses. dent Directors, George L. Miles, Jr. and The Board of Directors increased AIG’s Morris W. Offit. Mr. Miles is President and quarterly common stock dividend twice CEO of WQED Multimedia and a certified in 2005. In January, the dividend was public accountant. Mr. Offit is Co-CEO of increased by 66.7 percent from $0.075 per Offit Hall Capital Management LLC, and was the founder and CEO of OFFIT- BANK. He served as the first Chairman of AIG 2005 Annual Report ■ 9


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    Secretary Cohen and Ambassador Hills Sadly, one of AIG’s founding fathers, a employees second to none. On behalf of have been very active Directors in many giant in the industry and our organization, the Board of Directors and AIG manage- areas of our business, drawing on their Sir Edwin A.G. Manton, known to us all ment, I would like to sincerely thank each significant government and public policy as “Jimmy,” passed away in October at the of my colleagues for his or her efforts dur- expertise. On behalf of the Directors and age of 96. Jimmy had been President and ing this challenging past year, and also to management, I would like to thank Chairman of AIU, and later Executive recognize the loyalty and commitment of Bernie, Bill and Carla for their consider- Vice President of AIG and a member of our shareholders, customers, brokers, able contributions to AIG. I am pleased to the Board of Directors. Though he had agents and other business partners around advise that both Secretary Cohen and been ailing for a number of years, Jimmy the world. Together, our future is bright. Ambassador Hills have agreed to serve on continued to come into the office regularly AIG’s International Advisory Board. until his last weeks. His enthusiasm and I would also like to extend my sincere insights into the business of AIG were thanks and appreciation to our Chairman never diminished by the years. All of Sincerely, Frank G. Zarb and the entire AIG Board us who knew and worked with Jimmy over of Directors for their strong support, the years had a profound respect for his leadership and guidance during the past wisdom, perspective and humanity. He year. They have worked diligently, provid- cared deeply about our company and we ing Board oversight to management’s will miss him greatly. efforts, dealing with the regulatory issues Conclusion I have discussed and strengthening AIG’s Martin J. Sullivan I n my Letter to Shareholders last year, I corporate governance and financial President and closed with a discussion of what would Chief Executive Officer control environment. Their assistance and what would not change at AIG has been invaluable. under our new management team. This March 16, 2006 In January, 2006, Donald P. Kanak year, I have addressed how we have dealt announced his resignation as Executive with the challenges facing us, and how our Vice Chairman and Chief Operating major businesses are positioned to succeed Officer of AIG. He also resigned from the in the future. We have made a number AIG Board of Directors. Don joined AIG of important changes in our corporate in 1992 and made many contributions to governance, compliance and disclosure our organization, particularly in Asia, practices. We have added experienced and during his career at AIG. We wish Don respected individuals to our Board. AIG well in all his future endeavors. employees have executed our strategies with skill and dedication. We have a focused and committed management team and an excellent and dedicated family of 10 Letter to Shareholders


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    AIG 97,000 people around the world making a difference. For their customers. For their communities. For our shareholders. AIG 2005 Annual Report ■ 11


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    Left to right: D. Scott Tramel Regional Underwriting Manager Barbara T. Allen Claims Specialist Sandy Wolf Underwriting Technician Herman L. Bastian, Jr. Managing Attorney Dianne Coleman Underwriter AIG colleagues, includ- ing those pictured here, moved swiftly in Hurricane Katrina’s aftermath to help customers recover their losses. Throughout the stricken region, colleagues cared for customers’ material needs, while keeping constantly in touch with their own dis- placed fellow workers to provide them with as much comfort and reassurance as possible.


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    Through this portfolio of businesses flows a similarly broad range of products occurrences – shifting economic condi- and services via a multitude of distribution tions, fluctuating interest rates and natural A IG’s diversification is built upon channels in markets worldwide. This disasters such as Hurricane Katrina, a remarkable portfolio of diverse composition provides balance and among others. Because of our diverse busi- complementary businesses in gives the AIG organization ballast. ness mix and substantial capital base, we General Insurance, Life Insurance & While AIG’s diversity proves its value are not overly dependent on or vulnerable Retirement Services, Financial Services daily, it becomes particularly evident when to conditions in any single region or on a and Asset Management. the company faces major events and particular string of events. U N P A R A L L E L E D R A N G E Our diversity in terms of products, markets and distribution contributes to our financial strength. Left to right: AIG businesses are well positioned to meet the growing worldwide need for private sector retirement savings solutions. ■ AIG has a vast global network, with operations spanning more than 130 countries and jurisdictions. We have the most extensive worldwide property-casualty ■ and life insurance network of any insurer. Our broad product range generates strong revenue streams throughout the world. ■ ■ AIG Global Investment Group is one of the world’s top five institutional asset managers. AIG 2005 Annual Report ■ 13


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    Left to right: AIG has the leading foreign-owned insurance operation in Japan, which is also AIG’s largest international market and one that the AIG companies have been serving since 1946. AIG VALIC is the leading provider of group retirement plans to primary and secondary educational ■ organizations in the United States. Through AIG Europe, S.A., we are the leading U.S.-based general insurer serving continental European customers. ■ ■ For many years, the Domestic Brokerage Group companies have ranked as the leading U.S. underwriters of commercial and industrial insurance. ■ ALICO is ranked as the largest life insurer in the Middle East. ILFC is a leading lessor of advanced technology jet aircraft to the world’s airlines. ■ G L O B A L E X P E R T I S E We are leaders in markets around the world. A IG has a presence in every AIG’s unrivaled ability to combine all over the world. Year in and year out, major market in the world. local expertise with global networking AIG colleagues work hard to uphold the Tracing our roots to Shanghai capabilities creates unique opportunities company’s tradition of market leadership, in 1919, AIG has had a global orientation for our more than 65 million customers and their drive to be the best remains since its inception. Today, AIG’s worldwide. We strive to exceed expecta- the lifeblood of the company. businesses span more than 130 countries tions and set new standards of achieve- and jurisdictions, employing the most ment in every market we serve. This talented and skilled local professionals. strong commitment to excellence has propelled AIG to top industry rankings 14 Making a Difference


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    AIG American General, the leading U.S. life insurer as measured by individual life insurance issued, is continuously looking for new ways to enhance service effi- ciency for its customers. At the company’s office in Milwaukee, Wisconsin, the express underwriting team’s focus is on issuing a high volume of policies in minimal time, while offering round- the-clock support. Left to right: Lori Brandenburg Underwriter Deb Wirth Associate Director Underwriting Carlos Quintero Underwriter Laurie Borowski Vice President Underwriting George Harris Associate Underwriter 15


  • Page 18

    Estonia Russia Latvia Lithuania Poland Belarus In 2005, through AIU, AIG became the first U.S. insurer to be granted a license to operate a wholly owned general insurance operation in Vietnam, where it has had a thriving life insurance business since 2000. Pictured here are AIG General Insurance (Vietnam) Company Limited employees at Cua Nam Junction in Hanoi, not far from their new headquarters. Left to right: Nguyen Phuong Hang General Administrative Assistant Nguyen Nguyet Thanh Regional Manager Nguyen Thuy Vinh Claims Officer 16


  • Page 19

    Left to right: In 2005, AIG Consumer Finance Group, Inc. began offering consumer loans in Mexico, a personal lending growth market. ■ AIG’s Domestic Brokerage Group introduced 20 new products in the U.S. property-casualty market during 2005, with many more in the pipeline at year end. We also received permission to establish life insurance branch offices in Latvia and Lithuania. ILFC is the first and only ■ ■ lessor to date to offer the new Airbus A380, the world’s largest passenger airliner. In 2005, we opened a branch office in Tbilisi, Georgia, and now ■ have General Insurance operations in 13 countries in the Central Europe and C.I.S. region. L E A D I N G T H E WA Y We are often first in markets. A IG has long been a pioneer customer needs. A strong entrepreneurial a number of first-of-its-kind product offer- within the insurance and spirit, which is ever-present at all levels ings, including a comprehensive business financial services industry, well- of the organization, allows us to capitalize travel insurance policy in India. Milestones known for entering new markets ahead on opportunities swiftly and follow them and market firsts such as these are illustra- of its peers. The company is constantly through to fruition. tive of AIG’s long-term focus on maximiz- evaluating growth areas for possible In the past year, AIG expanded ing shareholder value, not only for today, expansion and developing innovative new operations into several emerging markets but for future generations as well. products and services to meet evolving such as Vietnam, Latvia, Lithuania and the Republic of Georgia, and launched AIG 2005 Annual Report ■ 17


  • Page 20

    For example, in 2005, our Domestic A IG believes that an open and Brokerage Group responded to customer constructive dialogue with cus- feedback by forming three specialized units tomers is crucial to success. By dedicated to serving the unique insurance customer segmentation strategy. These building mutually beneficial relationships and risk management needs of the con- initiatives reflect an ongoing strategy with customers, we are better able to struction, financial services and real estate of streamlining broker and client access learn about their specific needs and tailor sectors. Overseas, American International to the full spectrum of AIG companies’ solutions to best meet them. Underwriters also launched a new insurance products and services. R E L A T I O N S H I P S We stay close to our customers and respond quickly to their changing needs. Left to right: AIG Retirement Services offers a wide array of products, including variable annuities, fixed annuities and mutual funds. The newly opened ■ AIG Tower in Hong Kong is a powerful affirmation of AIG’s long-standing commitment to the Asian community and marketplace. It occupies the same location where AIG companies opened operations in the 1930s. The DBG Construction Solutions practice meets the specific needs of leading ■ contractors, developers and others in the industry. Claims professionals from faraway locations volunteered to work on the front lines in Hurricane ■ Katrina’s aftermath to help customers, many in dire need of assistance. The AIG Product Development team’s sole responsibility is to work with ■ member companies to continue developing new coverages that meet emerging customer needs. 18


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    Left to right: Stephen Poux Vice President Loss Prevention Stan Rivera Director Wildfire Protection Seated: James Aamodt Firebreak Spray Systems The AIG Private Client Group launched its Wildfire Protection Unit in 2005 to help high-net-worth cus- tomers living in specific at-risk regions reduce the threats that wildfires pose to their homes and personal property. In addition to preventative measure services, the program includes “Rapid Response” teams that are immediately dispatched to protect enrolled properties should a wildfire come within three miles of the home. AIG 2005 Annual Report ■


  • Page 22

    Through its eCommerce program, American General Finance, Inc. uses cut- ting-edge technology to reach customers. In 2005, the company generated record con- sumer loan volume via the Internet. Left to right: Jose Tejada Branch Manager Zabe Ahmed Financial Representative Carlton Lowe Customer Account Specialist Making a Difference


