AIG 2006 Annual Report Download - page 85

American International Group, Inc. and Subsidiaries
increased from 2005 due to improved performance of the Personal Lines Results
underlying investments, including initial public offering activity. Net 2006 and 2005 Comparison
investment income in 2006 included increases relating to out of
Personal Lines operating income increased $237 million in 2006
period adjustments of $109 million for the accounting for certain
compared to 2005 reflecting a reduction in the loss ratio of
investments in unit investment trusts and partnerships and
5.8 points. Favorable development on prior accident years re-
$85 million related to interest earned on a deposit contract that
duced incurred losses by $111 million in 2006 compared to an
did not exist in the prior year.
increase of $14 million in 2005, accounting for 2.7 points of the
decrease in the loss ratio. The 2005 catastrophe-related losses of
2005 and 2004 Comparison
$112 million added 2.4 points to the loss ratio. The loss ratio for
DBG’s net premiums written increased modestly in 2005 compared the 2006 accident year improved 0.7 points primarily due to the
to 2004, reflecting generally improving renewal retention rates and termination of The Robert Plan relationship effective Decem-
a modest change in the mix of business towards smaller accounts ber 31, 2005 and growth in the Private Client Group. The
for which DBG purchases less reinsurance. DBG also continued to improvement in the loss ratio was partially offset by an increase
expand its relationships with a larger number and broader range of in the expense ratio of 0.6 points primarily due to investments in
brokers. DBG saw improvement in domestic property rates as well people and technology, national expansion efforts and lower
as increases in submission activity in the aftermath of the 2005 response rates. Net premiums written were flat in 2006 compared
hurricanes. DBG attributes the increase in submissions to its to 2005, with growth in the Private Client Group and Agency Auto
overall financial strength in comparison to many insurers that divisions offset by termination of The Robert Plan relationship.
experienced significant losses and reductions of surplus as a result Growth in the Private Client Group spans multiple products, with a
of the hurricanes. continued penetration of the high net worth market, strong brand
The DBG loss ratio increased in 2005 from 2004 principally as promotion and innovative loss prevention programs.
a result of adverse loss development, higher catastrophe-related
losses and $197 million of losses incurred in 2005 resulting from 2005 and 2004 Comparison
the 2004 catastrophes.
Personal Lines net premiums written and net premiums earned for
The DBG expense ratio increased in 2005 from 2004,
2005 increased compared to 2004 as a result of strong growth in
principally due to an increase in net commissions resulting from
the Private Client Group and Agency Auto divisions due to
the replacement of certain ceded quota share reinsurance, for
increased agent/broker appointments, greater market penetration
which DBG earns a ceding commission, with excess-of-loss
and enhanced product offerings. AIG direct premiums in 2005
reinsurance, which generally does not include a ceding commis-
were down slightly from 2004 due to aggressive re-underwriting of
sion. Increases in other underwriting expenses reflect a change in
the previously acquired GE business and the discontinuation of
estimates for salvage and subrogation recoveries.
underwriting homeowners business. Involuntary auto premiums
DBG’s net investment income increased in 2005 compared to
were down in 2005 due to the decline in the assigned risk
2004 due to strong cash flows, higher interest rates and
marketplace. Statutory underwriting profit declined in 2005 as a
increased partnership income.
result of hurricane losses and related expenses, reserve strength-
ening, an increase in Agency Auto’s current accident year physical
Transatlantic Results
damage loss ratio, and expenses incurred related to terminating
2006 and 2005 Comparison AIG’s relationship with The Robert Plan effective December 31,
2005.
Transatlantic’s net premiums written and net premiums earned
increased in 2006 by 5 percent and 6 percent, respectively,
compared to 2005 due primarily to increased writings in domestic Mortgage Guaranty Results
operations. Operating income increased in 2006 compared to 2006 and 2005 Comparison
2005 due largely to lower catastrophe losses and net ceded
UGC’s operating income declined $35 million in 2006, down 10
reinstatement premiums, and increased net investment income.
percent from 2005 due primarily to unfavorable loss experience
on third-party originated second lien business with a credit quality
2005 and 2004 Comparison
lower than typical for UGC and a softening U.S. housing market.
Transatlantic’s net premiums written and net premiums earned for This increased UGC’s consolidated loss ratio for 2006 to 47.2
2005 decreased compared to 2004, principally due to competitive compared to 26.0 in 2005. The writing of this second lien
market conditions and increased ceding company retentions in coverage, which began in 2005, was discontinued as of year end
certain classes of business, largely resulting from Transatlantic’s 2006. Losses in the second lien business have been mitigated by
domestic operations. Operating income decreased principally as a a policy year aggregate limitation provision that is typically
result of the increased level of catastrophe losses. established for each lender.
Net premiums written increased 38 percent from growth in the
domestic second lien and international businesses as well as
improved persistency in the domestic first lien business. The
Form 10-K 2006 AIG 35