AIG 2014 Annual Report Download - page 92

ITEM 7 / RESULTS OF OPERATIONS / COMMERCIAL INSURANCE
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Acquisition expenses decreased in 2014 compared to 2013 primarily due to a reduction in expenses related to personnel
engaged in sales support activities, and lower premium taxes and guaranty fund and other assessments reflecting a change in
business mix.
General operating expenses decreased in 2014 compared to 2013, primarily due to efficiencies from organizational
realignment initiatives, partially offset by higher technology-related expenses and an increase in bad debt expense. In the prior
year, general operating expenses benefitted from an unusually low bad debt expense.
Net investment income decreased in 2014 compared to 2013, primarily due to a decrease in interest rates during 2014, as
yields on new purchases were lower than the weighted average yield of the overall portfolio, lower income on alternative
investments, and lower income associated with investments accounted for under the fair value option, as the increase related
to the PICC P&C rights offerings was more than offset by a decrease from fixed maturity investments accounted for under the
fair value option. These were partially offset by the effect of continued portfolio diversification. Additionally, the decrease in
allocated net investment income is also due to a reduction in net loss reserves.
See MD&A – Investments for additional information on the Non-Life Insurance Companies invested assets, investment
strategy, and asset-liability management process.
2013 and 2012 Comparison
Pre-tax operating income increased in 2013, compared to 2012, primarily due to a lower underwriting loss as a result of
lower catastrophe losses, rate increases, enhanced risk selection and loss mitigation activities and an increase in net
investment income. Catastrophe losses decreased to $710 million in 2013 from $2.3 billion in 2012. Partially offsetting these
improvements was a loss reserve discount charge of $322 million in 2013, compared to a $100 million benefit in 2012. See
Insurance Reserves– Non-Life Insurance Companies– Discounting of Reserves for further discussion. In addition, the current
accident year losses for 2013 included severe losses of $569 million compared to $293 million in 2012. This increase was
driven largely by a large property loss and related contingent business interruption claims, totaling $131 million in 2013 and by
an increased frequency of severe losses in 2013 compared to 2012. Net adverse prior year loss reserve development
increased by $30 million compared to 2012. Net adverse prior year loss reserve development, including related premium
adjustments was $294 million in 2013, which included $149 million of adverse prior year loss reserve development related to
Storm Sandy, compared to $236 million in 2012. The adverse prior year loss reserve development related to Storm Sandy
resulted from higher severities on a small number of existing large and complex commercial claims. These increased
severities were driven by a number of factors, including the extensive damage caused to properties in the downtown New York
metropolitan area.
Acquisition expenses decreased in 2013, compared to 2012, due to changes in reinsurance, the timing of guaranty funds
and other assessments, as well as change in business mix.
General operating expenses decreased in 2013, compared to 2012, primarily due to a decrease in bad debt expense and
reduced costs for strategic initiatives. Bad debt expense decreased by $159 million in 2013 from $140 million in 2012. The
decrease in bad debt expense was primarily due to reductions in prior year reserves, as collections exceeded the originally
estimated recoveries. Strategic initiatives which include technology-related expenses and those severance charges borne by
Property Casualty, decreased by $137 million in 2013 from $277 million in 2012. These decreases were partially offset by an
increase in the cost of employee incentive plans primarily due to an improved alignment of employee performance with the
overall performance of the organization, including our stock performance, and accelerated vesting provisions for retirement-
eligible individuals in the 2013 share-based plan.
Net investment income increased in 2013, compared to 2012, primarily due to increased alternative investment income
derived from equity market performance and income associated with the PICC P&C shares that are accounted for under the
fair value option. This alternative investment performance was primarily due to our investments in hedge funds, which
benefited from equity market performance. Fair value increases also contributed to the net investment income increase. The
portion of our investment in PICC P&C shares accounted for under the fair value option contributed $110 million to net
investment income. Although interest rates remained at historically low levels, there were upward movements in rates
throughout the year, with the ten year U.S. Treasury yield increasing 126 basis points during 2013. These increasing rates,
coupled with continued portfolio diversification, helped mitigate the effects of interest rates on matured or sold investments