  • Page 23

    The company’s ability to identify and adapt to changing distribution channels is one of its major assets. AIG businesses AIG companies are also staffed with stay closely in touch with customer experts in the field of technology who A IG reaches its customers distribution preferences and move quickly have made significant strides in helping through a global network of to implement efficient ways to address business units distribute their products 714,000 agents and brokers, as them. In Japan, for example, American online. In recent years, several AIG com- well as an array of alternative distribution Home Assurance Company has the largest panies have launched web-based systems channels, such as direct marketing, credit non-life direct marketing operation, which that allow brokers to quote and bind cards, travel agents, banks and retailers. emphasizes customer convenience. insurance policies in a matter of minutes. I N N O V A T I O N We are always looking for and identifying new distribution avenues for selling products. Left to right: We wrote more than $1.3 billion in specialty workers compensation net premiums through a website that serves the small business market. ■ AIG companies are the leading providers of fixed annuities sold through banks in Japan. Through a cooperative relationship with PICC, ■ the largest property-casualty insurer in China, we have the opportunity to offer jointly developed accident and health products to customers in virtually every town in the world’s largest country. AIG American General’s Affluent Markets Group provides a full range of products and marketing services ■ to leading life insurance producers and organizations serving the high-net-worth marketplace. 21


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    Left to right: AIG colleagues strive to adhere to the highest ethical standards. An in-house course helps employees better familiarize themselves with AIG’s Code of Conduct. In Taiwan, Nan Shan is regularly recognized as the insurance company with the best agents. Axel I. Freudmann, AIG Senior Vice ■ ■ President, Human Resources, meets with employees to discuss leadership building and developing competitive advantages. AIG American General ■ handles more than 117,000 individual life insurance claims each year, totaling $1.29 billion in death benefits paid. AIA has steadily expanded its life ■ insurance network in Vietnam, allowing it to serve customers in major markets as well as rural areas. I N T E G R I T Y AIG colleagues work hard to be the best for their customers and in the industry. A IG’s culture is built around Continuing education is paramount to customer confidence. Not surprisingly, teamwork, integrity and serving our profession. AIG colleagues know that many of them are well-respected members customers with the highest if they are to serve our customers effec- of the industry’s leading business societies. professional and ethical standards. tively, they must be alert to the changes New and seasoned AIG colleagues also Visitors to any AIG company location that are constantly under way in insurance avail themselves of our substantial online throughout the world will find themselves and financial services, as well as in the and on-site training and development among the industry’s best professionals – many countries and markets where AIG resources to hone their skills. men and women who are always on a path companies do business. to greater achievement. They also know the value that professional association membership and accreditation provide in building 22 Making a Difference


  • Page 25

    AIA’s consistent growth and market leadership throughout Southeast Asia are testaments to its strong commitment to agency development. First-class training programs provide these AIA Hong Kong managers with the tools they need to guide their local teams in deliver- ing superior customer service and upholding the company’s reputa- tion for having the most skilled and responsive insurance professionals in the industry. Left to right: Gary Lam Branch Manager Tonicha De Sousa Unit Manager Miranda Fung Senior Business Manager Bernard Hui Senior Unit Manager 23


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    Left to right: Remy Fujinami Senior Business Administrator Akihiro Sekiya Portfolio Manager Hiroshi Motoki Chief Investment Officer Akihito Yamanoi General Manager In Japan, AIG Global Investment Group (AIGGIG) has launched Socially Responsible Investment Funds that invest in companies with a “quality of life” focus, such as Toyota Motor Corporation, which has a division that manufactures environ- mentally friendly automobiles. Here, AIGGIG colleagues are pictured in Tokyo’s Ginza District with Toyota’s flagship hybrid vehicle, the Prius. 24


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    Left to right: For 10 years, AIG companies have invested considerable resources in Uganda’s microinsurance system, through which rural workers and their families can obtain much needed personal accident coverages, among others. AIG Global Real Estate Investment Corp. developed Atlantic Station ■ in Atlanta, and with the early help of AIG Environmental, led one of the largest brownfield remediation efforts ever undertaken in the United States. ■ AIG is among the world’s largest investors in government securities and other investments that fuel economic and infrastructure growth. The AIG ■ U.S. Residential Real Estate Funds raised $300 million to acquire and develop multifamily properties. G R O W T H A N D D E V E L O P M E N T AIG investments build better lives for people around the world. F rom the beginning, a central focus markets, set up telecommunications strategies. Likewise, our investments of AIG’s strategy has been to invest systems and lay down highways, in addi- reflect the values of AIG, which is why in the countries where we operate tion to funding many other essential our investment experts diligently evaluate and support important nation-building undertakings that have benefited people and select business partners and funds that and educational projects, among others, in the markets we serve. live up to our high standards. Over the that improve and contribute to greater With one of the largest investment years, for example, we have invested in a social well-being. portfolios in the world, AIG also empha- range of minority-owned firms and have Throughout the world, our investments sizes socially responsible investment moved toward developing “green funds” have helped open hospitals and schools, that benefit the environment. build dams, establish mortgage lending AIG 2005 Annual Report ■ 25


  • Page 28

    Our colleagues contribute their time and money to support many worthwhile causes such as education, helping the homeless and disaster relief. AIG encour- In 2005, the AIG Disaster Relief A IG has a long-standing ages everyone in the organization to Fund raised $8.6 million to help in recov- tradition of giving back to the play an active role in the community, ery efforts and provide assistance to those communities in which it oper- and we support them by matching affected by the year’s major natural ates, whether through direct charitable individual monetary contributions and disasters, including Hurricane Katrina donations, fundraising, volunteerism, or allotting specified amounts of paid time and the earthquake that struck Pakistan other forms of outreach. for volunteer efforts. and India. G O O D C I T I Z E N S H I P We contribute and volunteer in our communities. Left to right: Through “AIG Homers For Kids,” AIG donated $250 to a New York-based youth charity for every home run the New York Mets hit at Shea Stadium during the 2005 season. Working with Project Hope, AIU Shanghai funded the construction of a primary school in remote Jiangxi, ■ China. AIG colleagues volunteer with New York Cares, an organization that provides hands-on services for New Yorkers in need. AIG Disaster ■ ■ Relief Fund donations will help rebuild the largest fish and fresh food market in Banda Aceh, Indonesia, which was destroyed by the tsunami. ■ The AIG Disaster Relief Fund also donated $2.9 million to organizations involved in Hurricane Katrina recovery and humanitarian efforts, including the Baton Rouge Area Foundation, which had a special emphasis on providing immediate aid to evacuees from New Orleans. In Jakarta, ■ volunteers from AIU Indonesia are pictured unloading supplies of milk, which were airlifted to tsunami-stricken areas.


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    AIG employees in Houston give up their free time to work with Rebuilding Together Houston, a non-profit volunteer organization that provides home repair services for low income, elderly and disabled homeowners throughout the area. AIG American General supported the work of its volunteers with several donations in 2005 to restoration projects sponsored by Rebuilding Together Houston. Left to right: DeVon Henson Administrative Coordinator Judy Storey Associate Field Service Analyst Ray Sawicki Claims Director Background, left to right: Cheryl Howard New Business Associate Director Dianne Villareal Team Service Assistant Darrel John Research Coordinator On roof: Cecil Price Unit Leader 27


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    AIG at a Glance World leaders in insurance and financial services, AIG has operations in more than 130 countries and jurisdictions. General Insurance General Insurance (a) Before realized Domestic Brokerage Group Operating Income (a) capital gains (losses). AIG’s General Insurance operations The principal units of the Domestic Brokerage (billions of dollars) (b) 2001 includes catastro- include the largest U.S. underwriters of phe losses of $867 million Group (DBG) provide the widest available commercial and industrial insurance, the range of commercial and industrial coverages. 4.54 (including World Trade most extensive international property- Center losses ■ National Union Fire Insurance Company of casualty network, a personal lines business of $769 million). Pittsburgh, Pa. is the leading provider of with an emphasis on auto insurance and (c) 2002 includes General directors and officers, employment practices high-net-worth clients and mortgage Insurance loss reserve liability, network security insurance, fidelity/ 2.95 charge of $2.1 billion. crime coverage and a premier underwriter of guaranty insurance operations. AIG’s leadership is a result of its underwriting (d) 2004 includes catastro- professional liability and fiduciary coverages. phe losses of $1.05 billion, 1.98 skill, innovative insurance solutions, ■ American Home Assurance Company is 1.77 and a $850 million financial strength, superior service and 1.27 charge attributable to the the leading provider of excess casualty responsive claims handling. The AIG change in estimate liability insurance and a leading workers claims operation gives clients access to a for asbestos and environ- compensation insurer. mental exposures. vast worldwide network of dedicated ■ Lexington Insurance Company is the largest (e) 2005 includes excess and surplus lines carrier, specializing in experts and top legal firms. catastrophe losses of $2.89 billion, and difficult-to-place property and casualty risks. ’01 ’02 ’03 ’04 ’05 (b) (c) (d) (e) a fourth quarter reserve ■ AIG Environmental is the leading provider of charge of $1.82 billion. environmental coverages and services. Life Insurance & Retirement Services Life Insurance & (a) Before realized capital Foreign Life Insurance & Retirement Services Retirement Services gains (losses). Serving millions of customers around AIG’s Foreign Life Insurance & Retirement Operating Income (a) (b) 2001 includes World the world, AIG’s growing global Life Services operations are conducted principally 9.06 (billions of dollars) Trade Center losses of through the following market-leading Insurance businesses make up the most $100 million. 7.88 extensive network of any life insurer. companies: Strategies for enhancing growth focus on American International Assurance Company, 6.57 ■ developing new markets, expanding Ltd. is AIG’s flagship life insurance company for 5.55 distribution channels and broadening Southeast Asia and the largest life insurer in 5.03 product offerings. AIG has one of the the region. Its extensive network of branches, premier Retirement Services businesses in subsidiaries and affiliates spans Australia, Brunei, China, Guam, Hong Kong, India, the United States. It also has an extensive Indonesia, Macau, Malaysia, New Zealand, international retirement services network Singapore, South Korea, Thailand to meet the growing needs of groups and Vietnam. and individuals in countries worldwide. ’01 ’02 ’03 ’04 ’05 (b) Financial Services Financial Services * Includes the effect The businesses in AIG’s Financial Services Operating Income* of hedging activities Group are leaders in the markets they serve. AIG’s Financial Services businesses that do not qualify (billions of dollars) International Lease Finance Corporation specialize in aircraft and equipment for hedge accounting ■ 4.28 leasing, capital markets, consumer finance under FAS 133. (ILFC) is AIG’s aircraft finance business. ILFC and insurance premium finance. These is a market leader in the leasing and remarket- businesses complement AIG’s core ing of new advanced technology commercial 2.18 2.13 jet aircraft worldwide. insurance operations and achieve a 1.77 1.18 competitive advantage by capitalizing on opportunities throughout the AIG global network. ’01 ’02 ’03 ’04 ’05 Asset Management Asset Management ■ AIG Global Investment Group (AIGGIG) AIG’s Asset Management Group business- Operating Income manages equities, fixed income, private equity, (billions of dollars) hedge funds of funds and real estate invest- es include institutional and retail asset 2.25 ments for institutional, individual and high-net- 2.12 management, broker-dealer services, private worth investors around the world. AIGGIG banking and spread-based investment busi- ranks among the top five institutional asset 1.32 ness from the sale of guaranteed investment managers in the world. 1.13 1.02 contracts, as well as the management of AIG insurance invested assets. Businesses in the Group leverage AIG’s deep knowl- edge of markets around the world and expertise in a wide range of asset classes. ’01 ’02 ’03 ’04 ’05 28 AIG at a Glance


