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 Percentage Increase/(Decrease) (in millions, except ratios) 2007 2006 2005 2007 vs. 2006 2006 vs. 2005 Statutory underwriting profit (loss) (b)(d) : Domestic General Insurance DBG $3,404 $2,322 $(3,403) 47% —% Transatlantic 165 129 (434) 28 — Personal Lines (191) 204 (38) — — Mortgage Guaranty (849) 188 249 — (24) Foreign General Insurance 1,544 1,565 1,461 (1) 7 Total $4,073 $4,408 $(2,165) (8)% —% Domestic General Insurance (b) : Loss ratio 71.2 69.6 90.1 Expense ratio 20.8 21.4 21.0 Combined ratio 92.0 91.0 111.1 Foreign General Insurance (b) : Loss ratio 50.6 48.9 52.0 Expense ratio (c) 34.9 33.6 31.8 Combined ratio 85.5 82.5 83.8 Consolidated (b) : Loss ratio 65.6 64.6 81.1 Expense ratio 24.7 24.5 23.6 Combined ratio 90.3 89.1 104.7 (a) Includes the effect of out-of-period adjustments related to the accounting for UCITS in 2006. For DBG, the effect was an increase of $66 million, and for Foreign General Insurance, the effect was an increase of $424 million. (b) Catastrophe-related losses increased the consolidated General Insurance combined ratio in 2007 and 2005 by 0.60 points and 7.06 points, respectively. There were no significant catastrophe-related losses in 2006. Catastrophe-related losses in 2007 and 2005 by reporting unit were as follows: 2007 2005 Insurance Net Insurance Net Related Reinstatement Related Reinstatement (in millions) Losses Premium Cost Losses Premium Cost Reporting Unit: DBG $113 $(13) $1,811 $136 Transatlantic 11 (1) 463 45 Personal Lines 61 14 112 2 Mortgage Guaranty — — 10 — Foreign General Insurance 90 1 229 80 Total $275 $ 1 $2,625 $263 (c) Includes amortization of advertising costs. (d) Statutory underwriting profit (loss) is a measure that U.S. domiciled insurance companies are required to report to their regulatory authorities. The following table reconciles statutory underwriting profit (loss) to operating income for General Insurance for the years ended December 31, 2007, 2006 and 2005: 42 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries Domestic Foreign Brokerage Personal Mortgage General Reclassifications (in millions) Group Transatlantic Lines Guaranty Insurance and Eliminations Total 2007: Statutory underwriting profit (loss) $ 3,404 $ 165 $(191) $(849) $1,544 $ — $ 4,073 Increase in DAC 97 17 29 57 227 — 427 Net investment income 3,879 470 231 158 1,388 6 6,132 Net realized capital gains (losses) (75) 9 (2) (3) (22) (13) (106) Operating income (loss) $ 7,305 $ 661 $ 67 $(637) $3,137 $ (7) $10,526 2006: Statutory underwriting profit (loss) $ 2,322 $ 129 $ 204 $ 188 $1,565 $ — $ 4,408 Increase in DAC 14 14 2 3 216 — 249 Net investment income 3,411 435 225 140 1,484 1 5,696 Net realized capital gains (losses) 98 11 1 (3) (37) (11) 59 Operating income (loss) $ 5,845 $ 589 $ 432 $ 328 $3,228 $(10) $10,412 2005: Statutory underwriting profit (loss) $(3,403) $(434) $ (38) $ 249 $1,461 $ — $ (2,165) Increase (decrease) in DAC (21) 14 19 (8) 111 — 115 Net investment income 2,403 343 217 123 944 1 4,031 Net realized capital gains (losses) 201 38 (3) (1) 85 14 334 Operating income (loss) $ (820) $ (39) $ 195 $ 363 $2,601 $ 15 $ 2,315 AIG transacts business in most major foreign currencies. from both established and new distribution channels, and the The following table summarizes the effect of changes in effect of changes in foreign currency exchange rates as well as foreign currency exchange rates on the growth of General growth in Mortgage Guaranty, primarily from international Insurance net premiums written for the years ended business. December 31, 2007 and 2006: General Insurance net investment income increased in 2007 2007 2006 by $436 million. Interest and dividend income increased $714 million in 2007 compared to 2006 as fixed maturities and equity Growth in original currency* 3.5% 7.4% securities increased by $11.6 billion and the average yield Foreign exchange effect 1.4 (0.2) increased 10 basis points. Income from partnership investments Growth as reported in U.S. dollars 4.9% 7.2% increased $159 million in 2007 compared to 2006, primarily due * Computed using a constant exchange rate for each period. to improved returns on underlying investments and higher levels of invested assets. Investment expenses in 2007 declined $60 million 2007 and 2006 Comparison compared to 2006, primarily due to decreased interest expense on deposit liabilities. These increases to net investment General Insurance operating income increased in 2007 compared income were partially offset by $490 million of income from an to 2006 due to growth in net investment income, partially offset by out of period UCITS adjustment recorded in 2006. Net realized a decline in underwriting profit and Net realized capital losses. The capital losses in 2007 include other-than-temporary impairment 2007 combined ratio increased to 90.3, an increase of 1.2 points charges of $276 million compared to $77 million in 2006. See compared to 2006, primarily due to an increase in the loss ratio of also Capital Resources and Liquidity and Invested Assets herein. 1.0 points. The loss ratio for accident year 2007 recorded in 2007 In order to better align financial reporting with the manner in was 2.3 points higher than the loss ratio recorded in 2006 for which AIG’s chief operating decision makers manage their busiaccident year 2006. Increases in Mortgage Guaranty losses nesses, commencing in 2007, the foreign aviation business, accounted for a 2.1 point increase in the 2007 accident year loss which was historically reported in DBG, is now reported as part of ratio. The downward cycle in the U.S. housing market is not Foreign General Insurance, and the oil rig and marine businesses, expected to improve until residential inventories return to a more which were historically reported in Foreign General Insurance, are normal level, and AIG expects that this downward cycle will continue now reported as part of DBG. Prior period amounts have been to adversely affect Mortgage Guaranty’s loss ratios for the revised to conform to the current presentation. foreseeable future. The higher accident year loss ratio was partially offset by favorable development on prior years, which reduced 2006 and 2005 Comparison incurred losses by $606 million and $53 million in 2007 and 2006, respectively. Additional favorable loss development of General Insurance operating income increased in 2006 compared $50 million (recognized in consolidation and related to certain to 2005 due to growth in net premiums, a reduction in both asbestos settlements) reduced overall incurred losses. General Insurance net premiums written increased in 2007 compared to 2006, reflecting growth in Foreign General Insurance AIG 2007 Form 10-K 43
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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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and changing interest rates, as wel
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Index of Notes to Consolidated Fina
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SHAREHOLDER INFORMATION Corporate H
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