10-QPeriod: Q2 FY2006

AMERICAN INTERNATIONAL GROUP, INC. Quarterly Report for Q2 Ended Jun 30, 2006

Filed August 9, 2006For Securities:AIG

Summary

American International Group, Inc. (AIG) reported its financial results for the quarterly period ended June 30, 2006. The company experienced a decrease in total revenues, primarily driven by a decline in its Financial Services segment, impacted by hedging activities that did not qualify for hedge accounting treatment. Despite this, the General Insurance segment saw growth, particularly in underwriting results for the Domestic Brokerage Group, and Asset Management also showed increased operating income. However, income before taxes, minority interest, and accounting changes declined significantly year-over-year for both the quarter and year-to-date periods, largely due to the negative impact of hedging activities and one-time charges related to the Starr tender offer and credit card operations. Significant operational changes and adjustments were noted, including an out-of-period adjustment related to unit investment trusts that reclassified a substantial amount from other comprehensive income to net investment income. The company is also navigating ongoing regulatory investigations and has implemented remediation efforts to address material weaknesses in internal controls. Investors should monitor AIG's management of its various segments, the impact of regulatory scrutiny, and the effectiveness of its risk management strategies, particularly concerning its hedging activities and reserves.

Key Highlights

  • 1Total revenues decreased by 4% in the second quarter and 2% year-to-date, primarily due to the Financial Services segment's hedging activities.
  • 2Income before income taxes, minority interest, and accounting changes decreased significantly by 22% for the quarter and 19% year-to-date, largely driven by negative impacts from hedging and one-time charges.
  • 3General Insurance operating income increased by 52% for the quarter and 47% year-to-date, benefiting from improved underwriting results and an out-of-period adjustment.
  • 4Financial Services segment reported an operating loss for both the quarter and year-to-date periods, primarily due to hedging activities not qualifying for hedge accounting.
  • 5Asset Management operating income saw substantial increases, up 55% for the quarter and 14% year-to-date, driven by strong asset flows and increased fees.
  • 6AIG identified and recorded an out-of-period adjustment related to unit investment trusts, reclassifying $576 million to net investment income from other comprehensive income.
  • 7The company is actively engaged in remediation efforts related to previously identified material weaknesses in internal controls.

Frequently Asked Questions

The decrease in total revenues was primarily driven by the Financial Services segment, specifically due to hedging activities that did not qualify for hedge accounting treatment under FAS 133. These activities resulted in a significant negative impact on revenues and operating income within this segment.

An out-of-period adjustment related to certain interests in unit investment trusts reclassified approximately $576 million from 'Unrealized appreciation (depreciation) of investments' in Other Comprehensive Income to 'Net investment income' in the Consolidated Statement of Income for the three and six-month periods ended June 30, 2006. This adjustment boosted net investment income but had no impact on total shareholders' equity.

AIG expects to continue identifying profitable opportunities and building attractive new General Insurance businesses, leveraging its broad product lines and extensive distribution networks. Despite some industry price erosion in certain general insurance classes, the company saw improved underwriting results, particularly in the Domestic Brokerage Group.

AIG's management concluded that its disclosure controls and procedures were ineffective as of June 30, 2006, primarily due to previously identified material weaknesses in internal control over financial reporting. The company is undertaking remediation efforts to address these issues.

The Financial Services segment reported an operating loss for both the quarter and year-to-date periods. This was significantly impacted by hedging activities that did not qualify for hedge accounting under FAS 133, causing volatility in revenues and operating income. While Aircraft Finance showed some operational improvements, Capital Markets experienced substantial losses related to these hedging activities.