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    2005 Consolidated Revenues General Insurance 41.7% Life Insurance & by Major Business Segment Domestic 31.8% Retirement Services 43.7% Foreign 9.9% Domestic 14.8% Foreign 28.9% Financial Services 9.7% Asset Management 4.9% ■ AIG Risk Management, Inc. provides casualty providers of equipment breakdown and engi- Transatlantic Holdings, Inc. risk management products and services to large neered lines insurance. Transatlantic Holdings, Inc., which is a commercial customers. majority-owned subsidiary of AIG, is the largest ■ AIG Worldsource is a leading provider of global Domestic Personal Lines publicly traded, U.S.-based reinsurance insurance programs for U.S.-based multination- AIG’s growing Domestic Personal Lines opera- organization. als, as well as foreign companies with operations tions provide automobile insurance through in the United States. AIG Direct, the mass marketing operation, Foreign General Insurance Group ■ DBG also includes many specialty business Agency Auto Division and 21st Century The Foreign General Insurance Group units that draw on the worldwide resources Insurance Group, as well as a broad range of comprises AIG’s international property-casualty of AIG companies to meet client needs in coverages for high-net-worth individuals operations. aviation, transportation, the construction and through the AIG Private Client Group. energy industries, the small business sector and ■ American International Underwriters (AIU) accident and health coverages, as well as engi- United Guaranty Corporation is the marketing unit for AIG’s overseas neering services through AIG Consultants, Inc. property-casualty operations, the most extensive United Guaranty Corporation subsidiaries pro- foreign network of any insurance organization. ■ HSB Group, Inc. is the parent company of The vide default protection insurance for first and Stretching across Asia and the Pacific to Hartford Steam Boiler Inspection and Insurance second mortgages and private education loans, Latin America, Europe, Africa and the Company, HSB Engineering Insurance Limited as well as other financial services, to financial Middle East, AIU markets a full range of and The Boiler Inspection and Insurance institutions and mortgage investors. property-casualty products to both commercial Company of Canada, leading worldwide and consumer clients. ■ American Life Insurance Company (ALICO) Domestic Life Insurance & Retirement Services ■ AIG Annuity Insurance Company is the is among the largest international life insurance largest issuer of fixed annuities in the United In the United States, AIG’s Domestic Life companies in the world, with operations in States and the leading provider of annuities Insurance & Retirement Services businesses more than 50 countries. ALICO’s operations sold through financial institutions. offer a comprehensive range of life insurance, stretch from Japan to Europe, the Middle East, annuity and accident and health products for ■ AIG VALIC is the nation’s leading provider of Latin America, South Asia and the Caribbean. financial and estate planning, and wealth trans- group retirement plans to primary and second- ■ AIG Star Life Insurance Co., Ltd. is contribut- fer. They use a full complement of distribution ary educational organizations, the second largest ing to AIG’s growing life insurance presence in channels, including career agency networks, to healthcare groups and the third largest to Japan. independent advisors, financial planners, institutions of higher education. ■ AIG Edison Life Insurance Company serves brokers and banks. The principal Domestic ■ AIG SunAmerica Retirement Markets, Inc. Japan through 7,200 agents and other channels. Life Insurance & Retirement Services opera- is one of the nation’s leading distributors of tions include the following: individual variable annuities. ■ Nan Shan Life Insurance Company, Ltd. is Taiwan’s second largest life insurer. ■ AIG American General, one of the fastest growing major life insurance organizations in ■ The Philippine American Life and General the United States, distributes a broad range of Insurance Company is the largest and most life insurance, annuity and accident and profitable life insurance company in the health products. Philippines. ■ Capital Markets operations are conducted ■ AIG’s consumer finance business consists of through AIG Financial Products Corp., which American General Finance, Inc., one of the engages in transactions, as principal, to provide largest consumer finance organizations in clients with risk management solutions the United States, and AIG Consumer Finance and sophisticated hedging products in standard Group, Inc., which, through its subsidiaries, and customized commodities, credit, currencies, offers a broad range of consumer finance energy, equities and rates. Clients include products, primarily overseas. top-tier corporations, financial institutions, ■ Imperial A.I. Credit is the largest insurance governments, agencies, institutional investors premium finance provider in the United States. and high-net-worth individuals throughout the world. ■ AIG SunAmerica Asset Management Corp. ■ AIG Private Bank Ltd., AIG’s Zurich-based pri- manages and/or administers retail mutual funds, vate banking subsidiary, specializes in providing as well as the underlying assets of AIG asset management and private banking services SunAmerica and AIG VALIC variable to a worldwide clientele. annuities sold to individuals and institutional investors throughout the United States. ■ AIG Advisor Group, Inc. broker-dealers provide a broad range of financial products and support services to independent financial advisors serving the retirement planning needs of clients in the United States. AIG 2005 Annual Report ■ 29


  • Page 32

    General Insurance AIG’s General Insurance operations include the largest U.S. underwriters of commercial and industrial insurance, the most extensive international property- casualty network, a personal lines business with an emphasis on auto insurance and high-net-worth clients and mortgage guaranty insurance operations. (in millions, except ratios) 2005(a) 2004(b) Net premiums written $ 41,872 $ 40,623 Underwriting loss (2,050) (247) Net investment income 4,031 3,196 Operating income before realized capital gains 1,981 2,949 Realized capital gains 334 228 Operating income 2,315 3,177 Operating income before realized capital gains, excluding catastrophe losses 4,869 4,003 Net reserves for losses and loss expenses 57,476 47,254 Combined ratio 104.69 100.30 Combined ratio, excluding catastrophe losses(c) 97.63 97.56 (a) Includes fourth quarter net reserve charge of $1.82 billion. (b) Includes a charge of $850 million attributable to the change in estimate for asbestos and environ- mental exposures. (c) Excluding the fourth quarter net reserve charge, the 2005 combined ratio was 93.19. Excluding the change in estimate for asbestos and environmental exposures, the 2004 combined ratio was 95.35. Domestic Brokerage Group– Foreign General Insurance– Net Premiums Written Net Premiums Written (billions of dollars) (billions of dollars) 10.00 23.13 22.51 9.41 19.56 7.86 6.18 14.33 5.37 9.52 ’01 ’02 ’03 ’04 ’05 ’01 ’02 ’03 ’04 ’05 30 Review of Operations


  • Page 33

    Thomas R. Tizzio Richard H. Booth William V. Nutt, Jr. Senior Vice Chairman President and CEO President and CEO General Insurance HSB Group, Inc. United Guaranty Corporation Domestic Brokerage Group driver of National Union’s success. During Environmental provides environmental Taken together, the businesses in AIG’s 2005, National Union introduced an inno- coverage for fixed facilities, brownfields Domestic Brokerage Group (DBG) make up the vative coverage plan for hedge funds that and military bases closed under the Base nation’s preeminent property-casualty insurance bundles comprehensive D&O, partnership Realignment and Closure program. organization. DBG’s underwriting leadership is and professional liability insurance into a AIG Risk Management, Inc. (AIGRM) is one built on a franchise that offers the industry’s single package. National Union also of the leading underwriters of primary casu- widest range of coverages, including many launched new product packages for private alty, excess workers compensation, surety specialty and difficult-to-place classes of busi- companies with revenues up to $100 mil- and risk financing programs for large and ness, as well as some of the industry’s largest lion and public companies with market medium sized corporations, as well as risk capacity and financial resources. capitalization up to $75 million. In the management programs for major construc- errors and omissions area, National Union tion firms, complex building projects and (in millions, except ratios) 2005 2004 widened its offerings for professionals in transportation entities. In 2005, AIGRM Net premiums written $23,128 $22,506 specific industry segments, including trusts focused on the real estate, temporary Combined ratio 113.83 106.02 and real estate. staffing and financial institutions segments, Combined ratio, excluding 2005 was a year of strong achievement and emerged as the leading provider of catastrophe losses 105.54 103.27 throughout American Home. It reinforced workers compensation coverage for major DBG serves a wide customer base, its industry leading position in the excess U.S. commercial airlines. ranging from the world’s largest multi- casualty market. At AIG Specialty AIG Worldsource, one of the largest national corporations to regional medium Workers Compensation, online results providers of Defense Base Act coverage, sized companies and local small businesses reached a new high in premiums through expanded local service for contractors nationwide. In the U.S. market, DBG’s a website serving small businesses. engaged in reconstruction projects in the commercial property-casualty operations With solid growth in net premiums Middle East with the opening of a Dubai are virtually without peer. DBG’s 2005 written in 2005, Lexington continues to far claims office. growth was partially fueled by generally outdistance its competitors and reaffirm its AIG Global Energy, a leading provider of improving renewal retention rates, reflect- position as the largest U.S.-based surplus insurance and alternative risk management ing the importance to customers of placing lines insurer. Lexington was also named programs to energy companies worldwide, their business with the most financially “Best Overall Surplus Lines Insurer” based expanded operations in 2005. It established strong and experienced insurers. DBG’s on service, value, quality and innovation by underwriting branch offices in Chicago results in 2005 were affected by the tragic the Business Insurance 2005 Readers’ and Phoenix to increase penetration and losses resulting from Hurricanes Katrina, Choice Awards. enhance services for Midwestern and Rita and Wilma, as well as other storm- Starr Excess Liability Insurance Company, Western state brokerage customers. related activities. DBG claim teams were Ltd. is a leading writer of high-limit excess AIG Small Business provides specialty on the scene in the immediate aftermath liability and financial lines coverages, and insurance products and services to the of these tragic natural disasters, helping was one of the key providers to Fortune 500 small business segment. With operations customers recover and rebuild. companies in 2005. in Berkeley Heights, New Jersey and National Union has led the U.S. directors In 2005, AIG Environmental celebrated Phoenix, Arizona, the unit services over and officers (D&O) insurance market for AIG’s 25th anniversary in the environ- 60,000 policyholders. more than 30 years. The ability to address mental insurance industry. AIG Environ- The Domestic Accident & Health Division new and emerging management liability mental has long been the market leader had favorable growth in 2005. The issues, and being first to market to provide in the environmental insurance sector and Division is the largest U.S. provider of the needed coverage, is a hallmark and key has introduced many innovative products. group accident insurance in the employer Breakthroughs in environmental insurance and specialty market segments. include single policy programs that provide pollution coverage along with general liability coverage. In addition, AIG AIG 2005 Annual Report ■ 31


