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 catastrophe losses and prior accident year development, and premiums increased to 24 percent in 2007 compared to 23 pergrowth in Net investment income. The combined ratio improved to cent in 2006, primarily due to additional reinsurance for property 89.1, a reduction of 15.6 points from 2005, including an risks to manage catastrophe exposures. improvement in the loss ratio of 16.5 points. The reduction in DBG’s expense ratio decreased to 18.7 in 2007 compared to catastrophe losses represented 6.9 points and the reduction in 19.8 in 2006, primarily due to the 2006 charge related to the prior year adverse development represented 11.5 points of the remediation of the material weakness in internal control over overall reduction. Net premiums written increased $3.0 billion or certain balance sheet reconciliations that accounted for 7 percent in 2006 compared to 2005. Domestic General 2.1 points of the decline. The decline was partially offset by Insurance accounted for $1.6 billion of the increase as property increases in operating expenses for marketing initiatives and rates improved and submission activity increased due to the operations. strength of AIG’s capacity, commitment to difficult markets and DBG’s net investment income increased in 2007 compared to diverse product offerings. Foreign General Insurance contributed 2006, as interest income increased $384 million in 2007, on $1.4 billion to the increase in net premiums written. In 2005, growth in the bond portfolio resulting from investment of operating Domestic General Insurance net premiums written increased by cash flows. Income from partnership investments increased $300 million and Foreign General Insurance net premiums written $159 million in 2007 compared to 2006, primarily due to decreased by the same amount as a result of the commutation of improved returns on the underlying investments. Other investment the Richmond reinsurance contract. The commutation partially income declined $163 million in 2007 compared to 2006, offset the increase in Domestic General Insurance net premiums primarily due to out of period adjustments of $194 million written in 2006 compared to 2005 and increased Foreign General recorded in 2006. DBG recorded net realized capital losses in Insurance net premiums written in 2006 compared to 2005. 2007 compared to net realized capital gains in 2006 primarily due In 2006, certain adjustments were made in conjunction with to other-than-temporary impairment charges of $213 million in the remediation of the material weakness relating to balance 2007 compared to $73 million in 2006. sheet account reconciliations which increased earned premiums by $189 million and increased other expenses by $415 million. 2006 and 2005 Comparison The combined effect of these adjustments increased the expense DBG’s operating income was $5.85 billion in 2006 compared to a ratio by 0.9 points and decreased the loss ratio by 0.3 points. loss of $820 million in 2005, an improvement of $6.67 billion. General Insurance net investment income increased $1.67 bil- The improvement is also reflected in the combined ratio, which lion in 2006 to $5.7 billion on higher levels of invested assets, declined to 89.9 in 2006 compared to 114.6 in 2005 primarily strong cash flows, slightly higher yields and increased partnership due to an improvement in the loss ratio of 24.9 points. The income, and included increases from out of period adjustments of reduction in prior year adverse development and the reduction in $490 million related to the accounting for certain interests in catastrophe losses and related reinstatement premiums ac- UCITS, $43 million related to partnership income and $85 million counted for 20.7 points and 8.3 points, respectively, of the related to interest earned on a DBG deposit contract. See also improvement. Capital Resources and Liquidity — Liquidity and Invested Assets DBG’s net premiums written increased in 2006 compared to herein. 2005 as property rates improved and submission activity increased DBG Results due to the strength of AIG’s capacity, commitment to difficult markets and diverse product offerings. Net premiums 2007 and 2006 Comparison written in 2005 were reduced by $136 million due to reinstatement DBG’s operating income increased in 2007 compared to 2006 premiums related to catastrophes, offset by increases of primarily due to growth in both net investment income and $300 million for the Richmond commutation and $147 million underwriting profit. The improvement is also reflected in the related to an accrual for workers compensation premiums for combined ratio, which declined 4.5 points in 2007 compared to payroll not yet reported by insured employers. The combined 2006, primarily due to an improvement in the loss ratio of effect of these items reduced the growth rate for net premiums 3.3 points. Catastrophe-related losses increased the 2007 loss written by 1.3 percent. ratio by 0.4 points. The loss ratio for accident year 2007 recorded The loss ratio in 2006 declined 24.9 points to 70.2. The 2005 in 2007 was 0.9 points lower than the loss ratio recorded in 2006 loss ratio was negatively affected by catastrophe-related losses of for accident year 2006. The loss ratio for accident year 2006 has $1.8 billion and related reinstatement premiums of $136 million. improved in each quarter since September 30, 2006. As a result, Adverse development on reserves for loss and loss adjustment the 2007 accident year loss ratio is 2.8 points higher than the expenses declined to $175 million in 2006 compared to $4.9 bil- 2006 accident year loss ratio, reflecting reductions in 2006 lion in 2005, accounting for 20.7 points of the decrease in the accident year losses recorded through December 31, 2007. Prior loss ratio. year development reduced incurred losses by $390 million in 2007 DBG’s expense ratio increased to 19.8 in 2006 compared to and increased incurred losses by $175 million in 2006, accounting 19.5 in 2005, primarily due to an increase in other expenses that for 2.4 points of the improvement in the loss ratio. amounted to $498 million in 2006 (including out of period DBG’s net premiums written declined in 2007 compared to charges of $356 million) compared to $372 million in 2005. This 2006 as ceded premiums as a percentage of gross written increase added 0.4 points to the expense ratio. 