2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations Continued ( The occurrence of a discrete credit event resulting in (i) the Flight Equipment Recoverability (Financial Services): issuer defaulting on a material outstanding obligation; (ii) the ( Expected undiscounted future net cash flows: based upon issuer seeking protection from creditors under the bankruptcy current lease rates, projected future lease rates and estimated laws or any similar laws intended for court supervised terminal values of each aircraft based on third-party reorganization of insolvent enterprises; or (iii) the issuer information. proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities Operating Review having a fair value substantially lower than par value of their claims; or General Insurance Operations ( AIG may not realize a full recovery on its investment, AIG’s General Insurance subsidiaries write substantially all lines of regardless of the occurrence of one of the foregoing events. commercial property and casualty insurance and various personal The above criteria also consider circumstances of a rapid and lines both domestically and abroad. severe market valuation decline, such as that experienced in As previously noted, AIG believes it should present and discuss current credit markets, in which AIG could not reasonably assert its financial information in a manner most meaningful to its that the recovery period would be temporary (severity losses). financial statement users. Accordingly, in its General Insurance In light of the recent significant disruption in the U.S. residential business, AIG uses certain regulatory measures, where AIG has mortgage and credit markets, particularly in the fourth quarter, determined these measurements to be useful and meaningful. AIG has recognized an other-than-temporary impairment charge A critical discipline of a successful general insurance business (severity loss) of $2.2 billion (including $643 million related to is the objective to produce profit from underwriting activities AIGFP’s available for sale investment securities recorded in other taking into account costs of capital. AIG views underwriting results income), primarily from certain residential mortgage-backed securito be critical in the overall evaluation of performance. ties and other structured securities. Even while retaining their Statutory underwriting profit is derived by reducing net premiinvestment grade ratings, such securities were priced at a severe ums earned by net losses and loss expenses incurred and net discount to cost. Notwithstanding AIG’s intent and ability to hold expenses incurred. Statutory accounting generally requires immesuch securities indefinitely, and despite structures which indicate diate expense recognition and ignores the matching of revenues that a substantial amount of the securities should continue to and expenses as required by GAAP. That is, for statutory perform in accordance with their original terms, AIG concluded purposes, expenses (including acquisition costs) are recognized that it could not reasonably assert that the recovery period would immediately, not over the same period that the revenues are be temporary. earned. Thus, statutory expenses exclude changes in DAC. At each balance sheet date, AIG evaluates its securities GAAP provides for the recognition of certain acquisition holdings with unrealized losses. When AIG does not intend to hold expenses at the same time revenues are earned, the accounting such securities until they have recovered their cost basis, AIG principle of matching. Therefore, acquisition expenses are derecords the unrealized loss in income. If a loss is recognized from ferred and amortized over the period the related net premiums a sale subsequent to a balance sheet date pursuant to changes written are earned. DAC is reviewed for recoverability, and such in circumstances, the loss is recognized in the period in which the review requires management judgment. The most comparable intent to hold the securities to recovery no longer existed. GAAP measure to statutory underwriting profit is income before In periods subsequent to the recognition of an other-thanincome taxes, minority interest and cumulative effect of an temporary impairment charge for fixed maturity securities, which is accounting change. A table reconciling statutory underwriting profit not credit or foreign exchange related, AIG generally accretes into to income before income taxes, minority interest and cumulative income the discount or amortizes the reduced premium resulting effect of an accounting change is contained in footnote (d) to the from the reduction in cost basis over the remaining life of the following table. See also Critical Accounting Estimates herein and security. Notes 1 and 6 to Consolidated Financial Statements. Allowance for Finance Receivable Losses (Financial Services): AIG, along with most general insurance companies, uses the loss ratio, the expense ratio and the combined ratio as measures ( Historical defaults and delinquency experience: utilizing factors, of underwriting performance. The loss ratio is the sum of losses such as delinquency ratio, allowance ratio, charge-off ratio, and and loss expenses incurred divided by net premiums earned. The charge-off coverage. expense ratio is statutory underwriting expenses divided by net ( Portfolio characteristics: portfolio composition and considerapremiums written. These ratios are relative measurements that tion of the recent changes to underwriting criteria and portfolio describe, for every $100 of net premiums earned or written, the seasoning. cost of losses and statutory expenses, respectively. The com- ( External factors: consideration of current economic conditions, bined ratio is the sum of the loss ratio and the expense ratio. The including levels of unemployment and personal bankruptcies. combined ratio presents the total cost per $100 of premium ( Migration analysis: empirical technique measuring historical production. A combined ratio below 100 demonstrates underwritmovement of similar finance receivables through various levels ing profit; a combined ratio above 100 demonstrates underwriting of repayment, delinquency, and loss categories to existing loss. finance receivable pools. 