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    General Insurance Continued AIG Aviation, Inc. is the leading provider Agency Auto had strong growth for the Transatlantic Holdings, Inc. of aviation insurance and airline terrorism second consecutive year, with net written Transatlantic Holdings, Inc. (Transatlantic) is coverage. Serving most of the world’s major premium increasing more than 30 percent. a leading international reinsurance organiza- airlines, AIG Aviation had a very good 21st Century Insurance Group had profitable tion with a network of offices located in the year. Major customer segments include growth with good results stemming from Americas, Europe, Asia and Australia. airlines, airports, manufactured products, the ongoing implementation of its state Transatlantic is majority-owned by AIG. business and light aircraft, commercial/ expansion strategy, particularly through its charter, ground services and aviation entry into Texas early in 2005. The AIG (in millions, except ratios) 2005 2004 workers compensation. Private Client Group had strong net written Net premiums written $ 3,466 $ 3,749 The Hartford Steam Boiler Inspection and premium growth of over 40 percent in Combined ratio 112.17 101.46 Combined ratio, excluding Insurance Company and its insurance sub- 2005. Focusing exclusively on personal catastrophe losses 97.21 95.59 sidiaries (HSB) had strong results in 2005. insurance and risk management services HSB’s loss prevention initiatives play an for high-net-worth individuals and their Transatlantic had a profitable year in important role in its underwriting perform- families, the group benefited from an 2005 in an insurance industry sector that ance and help deliver excellent returns on influx of new policyholders, as well as high was particularly hard hit by losses from the capital. In 2005, HSB conducted more customer retention at 93.5 percent. year’s record catastrophe activity. Many in than 500,000 on-site customer loss preven- the industry reported negative results. tion inspections of equipment. HSB uses its United Guaranty Corporation Transatlantic’s performance was driven technical knowledge of equipment in by strategies focused on global reach, United Guaranty Corporation (UGC) subsidiaries concert with on-site inspections to help product diversification, prudent capital provide mortgage guaranty insurance for first its customers prevent losses. management and stringent risk selection and second mortgages, as well as a compre- efforts, in addition to the reinsurance hensive range of financial products and ser- Domestic Personal Lines coverage Transatlantic purchased for itself vices to lenders and mortgage investors, to protect its property and marine-energy The core businesses of AIG’s Domestic Personal including mortgage fraud recovery services and portfolios. For the year, net premiums Lines are AIG Direct, Agency Auto, 21st Century private education loan default insurance. written declined due largely to weaker Insurance Group and the AIG Private Client (in millions, except ratios) 2005 2004 market conditions and higher ceding com- Group. Net premiums written $ 628 $ 607 pany retentions, with the major reductions (in millions, except ratios) 2005 2004 Combined ratio 49.08 53.31 confined to a few classes. At year end, Combined ratio, excluding Transatlantic’s balance sheet remained Net premiums written $ 4,653 $4,354 catastrophe losses 47.17 53.31 strong. Combined ratio 100.70 96.51 Combined ratio, excluding UGC had a successful year in both its catastrophe losses 98.25 95.94 domestic and international operations. Foreign General Insurance AIG’s Domestic Personal Lines In the United States, UGC reported one of AIG’s Foreign General Insurance Group has the operations had good premium growth in the best combined ratios in the domestic most extensive worldwide network of any 2005. Overall, underwriting results for the mortgage guaranty insurance industry, property-casualty insurance organization. Its year were adversely affected by catastrophe while UGC’s consumer group marked its operations encompass more than 80 countries losses, reserve strengthening and costs seventh consecutive year of growth. UGC’s in Asia, the Pacific Rim, Latin America, Europe, incurred in exiting the assigned risk busi- global expansion effort continued as Africa and the Middle East. ness. AIG Direct, which provides voluntary planned in 2005, with new offices estab- auto insurance through a range of direct lished in Asia, Europe and the Americas. (in millions, except ratios) 2005 2004 sales channels, fully integrated and Net premiums written $ 9,997 $ 9,407 re-underwrote the previously acquired GE Combined ratio 85.56 90.81 Combined ratio, excluding business, and is running off its homeowners catastrophe losses 81.75 88.18 business while producing solid auto results. 32 Review of Operations


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    Robert M. Sandler Nicholas C. Walsh Executive Vice President Executive Vice President Domestic Personal Lines Foreign General Insurance American International Underwriters (AIU), duced good results with new accident and Award” from Reactions magazine for the the marketing unit for AIG’s Foreign health product launches. This alliance pro- fourth consecutive year and AIG Medical General Insurance operations, has built its vides AIU with access to PICC’s 104,000 & Rehabilitation in the U.K. was highly market-leading worldwide presence upon agents and 4,500 branches throughout the commended by Post magazine for outstand- disciplined underwriting skills, a localized country. ing service. approach to global insurance and a stead- Much like China, India is a region of In Central Europe and C.I.S., AIU fast commitment to customer service. tremendous opportunity, with a growing reported good premium growth and strong These qualities are engrained within the population in excess of one billion profits. These results were driven by bal- culture of the organization and, in 2005, people. AIG’s joint venture, Tata AIG anced performance across all 13 regional again helped drive AIU to strong growth General Insurance Company Limited countries, particularly in Romania, where in the majority of its regions. (Tata AIG), reported premium growth in AIU is a leader in the property and liability In 2005, Foreign General reported net all lines of business and loss ratios among markets. Russia and the Czech Republic premiums written of nearly $10 billion, the lowest in the industry in 2005. also contributed to AIU’s success in the and a combined ratio of 85.56, which Tata AIG’s strong results were driven by region during the year. ranks among the best in the industry. A the opening of several new offices and the In the Middle East, AIU is the largest major area of growth was in the consumer launch of India’s first business travel foreign insurer in Pakistan and AIG segment, with strong production in insurance program. Sigorta A.S. is the largest accident and accident and health, and record profits in In Southeast Asia, AIU became the first health underwriter in Turkey. In 2005, personal lines. U.S.-based insurance organization to AIU’s Middle Eastern operations reported A significant achievement for AIU in receive a license to operate a wholly owned solid premium and profit growth. 2005 was the launch of a new segmenta- general insurance company in Vietnam, AIU achieved good results in its Latin tion strategy aimed at fostering more sys- where it will market property-casualty American region in 2005. In Brazil, tematic and specialized relationships with insurance products to both individuals and Unibanco AIG Seguros S.A. is the number customers. The strategy aligns dedicated businesses. The addition of Vietnam to its one insurer of corporate business, and the management personnel with three cus- regional franchise strengthens AIU’s posi- largest provider of directors and officers tomer segments (major, commercial and tion as the largest general insurance liability insurance. It won the Brokers small-medium enterprises) to maximize provider in Southeast Asia. Relationship Marketing Award for “Best efficiency in meeting their specific product, With offices in 13 continental European Insurance Company in the Brazilian service and distribution needs. By getting countries, AIG Europe S.A. has one of the Market” in 2005. Elsewhere in the region, closer to the customer, AIU seeks to cross- most extensive general insurance networks American International Insurance Com- sell a full range of AIG company products in the region. Specializing in asset protec- pany of Puerto Rico and La Meridional and services to each segment. tion insurance for major and multinational Compania Argentina de Seguros S.A. were In Japan, American International companies throughout the continent, the number one providers of casualty insur- Underwriters Insurance Company (AIUI) AIG Europe S.A. achieved good premium ance in their respective markets. La and American Home Assurance Company growth. In 2005, more than 80 percent Meridional also won the 2005 Gold Award (AHA) purchased the insurance portfolio of the European Financial Times’ “Top 500 for the best direct marketing program. of the Royal & SunAlliance branch opera- Companies” were AIG Europe S.A. tions. AHA also opened an additional call customers. center in Toyama to add capacity while AIG’s General Insurance operations in lowering costs. the U.K. provide insurance to nearly 1.5 In mainland China, AIU’s strategic million individuals. In 2005, AIG General alliance with PICC Property and Casualty Insurance companies in the U.K. were Insurance Company Limited (PICC) pro- named “London’s Best Underwriting Teams” by Reactions magazine. In addition, AIG received the “Global Reactions AIG 2005 Annual Report ■ 33


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    Life Insurance & Retirement Services Serving millions of customers around the world, AIG’s growing Life Insurance & Retirement Services businesses constitute the industry’s most extensive network. (in millions) 2005 2004 Premiums, deposits and other considerations(a) $ 66,448 $ 66,844 GAAP premiums 29,400 28,088 Net investment income 18,134 15,269 Operating income before realized capital gains (losses) 9,062 7,880 Realized capital gains (losses) (218) 43 Operating income 8,844 7,923 (a) Represents aggregate business activity during the respective periods presented on a non-GAAP basis. Foreign Life Insurance & Retirement Domestic Life Insurance & Retirement Services–GAAP Premiums Services–GAAP Premiums (billions of dollars) (billions of dollars) 23.02 21.92 6.38 6.17 17.87 5.62 5.61 15.51 5.18 14.00 ’01 ’02 ’03 ’04 ’05 ’01 ’02 ’03 ’04 ’05 34 Review of Operations


