AIG 2005 Annual Report Download - page 84

Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
DBG’s net premiums written increased modestly in 2005 Foreign General Insurance had strong results in 2005.
when compared to 2004, reflecting generally improving renewal Growth in net premiums written for 2005 was achieved from
retention rates and a modest change in the mix of business new business as well as new distribution channels. In Japan,
towards smaller accounts for which DBG purchases less the purchase in February 2005 of the insurance portfolio of the
reinsurance. DBG also continued to expand its relationships Royal & SunAlliance branch operations opened new distribu-
with a larger number and broader range of brokers. Recently, tion channels. In the Far East, personal accident business
DBG has seen improvement in domestic property rates as well exhibited strong growth and had excellent results for 2005.
as increases in submission activity in the aftermath of the 2005 Commercial lines in Europe exhibited healthy growth and had
hurricanes. DBG attributes the increase in submissions to its positive results for 2005, partially offset by rate decreases in
overall financial strength in comparison to many insurers that Australia and the United Kingdom. Personal lines operations
experienced significant losses and reductions of surplus as a in Brazil and Latin America continue to exhibit strong growth,
result of the hurricanes. which translated into improved underwriting results for 2005.
The DBG loss ratio increased in 2005 from 2004 principally The Lloyd’s Ascot syndicate continues to grow; however,
as a result of adverse loss development, the third and fourth insurance losses and reinstatement premium costs relating to
quarter 2005 catastrophe related losses and the $197 million of the hurricanes caused a significant reduction in 2005 under-
additional losses resulting from increased labor and material writing results. Foreign General Insurance also benefited from a
costs related to the 2004 hurricanes. decrease in the fourth quarter of 2005 in net reserves for loss
The DBG expense ratio increased in 2005 from 2004 and loss expense for non-asbestos and environmental reserves.
principally due to an increase in net commissions resulting Approximately half of the Foreign General Insurance net
from the replacement of certain ceded quota share reinsurance, premiums written is derived from commercial insurance and
for which DBG earns a ceding commission, with excess-of-loss the remainder from consumer lines.
reinsurance, which generally does not include a ceding AIG transacts business in most major foreign currencies. The
commission. Increases in other underwriting expenses at DBG following table summarizes the effect of changes in foreign
relate to the changes in estimates noted above, as well as currency exchange rates on the growth of General Insurance
unusually high expenses for Personal Lines. The Foreign net premiums written.
General expense ratio increased in 2005 from 2004 principally
because consumer lines of business, which have higher 2005
acquisition costs, have become more significant. Growth in original currency 2.6%
Transatlantic’s net premiums written and net premiums Foreign exchange effect 0.5
earned for 2005 decreased compared to 2004, principally due to Growth as reported in U.S. dollars 3.1%
competitive market conditions and increased ceding company
retentions in certain classes of business. The great majority of AIG’s General Insurance results reflect the effects of
the premium decrease relates to Transatlantic’s domestic catastrophe related losses of $2.89 billion, $1.05 billion and
operations. Operating income decreased principally as a result $83 million in 2005, 2004 and 2003, respectively. Losses
of the increased level of catastrophe losses. caused by catastrophes can fluctuate widely from year to year,
Personal Lines net premiums written and net premiums making comparisons of recurring type business more difficult.
earned for 2005 increased when compared to 2004 as a result With respect to catastrophe losses, AIG believes that it has
of strong growth in the Private Client Group and Agency taken appropriate steps, such as careful exposure selection and
Auto divisions due to increased agent/broker appointments, obtaining reinsurance coverage, to reduce the effect of the
greater penetration and enhanced product offerings. AIG direct magnitude of possible future losses. The occurrence of one or
premiums are down slightly from 2004 due to aggressive re- more catastrophic events of unanticipated frequency or sever-
underwriting of the previously acquired GE business and the ity, such as a terrorist attack, earthquake or hurricane, that
discontinuation of underwriting homeowners business. Involun- causes insured losses, however, could have a material adverse
tary auto premiums were down in 2005 due to the decline in effect on AIG’s results of operations, liquidity or financial
the assigned risk marketplace. Underwriting profit declined in condition.
2005 as a result of hurricane losses and related expenses, General Insurance net investment income grew in 2005
reserve strengthening, an increase in Agency Auto’s current when compared to 2004. AIG is benefiting from strong cash
accident year physical damage loss ratio, and expenses incurred flow, higher interest rates and increased partnership income.
related to terminating AIG’s relationship with The Robert Cash flow for Foreign General was lower in 2005 when
Plan effective December 31, 2005. compared to 2004 due to payments for catastrophe related
Mortgage Guaranty net premiums written were up slightly losses incurred in 2005 and 2004 and for the purchase of the
for 2005 when compared to 2004, reflecting growth in the Royal & SunAlliance branch operations. Partnership income
second liens and international businesses offset by higher ceded was particularly strong for Foreign General due to increases in
premiums. Higher acquisition costs and lower earned premiums market valuations of infrastructure fund investments in Africa,
from certain single premium product lines resulted in lower Asia, China, Eastern Europe and India. Additionally, net
underwriting profit in 2005 compared to 2004. UGC continued investment income was positively affected by the compounding
to achieve expansion of its international business in 2005. of previously earned and reinvested net investment income. In
32 AIG m Form 10-K