44 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries DBG’s net investment income increased by $1.0 billion in Net premiums written increased in 2007 compared to 2006 2006 compared to 2005, as interest income increased $482 mil- due to continued growth in the Private Client Group and increased lion on growth in the bond portfolio resulting from investment of new business production in the aigdirect.com business partially operating cash flows and capital contributions. Partnership income offset by a reduction in the Agency Auto business. increased from 2005 due to improved performance of the On September 27, 2007, AIG completed its previously anunderlying investments, including initial public offering activity. Net nounced acquisition of 21st Century, paying $759 million to investment income in 2006 included increases relating to out of acquire the remaining 39.2 percent of the shares of 21st Century period adjustments of $109 million for the accounting for UCITS that it did not previously own. As a result of the acquisition, the and partnerships and $85 million related to interest earned on a AIG Direct and 21st Century operations have been combined as deposit contract that did not exist in the prior year. aigdirect.com. Under the purchase method of accounting, the assets and Transatlantic Results liabilities of 21st Century that were acquired were adjusted to 2007 and 2006 Comparison their estimated fair values as of the date of the acquisition, and goodwill of $342 million was recorded. A customer relationship Transatlantic’s net premiums written and net premiums earned intangible asset, initially valued at $119 million, was also increased in 2007 compared to 2006 due to increases in both established. domestic and international operations. The increase in statutory underwriting profit in 2007 compared to 2006 reflects improved 2006 and 2005 Comparison underwriting results in Domestic operations. Operating income increased in 2007 compared to 2006 due principally to increased Personal Lines operating income increased $237 million in 2006 net investment income and improved underwriting results. compared to 2005 reflecting a reduction in the loss ratio of 5.8 points. Favorable development on prior accident years reduced 2006 and 2005 Comparison incurred losses by $111 million in 2006 compared to an increase of $14 million in 2005, accounting for 2.7 points of the decrease Transatlantic’s net premiums written and net premiums earned in the loss ratio. The 2005 catastrophe-related losses of increased in 2006 compared to 2005 due primarily to increased $112 million added 2.4 points to the loss ratio. The loss ratio for writings in domestic operations. Operating income increased in the 2006 accident year improved 0.7 points primarily due to the 2006 compared to 2005 due largely to lower catastrophe losses termination of The Robert Plan relationship effective Decemand net ceded reinstatement premiums, and increased net ber 31, 2005 and growth in the Private Client Group. The investment income. improvement in the loss ratio was partially offset by an increase in the expense ratio of 0.6 points primarily due to investments in Personal Lines Results people and technology, national expansion efforts and lower 2007 and 2006 Comparison response rates. Net premiums written were flat in 2006 compared to 2005, with growth in the Private Client Group and Agency Auto Personal Lines operating income in 2007 decreased by $365 mildivisions offset by termination of The Robert Plan relationship. lion compared to 2006, largely due to an increase in incurred Growth in the Private Client Group spans multiple products, with a losses from a number of sources, leading to an overall increase in continued penetration of the high net worth market, strong brand the loss ratio of 6.8 points. Prior year net adverse reserve promotion and innovative loss prevention programs. development contributed 2.5 points of this increase in the loss ratio, as Personal Lines experienced $7 million in net adverse development (including $64 million in adverse development from Mortgage Guaranty Results businesses placed in runoff), compared to $111 million of 2007 and 2006 Comparison favorable development in 2006. An additional 1.6 point increase Mortgage Guaranty’s operating loss in 2007 was $637 million in the loss ratio resulted from $61 million of losses and compared to operating income of $328 million in 2006 as the $14 million of reinstatement premiums due to the California deteriorating U.S. residential housing market adversely affected wildfires. In addition, an increase in the loss ratio recorded in losses incurred for both the domestic first- and second-lien 2007 for accident year 2007 compared to the loss ratio recorded businesses. Domestic first- and second-lien losses incurred in 2006 for accident year 2006 of 2.7 points resulted, in part, increased 362 percent and 346 percent respectively, compared to from an increased frequency of large losses in the Private Client 2006, resulting in loss ratios of 122.0 and 357.0, respectively, in Group and average automobile premiums declining faster than 2007. Increases in domestic losses incurred resulted in an overall loss trends. loss ratio of 168.6 in 2007 compared to 47.2 in 2006. Prior year Operating income also declined due to increased expenses. development reduced incurred losses in 2007 by $25 million The expense ratio increased 1.1 points in 2007 compared to compared to a reduction of $115 million in 2006, which 2006, primarily due to $63 million of transaction and integration accounted for 12.7 points of the increase in the loss ratio. costs associated with the 2007 acquisition of the minority interest Net premiums written increased in 2007 compared to 2006 in 21st Century. primarily due to growth in the international markets, accounting for 19 percent of the increase in net premiums written. In addition AIG 2007 Form 10-K 45
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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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American International Group, Inc.
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Index of Notes to Consolidated Fina
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SHAREHOLDER INFORMATION Corporate H
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