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    Bruce R. Abrams Frank Chan Gustavo Covacevich Jose L. Cuisia, Jr. President and CEO President and CEO President President and CEO AIG Annuity and AIG VALIC Nan Shan International Retirement Services Philamlife and Group Management Division Foreign Life Insurance AIA ranked number one in the Hong for entire families and also launched a & Retirement Services Kong market for both in-force and annual- flexible endowment life insurance product AIG’s Foreign Life Insurance & Retirement ized new business premiums, and garnered that contributed to its strong results. Services businesses offer a broad range of several industry awards for its superior AIG Life Korea achieved excellent first insurance products in more than 70 countries. performance. year premium growth, mainly due to In many of these locations, AIG companies are In China, where AIA is one of the increases in universal life sales. AIG Life among the best-known insurers and have been leading foreign life insurers, premiums, Korea was also the market leader in banc- serving local markets for more than 50 years. deposits and other considerations grew assurance among all life insurers in Korea. 37.2 percent in 2005. AIA was also named Since becoming the first U.S.-based (in millions) 2005 2004 the number one foreign insurance brand in company to operate a life insurance busi- Premiums, deposits and China by Horizon Marketing Group, Inc., ness in Vietnam in 2000, AIA has consis- other considerations(a) $ 42,712 $39,866 a leading Chinese market research firm. tently grown its operations, which include GAAP premiums 23,016 21,917 AIA continues to be the largest life a distribution network of more than (a) Represents aggregate business activity during insurer in Singapore, with a market share 19,000 agents. AIA Vietnam successfully the respective periods presented on a non-GAAP basis. of 29.1 percent in 2005 based on in-force expanded its product portfolio in 2005 and annualized premiums. AIA Singapore is capitalizing on opportunities within In 2005, AIG’s Foreign Life companies launched several new products throughout the bancassurance sector. achieved excellent results by launching a the year and boosted sales of regular pre- American Life Insurance Company (ALICO), number of timely and innovative product mium products through various campaigns. which is among the largest international offerings in key regions. This was especially In Thailand, AIA ranked number one life insurance companies in the world, true in Asia, where many of AIG’s Life for both in-force and new business premi- had excellent results in 2005 in terms of businesses are household names, well- ums. AIA Thailand also launched the first operating income. An intensified focus regarded over many years. The Foreign Life universal life policy in the country and on diversifying distribution channels companies capitalize on a diverse range of was voted the “Most Admired Brand in the helped ALICO achieve its growth, while distribution channels, including a strong Life Insurance Category” in a BrandAge cost controls enabled margins and profits and highly professional agency force, banc- survey for the third consecutive year. to expand. assurance, worksite marketing and direct AIA grew its Indonesian business In Japan, where it has its largest marketing, among others. These channels during the year and became the first AIG operation, ALICO reported strong results. provide a powerful platform for growth. company to obtain a license to provide life ALICO Japan’s good performance is American International Assurance Company, products in compliance with Syariah laws attributable to increased sales of life prod- Ltd. (AIA) continues to be the dominant life and principles regarding buying and selling. ucts, continued growth in accident and insurer in Southeast Asia. In 2005, AIA In Malaysia, AIA received the Reader’s health profits, and increased annuity rolled out a number of campaigns aimed at Digest Superbrand Gold Award for insur- assets under management. Both captive increasing recruitment and productivity ance in 2005. and independent agency sales channels among agents in Hong Kong, which helped Tata AIG Life Insurance Company, grew at double-digit rates for the year, increase sales of higher margin risk-based Limited, one of India’s leading private insur- despite a challenging market environment. products – a major corporate initiative. ers, has a distribution network that encom- passes 65 sales offices in 41 cities, as well as approximately 36,000 agents and four bancassurance partners. In 2005, Tata AIG Life Insurance Company Limited became the first insurance company to offer acci- dental death and care insurance coverage AIG 2005 Annual Report ■ 35


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    Life Insurance & Retirement Services Continued In the United Kingdom, ALICO tributed to this output, particularly with development process. Philam Plans, reported excellent growth in operating the launch of an innovative multi-currency Philamlife’s pre-need subsidiary, topped income for the year and was named “Best fixed annuity product that increased new industry sales for the fourth consecutive Specialist Group” in the Individual annuity deposits substantially in its first year, with an overall market share of Pensions category of Standard & Poor’s year. Also in Japan, AIG Edison Life Insurance 23 percent. More than 300,000 Filipino Fund Awards 2005. Company (AIG Edison Life) grew premiums at families are Philam Plans customers. In Greece, ALICO ranked first among a double-digit rate in 2005. Since being Philam Plans is also the dominant provider foreign-owned life insurers in 2005 in acquired in 2003, AIG Edison Life has of education plans in the Philippines, with terms of profits, total insured benefits, been making significant contributions to a 32 percent market share of sales. excess interest benefit and productivity. AIG’s Japan operation by introducing sev- AIG International Retirement Services In Cyprus, Russia, the Slovak Republic eral new and innovative products per year (AIGIRS) had good results in 2005, its third and the Ukraine, ALICO maintained lead- and steadily improving agency productivity. year of operations. Following its success in ing rankings in terms of market share. In Nan Shan Life Insurance Company, Ltd. Japan and Korea, AIGIRS reported strong Poland, ALICO earned the “Clients’ (Nan Shan) in Taiwan reported 20 percent growth in China in annuity deposits via Golden Laurel 2005” Award, which recog- growth in total premiums, deposits and the bancassurance channel. AIGIRS nizes the most valuable brands in the other considerations for 2005. Nan Shan successfully expanded its product portfolio Polish financial services market. In 2005, garnered several awards for its outstanding and distribution in 2005, and entered ALICO’s Polish subsidiary, First American- service in the Taiwan market from into key agreements with bank partners in Polish Life Insurance and Reinsurance Risk Management, Insurance & Finance Indonesia, Vietnam, Singapore and Company, received permission to establish magazine. These awards include “The Thailand. In Italy, AIGIRS reported strong branch offices in Latvia and Lithuania. Most Renowned Insurance Company,” growth in investment linked products, ALICO’s Middle East region continues “The Best Insurance Company,” “The where part of the premium goes into an to show steady growth. ALICO benefits Best Claim Service” and “The Insurance investment fund. from having a leading agency presence Company with the Best Agents.” Nan The Group Management Division (GMD) in the Middle East. In Jordan, ALICO is Shan has earned the distinction of “The is the primary distribution arm for AIG’s the top life insurance company in terms of Insurance Company with the Best Agents” international employee benefits, credit, total life premiums written and total assets. for 13 consecutive years. Early in 2005, and pension products and services. GMD In Brazil, Unibanco AIG Seguros, the Vietnam Ministry of Finance continued its strong performance in 2005 S.A. had strong results for the year. The gave approval for Nan Shan to establish by maintaining its leadership position as majority of ALICO’s profits in Brazil were a representative office in Hanoi. either the number one or two provider generated from retail life and personal The Philippine American Life and General of group benefits in Hong Kong, Malaysia, accident products, employee benefits Insurance Company (Philamlife) has been Singapore, Taiwan and Thailand as meas- growth through middle market initiatives, the premier life insurance organization in ured by market share, and the number one and growth in its pension and retirement the Philippines for over five decades, con- issuer of new group life policies in Japan. business. sistently ranking number one in premiums, GMD covers over 84,000 corporate clients, In Japan, AIG Star Life Insurance Co., Ltd. assets and net income. In 2005, Philamlife including 70 of the U.S. Forbes 100. had record results, increasing premium, launched its first variable life insurance deposits and other considerations by product and was named a Platinum approximately 85 percent for the year. SuperBrand by Reader’s Digest Asia’s Annuity expansion significantly con- SuperBrands Survey for the second con- secutive year. Philamlife also was granted ISO 9001:2000 certification for branch servicing and re-certification of its product 36 Review of Operations


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    Rodney O. Martin, Jr. R. Kendall Nottingham Jay S. Wintrob Gerald W. Wyndorf Chairman Chairman and CEO President and CEO President and COO AIG American General and ALICO AIG Retirement Services AIA Chief Operating Officer Worldwide Life Insurance Domestic Life Insurance in the last 24 months. AIG American pany’s performance throughout the year. & Retirement Services General’s deferred annuity unit has grown AIG Annuity’s focus on maintaining the AIG’s Domestic Life Insurance & Retirement significantly since its launch in 2004. industry’s lowest operating expenses Services businesses distribute a broad range of In 2005, for the second year in a row, provides a competitive advantage in any life insurance, annuity, and accident and health AIG American General was the top- economic environment and a strong products and services through independent and ranked U.S. life insurer as measured in platform for future growth. career agent networks and brokers, as well as term life sales and the leader in total AIG VALIC had good results in 2005. It is alternative distribution channels, including individual life insurance issued. These a leader in the U.S. group retirement plan banks. Extensive product offerings, expanding results were achieved while overall indus- business – number one in the primary and distribution and financial strength provide try sales declined in both categories. secondary education market, number two key competitive advantages in the consumer A key competitive advantage for AIG among healthcare groups and third largest and institutional markets. American General continues to be its in higher education. AIG VALIC’s extensive distribution network of inde- focus on deposit growth, asset retention (in millions) 2005 2004 pendent producers, career agents and and changing client needs resulted in an Premiums, deposits and various other third parties including banks, expanded product portfolio, a new focus on other considerations (a) $23,736 $26,978 accountants and financial planners. The retirement income solutions for its client GAAP premiums 6,384 6,171 home services operation, staffed by career base and a client asset retention program (a) Represents aggregate business activity during agents, is a modest growth business, but that has generated strong initial results. the respective periods presented on a non-GAAP basis. continues to generate strong cash flow. In The company also formed a large group 2005, AIG American General consolidated acquisition division to identify new busi- Since joining the AIG franchise in its independent distribution channels into ness opportunities within its targeted mar- 2001, AIG American General has consistently one platform to more efficiently serve kets. AIG VALIC’s Guided Portfolio grown its business – even in the most its customers while leveraging new business Services platform’s growth in assets under challenging of markets. During this period, and insurance operations capabilities. management reflects an increasing demand retail periodic life sales have grown at a In 2005, AIG Annuity Insurance Company for independent professional advice in compound rate of 16 percent. In 2005, the (AIG Annuity) maintained its dominant mar- preparing for retirement. U.S. life insurance market was character- ket share in fixed annuities sold through Despite a difficult operating environ- ized by fierce competition and low interest banks, despite a decline in sales consistent ment and a decline in sales, AIG SunAmerica rates, with many carriers cutting prices with trends in the marketplace. The com- Retirement Markets, Inc. (AIG SunAmerica) in pursuit of market share. Despite these pany accounted for nearly 30 percent of all reported record fee income and assets obstacles, AIG American General pro- bank fixed annuity sales for the year, under management in 2005. The company duced solid results and strengthened its reflecting the quality of its product portfo- experienced unforeseen regulatory delays position as the premier U.S. life insurer lio, disciplined pricing strategy and respon- in the introduction of new living benefit by upholding its long-standing tradition of sive customer service. Over 80,000 bank options at a time when such options were high product quality and disciplined representatives at 735 financial institutions critical to variable annuity sales. By year underwriting. offered fixed annuity products issued by end, AIG SunAmerica had successfully AIG American General expanded AIG Annuity in 2005. Product enhance- launched MarketLock, an innovative its product portfolio in traditional lines of ments and continued success in expanding guaranteed minimum withdrawal benefit business, as well as newer ones designed for distribution also contributed to the com- feature in its Polaris and Seasons variable the worksite and accident and health annuity products, which helped boost markets. In the independent distribution sales. In addition, AIG SunAmerica con- network, 72 percent of 2005 paid sales were tinued to strengthen its sales organization, derived from products created or revised further penetrate the bank channel, and improve customer service and operational efficiencies. AIG 2005 Annual Report ■ 37