40 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries Net premiums written are initially deferred and earned based upon the terms of the underlying policies. The net unearned premium reserve constitutes deferred revenues which are generally earned ratably over the policy period. Thus, the net unearned premium reserve is not fully recognized in income as net premiums earned until the end of the policy period. The underwriting environment varies from country to country, as does the degree of litigation activity. Regulation, product type and competition have a direct effect on pricing and consequently on profitability as reflected in underwriting profit and statutory general insurance ratios. General Insurance Results General Insurance operating income is comprised of statutory underwriting profit (loss), changes in DAC, net investment income and net realized capital gains and losses. Operating income, as well as net premiums written, net premiums earned, net investment income and net realized capital gains (losses) and statutory ratios in 2007, 2006 and 2005 were as follows: Percentage Increase/(Decrease) (in millions, except ratios) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005 Net premiums written: Domestic General Insurance DBG $24,112 $24,312 $ 23,104 (1)% 5% Transatlantic 3,953 3,633 3,466 9 5 Personal Lines 4,808 4,654 4,653 3 — Mortgage Guaranty 1,143 866 628 32 38 Foreign General Insurance 13,051 11,401 10,021 14 14 Total $47,067 $44,866 $ 41,872 5% 7% Net premiums earned: Domestic General Insurance DBG $23,849 $23,910 $ 22,567 —% 6% Transatlantic 3,903 3,604 3,385 8 6 Personal Lines 4,695 4,645 4,634 1 — Mortgage Guaranty 886 740 533 20 39 Foreign General Insurance 12,349 10,552 9,690 17 9 Total $45,682 $43,451 $ 40,809 5% 6% Net investment income (a) : Domestic General Insurance DBG $ 3,879 $ 3,411 $ 2,403 14% 42% Transatlantic 470 435 343 8 27 Personal Lines 231 225 217 3 4 Mortgage Guaranty 158 140 123 13 14 Intercompany adjustments and eliminations — net 6 1 1 500 — Foreign General Insurance 1,388 1,484 944 (6) 57 Total $ 6,132 $ 5,696 $ 4,031 8% 41% Net realized capital gains (losses) $ (106) $ 59 $ 334 —% —% Operating income (loss) (a)(b) : Domestic General Insurance DBG $ 7,305 $ 5,845 $ (820) 25% —% Transatlantic 661 589 (39) 12 — Personal Lines 67 432 195 (84) 122 Mortgage Guaranty (637) 328 363 — (10) Foreign General Insurance 3,137 3,228 2,601 (3) 24 Reclassifications and eliminations (7) (10) 15 — — Total $10,526 $10,412 $ 2,315 1% 350% AIG 2007 Form 10-K 41
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AMERICAN INTERNATIONAL GROUP, INC.
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FINANCIAL HIGHLIGHTS (in millions,
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overall financial condition, althou
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Group Executive Committee We are ad
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AIG’s life insurance network is t
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We have also begun to address the e
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WHAT WE SEE The ability to see and
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The Major Accounts Practice within
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Around the world, the middle class
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WE SEE GROWTH OPPORTUNITIES IN EMER
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To grow the strength of the AIG glo
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Since 2003, the AIG Disaster Relief
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RESPECT Respect encompasses how we
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Life Insurance & Retirement Service
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Domestic Brokerage Group— Gross P
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In the summer of 2007, widespread f
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in gross premiums written. It launc
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It grew new business premiums from
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emerging markets for its services,
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ILFC—Revenues by Region Total = $
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AIG Investments acquired a 94 perce
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Index of Notes to Consolidated Fina
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SHAREHOLDER INFORMATION Corporate H
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2007 Annual Report - AIG.com

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