AIG 2006 Annual Report Download - page 76

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
quired Central Insurance Co., Ltd., a leading general insurance
Overview of Operations and Business Results
company in Taiwan.
AIG identifies its reportable segments by product or service line,
consistent with its management structure. AIG’s major product Outlook
and service groupings are General Insurance, Life Insurance & The commercial property and casualty insurance industry has
Retirement Services, Financial Services and Asset Management. historically experienced cycles of price erosion followed by rate
AIG’s operations in 2006 were conducted by its subsidiaries strengthening as a result of catastrophe or other significant
through these segments. Through these segments, AIG provides losses that affect the overall capacity of the industry to provide
insurance, financial and investment products and services to both coverage. Despite industry price erosion in commercial lines, AIG
businesses and individuals in more than 130 countries and expects to continue to identify profitable opportunities and build
jurisdictions. This geographic, product and service diversification attractive new general insurance businesses as a result of AIG’s
is one of AIG’s major strengths and sets it apart from its broad product line and extensive distribution networks in the U.S.
competitors. AIG’s Other category consists of items not allocated and abroad. Workers compensation remains under considerable
to AIG’s operating segments. pricing pressure, as statutory rates continue to decline. Rates for
AIG’s subsidiaries serve commercial, institutional and individ- D&O insurance also continue to decline due to competitive
ual customers through an extensive property-casualty and life pressures. There can be no assurance that price erosion will not
insurance and retirement services network. In the United States, become more widespread or that AIG’s profitability will not
AIG companies are the largest underwriters of commercial and deteriorate from current levels in major commercial lines, as well
industrial insurance and are among the largest life insurance and as in personal lines and specialty coverages, such as mortgage
retirement services operations as well. AIG’s Financial Services guaranty, where the loss ratio has increased due to softening in
businesses include commercial aircraft and equipment leasing, the U.S. housing market and the weakening performance of non-
capital markets operations and consumer finance, both in the traditional mortgage products. In Foreign General, opportunities
United States and abroad. AIG also provides asset management for growth exist in the consumer lines due to increased demand in
services to institutions and individuals. As part of its spread- emerging markets and the trend toward privatization of health
based business activities, AIG issues various debt instruments in insurance. Growth in the Personal Lines marketplace remains
the public and private markets. challenged from flat renewal pricing, consumer price shopping and
AIG’s operating performance reflects implementation of various increased advertising spending by market leaders. However, the
long-term strategies and defined goals in its various operating high net worth market continues to provide opportunities for
segments. A primary goal of AIG in managing its General growth as a result of AIG’s innovative products and services
Insurance operations is to achieve an underwriting profit. To specifically designed for that market. AIG expects that the
achieve this goal, AIG must be disciplined in its risk selection, acquisition of the remaining interest in 21st Century will enhance
and premiums must be adequate and terms and conditions AIG’s ability to grow the Personal Lines business while gaining
appropriate to cover the risks accepted and expenses incurred. efficiencies of scale.
Expense efficiency is also a primary goal of AIG. Losses caused by catastrophes can fluctuate widely from year
A central focus of AIG operations in recent years has been the to year, making comparisons of results more difficult. With
development and expansion of distribution channels. In 2006, AIG respect to catastrophe losses, AIG believes that it has taken
continued to expand its distribution channels, which now include appropriate steps, such as careful exposure selection and
banks, credit card companies, television-media home shopping, adequate reinsurance coverage, to reduce the effect of possible
affinity groups, direct response, worksite marketing and future losses. The occurrence of one or more catastrophic events
e-commerce. of unanticipated frequency or severity, such as a terrorist attack,
AIG patiently builds relationships in markets around the world earthquake or hurricane, that causes insured losses, however,
where it sees long-term growth opportunities. For example, the could have a material adverse effect on AIG’s results of
fact that AIG has the only wholly owned foreign life insurance operations, liquidity or financial condition.
operations in eleven cities in China is the result of relationships AIG’s operations in China continue to expand, but AIG expects
developed over nearly 30 years. AIG’s more recent extensions of competition in China to remain strong and AIG’s success in China
operations into India, Vietnam, Russia and other emerging will depend on its ability to execute its growth strategy.
markets reflect the same growth strategy. Moreover, AIG believes In India, AIG expects to grow all segments, both organically
in investing in the economies and infrastructures of these and through acquisitions and joint ventures.
countries and growing with them. When AIG companies enter a In Japan, AIG expects its Life Insurance & Retirement Services
new jurisdiction, they typically offer both basic protection and earnings growth may be challenged by increased competition in
savings products. As the economies evolve, AIG’s products evolve light of a new industry-wide mortality table, the continued runoff
with them, to more sophisticated and investment-oriented models. of the older, higher-margin in-force business of AIG Star Life and
Growth for AIG may be generated internally as well as through AIG Edison Life and lower consumer demand for certain accident
acquisitions which both fulfill strategic goals and offer adequate and health products in light of tax law changes. The flat yield
return on capital. During 2006, AIG acquired Travel Guard curve and declining Yen foreign exchange environment may
International, one of the nation’s leading providers of travel continue to constrain certain fixed annuity production. To leverage
insurance programs and emergency travel assistance, and ac-
26 AIG 2006 Form 10-K