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    Financial Services AIG’s Financial Services businesses specialize in aircraft and equipment leasing, capital markets, consumer finance and insurance premium finance. These businesses complement AIG’s core insurance operations and achieve a competitive advantage by capitalizing on opportunities throughout AIG’s global network. (in millions) 2005 2004 Revenues(a) $ 10,525 $ 7,495 Operating income(a) 4,276 2,180 (a) Includes the effect of hedging activities that do not qualify for hedge accounting under FAS 133. Financial Services Revenues (a) (b) ILFC 2005 Revenues by Region (billions of dollars) 10.53 7.50 6.82 6.32 6.24 Europe 48.4% Asia and the Pacific 22.1% United States and Canada 13.8% Africa/Middle East 8.4% Latin America 7.3% ’01 ’02 ’03 ’04 ’05 (b) Includes interest, lease and finance charges. 38 Review of Operations


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    William N. Dooley Joseph J. Cassano Joel L. Epstein Frederick W. Geissinger Steven Udvar-Hazy Senior Vice President President President President President Financial Services AIG Financial Products Corp. AIG Consumer Finance Group, Inc. American General Finance, Inc. International Lease Finance Corporation Financial Services Airbus A350. Both aircraft types reflect In 2005, AIG Consumer Finance Group, Inc. AIG’s Financial Services Group is global in new technology providing maximum fuel (CFG) had record results, with strong growth scope, with diverse businesses that emphasize efficiency and minimum environmental in operating income. CFG built upon its efficient use of capital and regularly generate impact. leadership presence in Poland by expand- above average returns in the markets ILFC continues to enhance its market ing personal loan branches and launching they serve. The Group achieves significant leadership position by focusing on global a new home equity product. AIG Bank competitive advantage from the risk manage- expansion. During the past year, ILFC Polska S.A., CFG’s Polish loan financing ment acumen and international client relation- made significant strides in the Middle unit, won the Laurel Award, which ships of the AIG companies. Eastern, European and Asian aviation recognizes the number one financial markets, and is particularly well positioned institution in the country. In Argentina, AIG’s Financial Services businesses are for growth in China, where it is estimated CFG expanded its sales finance business recognized as leaders and innovators in the that less than 11 percent of the country’s and, in Mexico, CFG opened its first markets they serve, and their collective 1.3 billion population has ever flown on branch to offer personal loans, growing to performance in 2005 again reinforced this an aircraft. a total of six branches by year end. In reputation. AIG’s Capital Markets businesses are Asia, the group focused on growing its auto International Lease Finance Corporation conducted through AIG Financial Products loans, credit card and personal loan (ILFC) leases commercial jet aircraft to 146 Corp. and its subsidiaries (AIGFP), which products. During the year, CFG established airlines spanning the globe. ILFC estimates enter into a broad range of financial deriva- business operations in China to focus on that every 15 seconds, one of its aircraft tives transactions and invest in a wide sales financing. takes off or lands somewhere in the world. range of debt and equity securities. AIGFP Imperial A.I. Credit Companies extended ILFC benefited from improved market offers its institutional and high-net-worth its leadership position as the largest finan- conditions in 2005, reporting operating clients standard and customized financial cier of insurance premiums in North income of $679.5 million – an increase of solutions for their corporate finance, finan- America. Its life insurance financing busi- 5.8 percent for the year. In a high energy cial risk management and investment ness, focused on high-net-worth individu- cost environment, ILFC gains a major needs. Capital Markets is well regarded in als, celebrated its 10th anniversary with competitive advantage by offering the most the industry for its intellectual capital and uninterrupted growth. advanced fuel-efficient aircraft available. its proven track record. It consistently Another key strength lies in ILFC’s success combines high counterparty credit quality in leasing new aircraft well in advance of with market risk lower than its capital mar- delivery. At year-end 2005, ILFC had kets peers. leased all planes due for delivery in 2006 In 2005, Capital Markets’ results were and approximately 66 percent of planes affected favorably by growth in their credit due in 2007. In 2005, ILFC was the first derivatives, commodity index and currency- lessor to order the new Boeing 787, and linked products. one of the first lessors to order the new American General Finance, Inc. (AGF) and its subsidiaries provide loans, retail financing and other credit-related products to approximately two million families in 45 states, Puerto Rico and the Virgin Islands. In 2005, AGF reported strong net finance receivable growth due primarily to non-conforming real estate loan volume, a growing Internet-based business, as well as the acceleration of several e-commerce initiatives. AIG 2005 Annual Report ■ 39


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    Asset Management AIG’s Asset Management Group manages institutional, retail and private fund assets, in addition to AIG insurance company invested assets. Businesses in the Group also include retail mutual funds, broker-dealer services, private banking and guaranteed investment contracts. (in millions) 2005 2004 Revenues(a) $ 5,325 $ 4,714 Operating income(a) 2,253 2,125 (a) Includes the effects of FIN46R and FAS 133. Asset Management Revenues* (billions of dollars) 5.33 4.71 3.65 3.57 3.47 ’01 ’02 ’03 ’04 ’05 *Includes advisory and management fees, and net investment income from guaranteed investment contracts. 40 Review of Operations


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    AIG Global Investment Group (AIGGIG) reported success. AIGGIG also furthered its part- independent financial professionals, AIG strong growth in both revenues and assets nership with AIG’s Domestic Brokerage Advisor Group is the largest independent under management in all of its key areas, Group to cross-sell to insurance clients. broker-dealer network in the United States including listed equity, private equity, AIGGIG garnered several outstanding and is comprised of Advantage Capital hedge funds, fixed income and real estate. performance accolades from the invest- Corporation, AIG Financial Advisors, FSC AIGGIG companies and other investment ment community in 2005. Many equity Securities Corporation and Royal Alliance operations of AIG had over $62 billion of and fixed income portfolios won awards Associates. client assets under management at the end including the European Small Cap Fund, AIG Private Bank Ltd. reported solid of 2005, an increase of 20.6 percent for the the Japan Small Cap Fund, the Latin results in 2005 and continued to expand year. A significant portion of this growth is America Large Cap Fund and the Singa- its global operations by developing its attributable to record new business, which pore Bond Fund. Pensions and Investments broker-dealer company and applying for a included four oversubscribed private equity ranked AIGGIG as one of the world’s five branch license in Hong Kong. It was also and real estate funds that closed during largest institutional asset managers. the first foreign private bank to open a 2005. At year end, AIGGIG and other AIG SunAmerica Asset Management Corp. representative office in Shanghai, and AIG operations managed $541.11 billion (AIG SAAMCo) manages and/or administers made significant progress toward establish- in AIG’s insurance and asset management retail mutual funds, as well as the underly- ing a private banking business in Buenos portfolios. ing assets of AIG SunAmerica and AIG Aires. AIG Private Bank has also increased AIGGIG successfully initiated and grew VALIC variable annuities sold to individu- its distribution of diversified hedge fund strategic relationships with key investors als and groups throughout the United portfolios managed by AIGGIG and con- across a wide spectrum of markets and States. In 2005, AIG SAAMCo benefited tinued to execute cross-selling strategies asset classes in 2005 by drawing upon its from new product launches, including its with other AIG companies. “Investor to Investor” approach, in which first closed-end mutual fund, and the Guaranteed Investment Contracts AIG companies invest a meaningful stake Horizon Funds, which provide additional (GICs) contributed $1.19 billion to operat- of their own assets alongside AIGGIG’s investment and retirement planning solu- ing income in 2005. In September, 2005, clients. To support its growth, AIGGIG tions. AIG SAAMCo also demonstrated AIG launched a $10 billion matched expanded its global operations to encom- strong performance in several mutual fund investment program in the Euromarkets, pass 44 investment offices worldwide. classes, including the SunAmerica Income under which AIG debt securities will In addition to adding new investors to Funds, Focused Asset Allocation Strategies be issued. AIG also expects to launch a its global client roster in 2005, AIGGIG and Focused Portfolios. SunAmerica matched investment program in the ensured retention of its established Focused Technology earned the Lipper domestic market, which, along with the customer base by consistently delivering Fund Award for best fund over the past Euro program, will become AIG’s principal innovative product offerings, including three years and AIG SunAmerica’s income spread-based investment activity. new real estate, private equity and hedge funds were rated as the top-performing funds. As a result, 60 percent of new assets group of taxable bond funds by Barron’s raised in 2005 were from existing clients. for 2005. In 2005, AIGGIG continued to grow its AIG Advisor Group, Inc. broker-dealers AIG-Huatai Fund Management Company provide a broad range of financial products Limited in China and initiated planning and support services to independent for its first asset management company in financial advisors serving the retirement India – two crucial regions for future planning needs of clients nationwide. In 2005, assets under management and fees for advisory services increased, contribut- ing to the Group’s results. With over 7,000 AIG 2005 Annual Report ■ 41


