American 2006 International Annual Group, Inc. Report Putting Strategies Into Action About AIG Contents American International Group, Inc. (AIG), world Financial Highlights 1 leaders in insurance and financial services, is Letter to Shareholders 2 the leading international insurance organization, with operations in more than 130 countries and AIG: Putting Strategies Into Action 9 jurisdictions. AIG companies serve commercial, AIG at a Glance 22 institutional and individual customers through the most extensive worldwide property-casualty Review of Operations 24 and life insurance networks of any insurer. In Reconciliation in Accordance addition, AIG companies are leading providers with Regulation G 40 of retirement services, financial services and Five Year Summary of asset management around the world. Consolidated Operations 41 Five Year Summary of Selected About the Cover Financial Information 42 Supplemental Many of our largest commercial customers in Financial Information 44 the United States purchase three or more 46 different kinds of property-casualty insurance Board of Directors from AIG’s Domestic Brokerage Group (DBG) Corporate Directory 47 companies. DBG puts a “total account review” strategy into action for these customers where Annual Report on Form 10-K Inside underwriters, claims and business development Shareholder Information Back Cover professionals work alongside one another, as they are shown here, to ensure the delivery of best-in-class products and services. Financial Highlights (in millions, except per share data and ratios) 2006 2005 % Change Net income $ 14,048 $ 10,477 34.1 Realized capital gains, net of tax 33 201 — FAS 133 gains (losses), excluding realized capital gains (losses), net of tax (1,424) 1,530 — Cumulative effect of an accounting change, net of tax 34 —— Adjusted net income(a) 15,405 8,746 76.1 Net income, per common share—diluted 5.36 3.99 34.3 Adjusted net income, per common share—diluted(a) 5.88 3.33 76.6 Book value per common share 39.09 33.24 17.6 Revenues(b) $ 113,194 $ 108,905 3.9 Assets 979,414 853,051 14.8 Shareholders’ equity 101,677 86,317 17.8 General Insurance combined loss and expense ratio 89.06 104.69 General Insurance combined loss and expense ratio, excluding current year catastrophe-related losses 89.06 97.63 (a) Excludes realized capital gains, the cumulative effect of an accounting change and FAS 133 gains (losses). (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 net investment income from spread-based products and advisory and management fees, and realized capital gains (losses). Net Income Net Income per Book Value per (billions of dollars) Common Share–Diluted Common Share (dollars) (dollars) 39.09 14.05 5.36 33.24 30.69 10.48 9.84 3.99 26.54 3.73 8.11 22.34 3.07 5.73 2.17 ’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06 (c) (d) (e) (f) (g) Revenues Assets Shareholders’ Equity (billions of dollars) (billions of dollars) (billions of dollars) 979.4 113.2 108.9 101.7 853.1 97.7 801.0 86.3 79.7 79.4 675.6 69.2 561.1 66.2 58.3 ’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06 ’02 ’03 ’04 ’05 ’06 (c) 2002 included General Insurance loss reserve charge of $1.34 billion and FAS 133 gains of $20 million. (d) 2003 included FAS 133 losses of $697 million. (e) 2004 included $729 million in current year catastrophe-related losses, $144 million loss related to the cumulative effect of an accounting change, $553 million charge for a change in estimate for asbestos and environmental reserves, and $315 million of FAS 133 gains. (f) 2005 included $2.11 billion in current year catastrophe-related 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. (g) 2006 included a $34 million gain related to the cumulative effect of an accounting change and $1.42 billion of FAS 133 losses. Annual Report 2006 AIG 1 Dear Fellow Shareholders: 2006 was an excellent year, starting with the resolution of our significant regulatory challenges and ending with record financial results. hroughout my 35-year career with AIG, my regard for this 2006 Results extraordinary company has grown immensely. After AIG reported record net income for 2006 of $14.05 billion, an T increase of 34.1 percent over 2005. The company earned $5.36 two years as President and Chief Executive Officer, I have gained an entirely new appreciation for AIG’s strength and per diluted share in 2006, 34.3 percent higher than the $3.99 resilience. 