AIG 2007 Annual Report Download - page 100

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
the increased use of mortgage insurance for credit enhancement written for commercial lines increased due to new business in the
as well as better persistency resulted in an increase in domestic U.K. and Europe and decreases in the use of reinsurance,
first-lien premiums. UGC has taken steps to strengthen its partially offset by declines in premium rates. Growth in consumer
underwriting guidelines and increase rates. It also discontinued lines in Latin America, Asia and Europe also contributed to the
new production for certain programs in the second-lien business increase. Net premiums written for the Lloyd’s syndicate Ascot
beginning in the fourth quarter of 2006. However, UGC will (Ascot) and Aviation declined due to rate decreases and increased
continue to receive renewal premiums on that portfolio for the life market competition.
of the loans, estimated to be three to five years, and will continue The 2007 loss ratio increased a total of 1.7 points compared
to be exposed to possible losses from future defaults. to 2006. Losses of $90 million from the June 2007 U.K. floods
The expense ratio in 2007 was 21.2, down from 23.4 in 2006 added 0.7 points to the loss ratio and higher severe but non-
as premium growth offset the effect of increased expenses catastrophic losses and higher loss frequency for personal
related to UGC’s international expansion and the employment of accident business in Japan and personal lines business in Asia
additional operational resources in the second-lien business. and Latin America added 1.6 points to the loss ratio. Partially
UGC domestic mortgage risk in force totaled $29.8 billion as offsetting these increases was favorable loss development on
of December 31, 2007 and the 60-day delinquency ratio was prior accident years of $286 million in 2007 compared to
3.7 percent (based on number of policies, consistent with $183 million in 2006, which decreased the loss ratio by 0.6
mortgage industry practice) compared to domestic mortgage risk points.
in force of $24.9 billion and a delinquency ratio of 2.1 percent at The 2007 expense ratio increased 1.3 points compared to
December 31, 2006. Approximately 81 percent of the domestic 2006. This increase reflected the cost of realigning certain legal
mortgage risk is secured by first-lien, owner-occupied properties. entities through which Foreign General Insurance operates and the
increased significance of consumer lines of business, which have
higher acquisition costs. These factors contributed 0.7 points to
2006 and 2005 Comparison
the 2007 expense ratio. AIG expects the expense ratio to
Mortgage Guaranty operating income declined in 2006 from 2005 increase in 2008 due to the continued cost of realigning certain
due primarily to unfavorable loss experience on third-party legal entities through which Foreign General Insurance operates.
originated second-lien business with a credit quality lower than Net investment income decreased in 2007 compared to 2006
typical for UGC and a softening U.S. housing market. This as the 2006 period included the out of period UCITS adjustments,
increased Mortgage Guaranty’s consolidated loss ratio in 2006 to which more than offset increases resulting from higher interest
47.2 compared to 26.0 in 2005. The writing of this second-lien rates, increased cash flows and mutual fund income. Mutual fund
coverage, which began in 2005, was discontinued as of year end income was $93 million higher than 2006 reflecting improved
2006. Losses in the second-lien business have been mitigated by performance in the equity markets in 2007. Partnership income
a policy year aggregate limitation provision that is typically was essentially unchanged.
established for each lender.
Net premiums written increased due to growth in the domestic 2006 and 2005 Comparison
second-lien and international businesses as well as improved
persistency in the domestic first-lien business. The expense ratio Foreign General Insurance operating income increased in 2006
remained flat as premium growth covered increased expenses compared to 2005 due to out of period UCITS adjustments in
related to expansion internationally and continued investment in 2006, the absence of significant catastrophe-related losses in
risk management resources. 2006, rate increases and lower current accident year losses by
Ascot on its U.S. book of business and lower asbestos and
environmental reserve increases. These increases were partially
Foreign General Insurance Results
offset by lower favorable loss development from prior accident
2007 and 2006 Comparison years and adverse loss development on the 2005 hurricanes.
Statutory underwriting profit increased $104 million in 2006
Foreign General Insurance operating income decreased in 2007
compared to 2005. Catastrophes in 2005 resulted in losses of
compared to 2006, due primarily to decreases in Net investment
$229 million and reinstatement premiums of $80 million.
income and statutory underwriting profit. Net investment income
Net premiums written increased 14 percent (15 percent in
in 2006 included income of $424 million from out of period UCITS
original currency) in 2006 compared to 2005, reflecting growth in
adjustments. Statutory underwriting profit decreased due to
both commercial and consumer lines driven by new business from
losses from the June 2007 U.K. floods, an increase in severe but
both established and new distribution channels, including a wholly
non-catastrophic losses and higher frequency of non-severe losses
owned insurance company in Vietnam and Central Insurance Co.,
compared to 2006, partially offset by higher favorable loss
Ltd. in Taiwan. Ascot also contributed to the growth in net
development on prior accident years.
premiums written as a result of rate increases on its
Net premiums written increased 14 percent (10 percent in
U.S. business. Consumer lines in Latin America and commercial
original currency) in 2007 compared to 2006, reflecting growth in
lines in Europe, including the U.K., also contributed to the
commercial and consumer lines driven by new business from both
increase. Net premiums written in 2005 were reduced by
established and new distribution channels, including Central
reinstatement premiums related to catastrophes and a portfolio
Insurance Co. Ltd. in Taiwan acquired in late 2006. Net premiums
46 AIG 2007 Form 10-K