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    Investments AIG’s cash and invested assets totaled For Domestic Life & Retirement portfolios, with particular attention given $691.77 billion at year-end 2005, com- Services and Asset Management companies, to aligning the maturity profile of assets pared to $649.83 billion at year-end 2004, the portfolios consist principally of and liabilities. As the overall maturity pro- an increase of 6.5 percent. Of this total, investment grade corporate debt securities, file is somewhat shorter than that of tradi- 13.7 percent was derived from General highly rated mortgage-backed and asset- tional life products, heavier use is made of Insurance operations, 54.0 percent from backed securities. In addition, a small asset-backed and floating rate investments. Life Insurance & Retirement Services allocation – normally about 10 percent – is For both Life Insurance & Retirement operations, 21.7 percent from Financial made to other, more volatile but potentially Services and General Insurance compa- Services operations, 10.5 percent from higher yielding investments, including nies, allocation to equities is intended to Asset Management operations and less high yield, distressed and emerging market provide an economic hedge against the than one percent from other sources. bonds; public and private equity securities; potential risks associated with inflation General Insurance net investment income hedge funds; real estate and other and changing interest rates, as well as the grew 26.1 percent in 2005 to $4.03 billion. investments having equity-like risks and potential for superior long-term perfor- Life Insurance & Retirement Services net expected returns. mance in funding liabilities for which investment income increased 18.8 percent Non-U.S. Life Insurance & Retirement there are no, or very limited, fixed income to $18.13 billion. Services portfolios, other than those that alternatives. Total General Insurance cash and are dollar-denominated, are generally con- Financial Services cash and invested invested assets amounted to $94.80 billion centrated in local sovereign and other high assets amounted to $150.38 billion at year at year end, an increase of 14.9 percent quality (in the context of the local market) end, of which $82.37 billion, or 54.8 per- over year-end 2004. Life Insurance & bonds matched as nearly as possible to the cent, related to Capital Markets opera- Retirement Services cash and invested liability characteristics of the business. Due tions. The majority of Capital Markets assets were $373.40 billion at year end, an to the limited or non-existent supply of assets represent the investment of proceeds increase of 8.7 percent over year-end 2004. long-dated maturities in certain markets, as from the issuance of guaranteed invest- Asset Management invested assets well as the very long duration of traditional ment agreements, notes and other bonds in amounted to $72.91 billion at year end. life products, asset durations tend to be short- and medium-term securities of high The majority of these assets relate to guar- somewhat short in many non-U.S. jurisdic- credit quality. Aircraft owned by ILFC for anteed investment contracts. tions relative to liability durations. lease to commercial airlines around the Investment strategies are tailored to the Exposure to corporate credit in nondollar world are the other principal component of specific business needs of each operating portfolios is limited outside of Western Financial Services cash and invested assets. unit based on considerations that include Europe, due to the generally fewer number At year end, the net book value of the fleet the realities of the local market, liability of corporate issuers in many of the markets totaled $36.25 billion. duration and cash flow characteristics, in which AIG operates, or, in the case of Within the fixed income credit portfo- rating agency and regulatory capital con- Japan, due to the absence of a significant lios, we conduct rigorous and thorough siderations, legal investment limitations, spread differential between sovereign and independent credit analyses, and follow tax optimization, diversification and other high quality nonsovereign debt. In jurisdic- policies of extensive diversification and risk control considerations. Overall, these tions with limited long-dated bond markets, active management. Portfolios of mort- strategies are intended to produce a reason- equities are used to extend the effective gage-backed securities and related asset ably stable and predictable return through- duration of investment portfolios. In classes are actively managed to mitigate out the economic cycle, without undue addition, foreign exchange positions are prepayment risk. risk or volatility. employed to diversify risk and enhance In most global equity and credit Domestic General Insurance portfolios yield in certain markets with very low markets, 2005 saw a continuation of the consist principally of highly rated tax- domestic interest rate curves, such as Japan recovery that began in late 2002. Credit exempt municipal bonds, together with a and Taiwan. spreads in the U.S. market remained gener- modest– about 15 percent– allocation to Assets supporting guaranteed invest- ally at tight levels (with the notable excep- public and private equity and other part- ment contracts are invested similarly to tion of the auto sector) with most areas of nership investments. Non-U.S. General other Domestic Life Insurance & Retire- the market remaining near historic narrow Insurance assets are normally invested in a ment Services and Asset Management levels. At the same time, equity markets in mix of high quality taxable dollar bonds Asia, Europe, Japan and Latin America and equities. turned in generally positive returns, with 42 Review of Operations


  • Page 45

    Domestic General, AAA 35% Composition Taxable Mortgage loans, fixed maturities 48.6% policy and Life Insurance & AA 15% of Cash and collateral loans, Tax-exempt Retirement A 24% Invested Assets fixed maturities 7.2% and real estate 4.3% Services and BBB 20% at December 31, Equity securities 3.4% Cash and other Asset Management Lower 5% 2005 Flight equipment 5.2% short-term Bond Portfolio Non-rated 1% investments 15.9% Other financial Ratings services assets 15.4% particular strength in Latin America and curve flattened substantially as increases were very well correlated with risks, as Japan. U.S. markets generally lagged in in short-term rates were not echoed in the lower rated bonds (especially emerging relation to other global equity markets. longer maturity part of the curve. markets) generally outperformed higher Long-term global interest rates, while dis- Overseas, the general picture was much quality securities. While U.S. public equity playing a fair degree of intra-year volatility, the same, as demand, liquidity, economic performance for the year was modest, pri- ended 2005 close to where they began, as growth and low inflation all served to vate equity returns remained good as the subdued global inflation and central bank underpin both stock and bond valuations. strength of the high yield bond market and policy in most of the developed world From a macro viewpoint, 2005, like leveraged loan market, as well as an uptick markets dampened pressure on interest 2004, was a year that generally rewarded in mergers and acquisitions activity, served rates. In the U.S. market, the interest rate risk. While there were exceptions, returns to maintain private market valuations. Life Insurance Percent (in millions) General & Retirement Financial Asset of December 31, 2005 Insurance Services Services Management Other Total Total Cash and Invested Assets: Fixed maturities $ 72,398 $ 274,238 $ 1,307 $37,737 $ — $ 385,680 55.8% Equity securities 6,562 16,318 10 639 59 23,588 3.4 Mortgage loans on real estate, policy and collateral loans 19 18,406 1,792 4,594 98 24,909 3.6 Securities lending collateral 4,931 42,991 — 11,549 — 59,471 8.6 Other invested assets 6,272 7,777 2,751 10,459 8 27,267 3.9 Flight equipment — — 36,245 — — 36,245 5.2 Finance receivables — — 27,995 — — 27,995 4.0 Unrealized gain on swaps, options and forward transactions — — 18,695 — — 18,695 2.7 Securities available for sale — — 37,511 — — 37,511 5.4 Securities purchased under agreements to resell — 28 14,519 — — 14,547 2.1 Trading securities — — 6,499 — — 6,499 1.0 Investment income due and accrued 1,232 4,073 18 402 2 5,727 0.8 Real estate 603 2,729 24 1,710 32 5,098 0.7 Other, including cash and short-term investments 2,787 6,844 3,009 5,815 80 18,535 2.8 Total $ 94,804 $ 373,404 $ 150,375 $72,905 $ 279 $ 691,767 100.0% December 31, 2004 Cash and Invested Assets: Fixed maturities $ 62,670 $ 260,202 $ 1,344 $41,461 $ — $ 365,677 56.3% Equity securities 5,631 11,845 9 177 44 17,706 2.7 Mortgage loans on real estate, policy and collateral loans 22 16,858 1,511 5,093 — 23,484 3.6 Securities lending collateral 4,889 34,923 — 9,357 — 49,169 7.6 Other invested assets 5,604 7,072 2,230 8,316 337 23,559 3.6 Flight equipment — — 32,130 — — 32,130 4.9 Finance receivables — — 23,574 — — 23,574 3.6 Unrealized gain on swaps, options and forward transactions — — 22,670 — — 22,670 3.5 Securities available for sale — — 31,225 — — 31,225 4.8 Securities purchased under agreements to resell — — 26,272 — — 26,272 4.0 Trading securities — — 2,746 — — 2,746 0.4 Investment income due and accrued 997 4,035 63 461 — 5,556 0.9 Real estate 592 3,007 26 326 28 3,979 0.6 Other, including cash and short-term investments 2,113 5,515 4,766 9,679 5 22,078 3.5 Total $ 82,518 $ 343,457 $ 148,566 $74,870 $ 414 $ 649,825 100.0% AIG 2005 Annual Report ■ 43


  • Page 46

    Reconciliation in Accordance with Regulation G Regulation G, promulgated by the Securities and Exchange Commission, requires a reconciliation of each non-GAAP financial measure used in this Annual Report to the comparable GAAP figure. Such reconciliations are set forth below, in the Five Year Summary of Consolidated Operations on page 45 and throughout this Annual Report. AIG presents its operations in the way it believes will be most meaningful and use- ful, as well as most transparent, to the investing public and others who use AIG’s financial information in evaluating the performance of AIG. (in millions, except ratios) Years Ended December 31, 2005 2004 2003 General Insurance revenues: Net premiums earned $ 40,809 $ 38,537 $ 31,306 Net investment income 4,031 3,196 2,566 Realized capital gains (losses) 334 228 (39) Total $ 45,174 $ 41,961 $ 33,833 General Insurance operating income $ 2,315 $ 3,177 $ 4,502 Realized capital gains (losses) 334 228 (39) General Insurance operating income, excluding realized capital gains (losses) 1,981 2,949 4,541 Catastrophe losses (2,888) (1,054) (83) Change in estimate for asbestos and environmental exposures — (850) — Reserve charge (1,824) — — General Insurance operating income, excluding realized capital gains (losses), catastrophe losses, change in estimate for asbestos and environmental exposures and reserve charge $ 6,693 $ 4,853 $ 4,624 General Insurance combined ratio 104.69 100.30 92.68 Catastrophe losses 7.06 2.74 0.27 General Insurance combined ratio, excluding catastrophe losses 97.63 97.56 92.41 Change in estimate for asbestos and environmental exposures — 2.21 — Reserve charge 4.44 — — General Insurance combined ratio, excluding catastrophe losses, change in estimate for asbestos and environmental exposures, and reserve charge 93.19 95.35 92.41 Life Insurance & Retirement Services revenues: GAAP premiums $ 29,400 $ 28,088 $ 23,496 Net investment income 18,134 15,269 12,942 Realized capital gains (losses) (218) 43 240 Total $ 47,316 $ 43,400 $ 36,678 Life Insurance & Retirement Services premiums: GAAP premiums $ 29,400 $ 28,088 $ 23,496 Deposits and other considerations not included in revenues under GAAP 37,048 38,756 29,617 Premiums, deposits and other considerations $ 66,448 $ 66,844 $ 53,113 Life Insurance & Retirement Services operating income $ 8,844 $ 7,923 $ 6,807 Realized capital gains (losses) (218) 43 240 Life Insurance & Retirement Services operating income, excluding realized capital gains (losses) $ 9,062 $ 7,880 $ 6,567 Net income $ 10,477 $ 9,839 $ 8,108 Realized capital gains (losses), net of tax 201 85 (342) FAS 133 gains (losses), excluding realized capital gains (losses) 1,530 315 (697) Cumulative effect of accounting changes, net of tax — (144) 9 Adjusted net income $ 8,746 $ 9,583 $ 9,138 44 Reconciliation in Accordance with Regulation G


