AIG 2007 Annual Report Download - page 85

American International Group, Inc. and Subsidiaries
to continue to be adversely affected by the factors referred to Workers compensation remains under considerable pricing
above. The downward cycle in the U.S. housing market is not pressure, as statutory rates continue to decline. Rates for
expected to improve until residential inventories return to a more aviation, excess casualty, D&O and certain other lines of
normal level and the mortgage credit market stabilizes. AIG insurance also continue to decline due to competitive pressures.
expects that this downward cycle will continue to adversely affect Rates for commercial property lines are also declining following
UGC’s operating results for the foreseeable future and will result another year of relatively low catastrophe losses. Further price
in a significant operating loss for UGC in 2008. AIG also incurred erosion is expected in 2008 for the commercial lines; AIG seeks
substantial unrealized market valuation losses in 2007, particu- to mitigate the decline by constantly seeking out profitable
larly in the fourth quarter, on AIGFP’s super senior credit default opportunities across its diverse product lines and distribution
swap portfolio and substantial other-than-temporary impairment networks while maintaining a commitment to underwriting disci-
charges on AIG’s Insurance and Financial Services available for pline. There can be no assurance that price erosion will not
sale securities. The results from AIG’s operations with exposure become more widespread or that AIG’s profitability will not
to the U.S. residential mortgage market will be highly dependent deteriorate from current levels in major commercial lines.
on future market conditions. Continuing market deterioration will In Foreign General Insurance, opportunities for growth exist in
cause AIG to report additional unrealized market valuation losses the consumer lines due to increased demand in emerging markets
and impairment charges. and the trend toward privatization of health insurance. In commer-
The ongoing effect of the downward cycle in the U.S. housing cial lines, the late 2007 acquisition of W¨uBa enhances AIG’s
market on AIG’s other operations, investment portfolio and overall insurance offerings to small and medium sized companies in
consolidated financial condition could be material if the market Europe.
disruption continues and expands beyond the residential mort- Through operations in Bahrain designed to comply with Islamic
gage markets, although AIG seeks to mitigate the risks to its law, AIG is tapping into a growing market. Islamic insurance,
business by disciplined underwriting and active risk management. called Takaful, is an alternative to conventional insurance based
Globally, heightened regulatory scrutiny of financial services on the concept of mutual assistance through pooling of resources.
companies in many jurisdictions has the potential to affect future The Personal Lines automobile marketplace remains challeng-
financial results through higher compliance costs. This is particu- ing with rates declining steadily, increased spending on commis-
larly true in the United States, where Federal and state authorities sions and advertising and favorable liability frequency trends
have commenced various investigations of the financial services slowing, while severity in both liability and physical damage are
industry, and in Japan and Southeast Asia, where financial expected to increase. In addition to the deteriorating underwriting
institutions have received remediation orders affecting consumer cycle, a generally weakening economy leads to slower growth in
and policyholder rights. automobile insurance exposure units and values. The Personal
In certain quarters, AIG’s returns from partnerships and other Lines business is focused on consolidation and improving opera-
alternative investments were particularly strong, driven by tional efficiencies to reduce costs, as well as enhancing rating
favorable equity market performance and credit conditions. These algorithms and creating a new aigdirect.com brand, as a result of
returns may vary from period to period and AIG believes that the the 2007 combination of AIG Direct and 21st Century Insurance
particularly strong performance in certain prior periods is not Group (21st Century) operations, to support growth. The high net
indicative of the returns to be expected from this asset class in worth market continues to provide opportunities for growth as a
future periods. result of AIG’s innovative products and services specifically
AIG has recorded out of period adjustments in the last two designed for that market.
years due to the remediation of control deficiencies. As AIG Losses caused by catastrophes can fluctuate widely from year
continues its remediation activities, AIG expects to continue to to year, making comparisons of results more difficult. With
incur expenses related to these activities and to record additional respect to catastrophe losses, AIG believes that it has taken
out of period adjustments, although all known errors have been appropriate steps, such as careful exposure selection and
corrected. adequate reinsurance coverage, to reduce the effect of possible
future losses. The occurrence of one or more catastrophic events
of higher than anticipated frequency or severity, such as a
General Insurance
terrorist attack, earthquake or hurricane, that causes insured
The commercial property and casualty insurance industry has losses, however, could have a material adverse effect on AIG’s
historically experienced cycles of price erosion followed by rate results of operations, liquidity or financial condition.
strengthening as a result of catastrophes or other significant
losses that affect the overall capacity of the industry to provide Life Insurance & Retirement Services
coverage. As premium rates decline, AIG will generally experience
higher current accident year loss ratios, as the written premiums Disruption in the U.S. residential mortgage and credit markets
are earned. Despite industry price erosion in commercial lines, had a significant adverse effect on Life Insurance & Retirement
AIG expects to continue to identify profitable opportunities and Services operating results in 2007 and will continue to be a key
build attractive new general insurance businesses as a result of factor in 2008 and beyond, especially in the U.S.-based opera-
AIG’s broad product line and extensive distribution networks in the tions. The volatility in operating results will be further magnified by
United States and abroad. the continuing market shift to variable products with living benefits
AIG 2007 Form 10-K 31