2006 was an excellent year, starting with the resolution per diluted share earned in 2005. Results for 2005 included a of our significant regulatory challenges and ending with record $1.15 billion after-tax charge for regulatory settlements and a $1.19 billion after-tax charge related to an increase in net financial results. We made significant progress in capital manage- reserve for losses and loss expenses. AIG also reported a record ment, allowing us to announce a new dividend policy and share $2.11 billion in after-tax catastrophe-related losses in 2005. repurchase program in early 2007. In addition, we continued to Net income in 2006 included the effect of economically effec- improve our financial control environment, providing greater tive hedging activities that did not qualify for hedge accounting transparency in our financial disclosures and remaining on the treatment under FAS 133, including the related foreign exchange forefront of good corporate governance. gains and losses. Full-year 2006 adjusted net income was The road from uncertainty to success was not an easy one. $15.41 billion, or $5.88 per diluted share, compared to $8.75 bil- Traveling it required the focused and determined efforts of AIG’s tal- lion or $3.33 per diluted share in 2005. ented employees all over the world. Through their efforts, we exe- Solid execution of our strategies and the absence of significant cuted our strategy and achieved healthy growth in our businesses. catastrophes contributed to our outstanding results in 2006. Around We also grew as an organization under new governance and man- the world and across all of our business segments we are capitaliz- agement policies that will make AIG more responsive and responsi- ing on growth opportunities, using our business diversity and matrix- ble in every aspect of our business. management structure to respond quickly to customer needs. Last year’s successes were also due in great measure to the As our businesses have grown, so too has our financial strength, inherent strengths of the AIG culture. I don’t know of any other com- which is the foundation for everything we do. During 2006, our pany that combines our depth of talent, entrepreneurship, leading assets grew more than $126 billion, or nearly 15 percent, to worldwide market positions, and business and geographic diversifi- $979.41 billion. To keep pace with net cash provided for invest- cation. These attributes made it possible for AIG to work through ment by our insurance operations and cash generated from difficult challenges while continuing to build shareholder value. our investment portfolio, every day we invest an average of nearly $200 million. At year end, shareholders’ equity was $101.68 bil- lion, an increase of 17.8 percent over 2005. Total revenues in 2006 were $113.19 billion, 3.9 percent above 2005. Our return on equity for 2006 was 15.26 percent and our book value per share grew from $33.24 to $39.09. 2 AIG 2006 Annual Report Martin J. Sullivan President and Chief Executive Officer We achieved a key goal in 2006—stabilizing AIG’s financial •We received regulatory approval from the Reserve Bank of India ratings. All of the major ratings agencies have revised their outlook to operate a wholly owned non-bank finance company that will on AIG and our core insurance subsidiaries to stable from negative. serve as a platform to build our asset management and con- Overall, AIG’s ratings continue to be among the highest of any sumer finance franchise. We believe these businesses will com- insurance and financial services organization in the world. Customers plement our Tata AIG Life and General Insurance joint ventures. and shareholders can be assured that enhancing AIG’s financial •Our Foreign General Insurance group set up operations in Dubai strength and preserving its current ratings will continue to be an to expand our presence in the Middle East, Mediterranean and overriding priority. South Asia region. As part of this effort we also entered the Islamic Shariah-compliant market with the launch of a new Putting Strategies Into Action regional company, AIG Takaful, headquartered in Bahrain. The The theme of this year’s report, Putting Strategies Into Action, market for Shariah-compliant insurance and financial products is describes how we are transforming our formidable attributes into underserved and we believe that we can meet the needs of that specific strategies and positive business results. Last year, I empha- market better than any other company. sized priorities such as staying customer focused; continuing to •We announced key strategic investments in high-quality entities expand distribution and geographic reach; controlling costs; identi- like Kinder Morgan, London City Airport and P&O Ports North fying new business opportunities, acquisitions and strategic America. These investments demonstrate our determination to alliances; developing new products; and investing for growth. identify quality opportunities to build value and strength for our In 2006, we saw those priorities bear fruit.