  • Page 47

    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 . A N D S U B S I D I A R I E S Five Year Summary of Consolidated Operations * Compound Annual (in millions) Growth Rate Years Ended December 31, 2005 2004 2003 2002 2001 2001–2005 General Insurance operations: Gross premiums written $ 52,725 $ 52,046 $ 46,938 $ 36,678 $ 28,341 16.8% Net premiums written 41,872 40,623 35,031 26,718 19,793 20.6 Net premiums earned 40,809 38,537 31,306 23,595 18,661 21.6 Underwriting profit (loss)(a) (2,050) (247) 1,975 (1,082) (777) — Net investment income 4,031 3,196 2,566 2,350 2,551 12.1 Operating income before realized capital gains (losses) 1,981 2,949 4,541 1,268 1,774 2.8 Realized capital gains (losses) 334 228 (39) (345) (189) — General Insurance operating income 2,315 3,177 4,502 923 1,585 9.9 Life Insurance & Retirement Services operations: GAAP premiums 29,400 28,088 23,496 20,694 19,600 10.7 Net investment income 18,134 15,269 12,942 11,243 10,451 14.8 Operating income before realized capital gains (losses) 9,062 7,880 6,567 5,553 5,033 15.8 Realized capital gains (losses) (218) 43 240 (372) (400) — Life Insurance & Retirement Services operating income 8,844 7,923 6,807 5,181 4,633 17.5 Financial Services operating income 4,276 2,180 1,182 2,125 1,769 24.7 Asset Management operating income 2,253 2,125 1,316 1,125 1,019 21.9 Other realized capital gains (losses) 225 (227) (643) (936) (321) — Other income (deductions) — net (2,700) (333) (1,257) (610) (751) — Acquisition, restructuring and related charges — — — — (2,017) — Income before income taxes, minority interest and cumulative effect of accounting changes 15,213 14,845 11,907 7,808 5,917 26.6 Income taxes 4,258 4,407 3,556 1,919 1,594 — Income before minority interest and cumulative effect of accounting changes 10,955 10,438 8,351 5,889 4,323 26.2 Minority interest (478) (455) (252) (160) (101) — Cumulative effect of accounting changes(b) — (144) 9 — (136) — Net income (c) $ 10,477 $ 9,839 $ 8,108 $ 5,729 $ 4,086 26.5% * Includes reconciliation of certain non-GAAP financial measures in accordance with SEC Regulation G. (a) Underwriting profit (loss), a GAAP measure, is statutory underwriting profit (loss)adjusted primarily for changes in the deferral of policy acquisition costs. This adjustment is necessary to present the financial statements in accordance with GAAP. (b) Represents a net benefit (expense) for the cumulative effect of adoption of accounting pronouncements related to the adoption of the American Institute of Certified Public Accountants Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (SOP 03-1) in 2004; FIN 46R, “Consolidation of Variable Interest Entities,” in 2003; FAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and EITF 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”, in 2001. (c) 2005 net income includes catastrophe losses of $2.11 billion, a General Insurance fourth quarter reserve charge of $1.19 billion, and settlement charges of $1.15 billion. 2004 net income includes catastrophe losses of $729 million, and $553 million for the change in estimate for asbestos and environmental exposures. 2002 net income includes the General Insurance loss reserve charge of $1.34 billion. 2001 net income includes catastrophe losses of $581 million and restructuring charges of $1.38 billion. AIG 2005 Annual Report ■ 45


  • Page 48

    Five Year Summary of Selected Financial Information Compound Annual (in millions, except per share amounts and ratios) Growth Rate Years Ended /As of December 31, 2005 2004 2003 2002 2001 2001–2005 Balance Sheet Data: Total cash and invested assets(a) $691,767 $ 649,825 $ 528,550 $ 435,454 $ 364,918 17.3% Total assets 853,370 801,145 675,602 561,598 490,614 14.8 Total reserves(b) 167,369 153,036 129,944 102,166 91,217 16.4 Total General Insurance reserves 57,476 47,254 36,228 29,347 26,005 21.9 Total liabilities 766,867 721,273 606,180 501,163 438,551 15.0 Total shareholders’ equity 86,317 79,673 69,230 58,303 49,881 14.7 Income Statement Data: Revenues(c) $108,905 $ 97,666 $ 79,421 $ 66,171 $ 59,958 16.1% Loss ratio 81.09 78.78 73.06 83.12 79.33 Expense ratio 23.60 21.52 19.62 21.81 24.27 Combined ratio(d) 104.69 100.30 92.68 104.93 103.60 Return on Equity (ROE):(e) ROE, GAAP basis 12.34% 13.27% 12.54% 10.59% 8.59% Per Common Share Data: Net income(f) Basic $ 4.03 $ 3.77 $ 3.10 $ 2.20 $ 1.56 26.8% Diluted 3.99 3.73 3.07 2.17 1.54 26.9 Dividends(g) .63 .29 .24 .18 .16 40.9 Book value 33.24 30.69 26.54 22.34 19.07 14.9 Market price 68.23 65.67 66.28 57.85 79.40 (3.7) Market capitalization at December 31,(h) $177,169 $ 170,507 $ 172,888 $ 150,965 $ 207,665 (3.9)% (a) Refer to the table on page 43 of this report for the composition of total cash and invested assets. (b) Including net General Insurance reserves for losses and loss expenses, Life Insurance & Retirement Services future policy benefits, and policy and contract claims. (c) Represents the sum of General Insurance net premiums earned, Life Insurance & Retirement Services GAAP premiums, net investment income, Financial Services interest, lease and finance charges, Asset Management advisory fees and management fees, and net investment income from guaranteed investment contracts, and realized capital gains (losses). (d) Excluding catastrophe losses, 2005 and 2002 reserve charges, 2004 change in estimate for asbestos and environmental exposures, and 2001 WTC losses, the combined ratios were 93.19, 95.35, 92.41, 95.77 and 98.95 for 2005, 2004, 2003, 2002 and 2001, respectively. (e) Return on equity (ROE) is net income, expressed as a percentage of average shareholders’ equity. (f) See Note 1(dd) of Notes to Financial Statements. (g) Dividends have not been restated to reflect dividends paid by American General Corporation, which was acquired by AIG on August 29, 2001. (h) Market capitalization is based on the number of AIG shares outstanding multiplied by the closing price per share at December 31 on the New York Stock Exchange. 46 Five Year Summary of Selected Financial Information


  • Page 49

    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 . A N D S U B S I D I A R I E S Supplemental Financial Information 2005 2004 Net Percent Net Percent (dollars in millions) Premiums of Premiums of Years Ended December 31, Written Total Written Total General Insurance Net Premiums Written: Domestic Brokerage Group $ 23,128 55.2% $ 22,506 55.4% Foreign General 9,997 23.9 9,407 23.2 Personal Lines 4,653 11.1 4,354 10.7 Transatlantic 3,466 8.3 3,749 9.2 Mortgage Guaranty (UGC) 628 1.5 607 1.5 Total $ 41,872 100.0% $ 40,623 100.0% Premiums, Deposits and Other (in millions) GAAP Premiums Considerations(a) Years Ended December 31, 2005 2004(b) 2005 2004(b) Life Insurance & Retirement Services by Major Product Domestic: Life insurance $ 2,108 $ 1,888 $ 3,208 $ 2,842 Home service 801 812 956 965 Group life/health 1,012 1,128 1,012 1,118 Payout annuities(c) 1,473 1,484 2,172 2,172 Retirement services Group retirement products 351 313 5,532 5,555 Individual fixed annuities 100 59 7,337 9,947 Individual variable annuities 467 407 3,319 4,126 Individual annuities – runoff (d) 72 80 200 253 Total domestic 6,384 6,171 23,736 26,978 Foreign: Life insurance 15,631 14,938 21,331 18,609 Personal accident and health 5,002 4,301 5,050 4,328 Group products 1,925 2,215 3,120 3,319 Retirement services Individual fixed annuities 361 395 10,833 11,981 Individual variable annuities 97 68 2,378 1,629 Total foreign 23,016 21,917 42,712 39,866 Total $29,400 $28,088 $66,448 $ 66,844 (a) Premiums, deposits and other considerations represent aggregate business activity during the respective periods presented on a non-GAAP basis. (b) Data for 2004 has been adjusted to conform to the 2005 presentation. (c) Includes structured settlements, single premium immediate annuities and terminal funding annuities. (d) Primarily represents runoff annuity business sold through discontinued distribution relationships. AIG 2005 Annual Report ■ 47


  • Page 50

    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 . Board of Directors Frank G. Zarb Martin S. Feldstein George L. Miles, Jr. 1. Frank G. Zarb Chairman of the Board of Directors of Professor of Economics President and Chief Executive Officer 2. Martin J. Sullivan American International Group, Inc. Harvard University WQED Multimedia 3. M. Bernard Aidinoff Senior Advisor President and Chief Executive Officer 4. Pei-yuan Chia Hellman & Friedman LLC National Bureau of Economic Morris W. Offit Co-Chief Executive Officer 5. Marshall A. Cohen Former Chairman Research National Association of Securities Offit Hall Capital Management LLC 6. William S. Cohen Dealers, Inc. and The Nasdaq Ellen V. Futter Founder and Former 7. Martin S. Feldstein Stock Market, Inc. President Chief Executive Officer, OFFITBANK 8. Ellen V. Futter American Museum of Natural History 9. Stephen L. Hammerman Martin J. Sullivan Michael H. Sutton Stephen L. Hammerman Consultant 10. Carla A. Hills President and Chief Executive Officer Senior Special Counsel Former Chief Accountant of 11. Richard C. Holbrooke American International Group, Inc. Clifford Chance LLP the United States Securities and 12. Fred H. Langhammer Retired Vice Chairman Exchange Commission 13. George L. Miles, Jr. Merrill Lynch & Co., Inc. 14. Morris W. Offit Retired Deputy Police Commissioner Edmund S.W. Tse M. Bernard Aidinoff 15. Michael H. Sutton New York City Police Department Senior Vice Chairman, Life Insurance Retired Partner 16. Edmund S.W. Tse American International Group, Inc. Sullivan & Cromwell 17. Robert B. Willumstad Carla A. Hills Chairman and Robert B. Willumstad Pei-yuan Chia Chief Executive Officer Former President and Retired Vice Chairman Hills & Company Chief Operating Officer Citicorp and Citibank, N.A. Former United States Trade Citigroup Inc. Marshall A. Cohen Representative 9 Counsel 3 4 15 17 Cassels Brock & Blackwell Richard C. Holbrooke 6 5 Former President and Vice Chairman 12 11 Chief Executive Officer Perseus LLC 13 Former United States Ambassador 10 The Molson Companies Limited to the United Nations William S. Cohen Former Vice Chairman 7 2 1 16 14 8 Chairman and Credit Suisse First Boston Chief Executive Officer The Cohen Group Fred H. Langhammer Former United States Secretary of Chairman, Global Affairs, and Defense and Senator Former Chief Executive Officer The Estée Lauder Companies Inc.

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