AIG 2007 Annual Report Download - page 98

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
catastrophe losses and prior accident year development, and premiums increased to 24 percent in 2007 compared to 23 per-
growth in Net investment income. The combined ratio improved to cent in 2006, primarily due to additional reinsurance for property
89.1, a reduction of 15.6 points from 2005, including an risks to manage catastrophe exposures.
improvement in the loss ratio of 16.5 points. The reduction in DBG’s expense ratio decreased to 18.7 in 2007 compared to
catastrophe losses represented 6.9 points and the reduction in 19.8 in 2006, primarily due to the 2006 charge related to the
prior year adverse development represented 11.5 points of the remediation of the material weakness in internal control over
overall reduction. Net premiums written increased $3.0 billion or certain balance sheet reconciliations that accounted for
7 percent in 2006 compared to 2005. Domestic General 2.1 points of the decline. The decline was partially offset by
Insurance accounted for $1.6 billion of the increase as property increases in operating expenses for marketing initiatives and
rates improved and submission activity increased due to the operations.
strength of AIG’s capacity, commitment to difficult markets and DBG’s net investment income increased in 2007 compared to
diverse product offerings. Foreign General Insurance contributed 2006, as interest income increased $384 million in 2007, on
$1.4 billion to the increase in net premiums written. In 2005, growth in the bond portfolio resulting from investment of operating
Domestic General Insurance net premiums written increased by cash flows. Income from partnership investments increased
$300 million and Foreign General Insurance net premiums written $159 million in 2007 compared to 2006, primarily due to
decreased by the same amount as a result of the commutation of improved returns on the underlying investments. Other investment
the Richmond reinsurance contract. The commutation partially income declined $163 million in 2007 compared to 2006,
offset the increase in Domestic General Insurance net premiums primarily due to out of period adjustments of $194 million
written in 2006 compared to 2005 and increased Foreign General recorded in 2006. DBG recorded net realized capital losses in
Insurance net premiums written in 2006 compared to 2005. 2007 compared to net realized capital gains in 2006 primarily due
In 2006, certain adjustments were made in conjunction with to other-than-temporary impairment charges of $213 million in
the remediation of the material weakness relating to balance 2007 compared to $73 million in 2006.
sheet account reconciliations which increased earned premiums
by $189 million and increased other expenses by $415 million. 2006 and 2005 Comparison
The combined effect of these adjustments increased the expense DBG’s operating income was $5.85 billion in 2006 compared to a
ratio by 0.9 points and decreased the loss ratio by 0.3 points. loss of $820 million in 2005, an improvement of $6.67 billion.
General Insurance net investment income increased $1.67 bil- The improvement is also reflected in the combined ratio, which
lion in 2006 to $5.7 billion on higher levels of invested assets, declined to 89.9 in 2006 compared to 114.6 in 2005 primarily
strong cash flows, slightly higher yields and increased partnership due to an improvement in the loss ratio of 24.9 points. The
income, and included increases from out of period adjustments of reduction in prior year adverse development and the reduction in
$490 million related to the accounting for certain interests in catastrophe losses and related reinstatement premiums ac-
UCITS, $43 million related to partnership income and $85 million counted for 20.7 points and 8.3 points, respectively, of the
related to interest earned on a DBG deposit contract. See also improvement.
Capital Resources and Liquidity — Liquidity and Invested Assets DBG’s net premiums written increased in 2006 compared to
herein. 2005 as property rates improved and submission activity in-
creased due to the strength of AIG’s capacity, commitment to
DBG Results difficult markets and diverse product offerings. Net premiums
2007 and 2006 Comparison written in 2005 were reduced by $136 million due to reinstate-
ment premiums related to catastrophes, offset by increases of
DBG’s operating income increased in 2007 compared to 2006
$300 million for the Richmond commutation and $147 million
primarily due to growth in both net investment income and
related to an accrual for workers compensation premiums for
underwriting profit. The improvement is also reflected in the
payroll not yet reported by insured employers. The combined
combined ratio, which declined 4.5 points in 2007 compared to
effect of these items reduced the growth rate for net premiums
2006, primarily due to an improvement in the loss ratio of
written by 1.3 percent.
3.3 points. Catastrophe-related losses increased the 2007 loss
The loss ratio in 2006 declined 24.9 points to 70.2. The 2005
ratio by 0.4 points. The loss ratio for accident year 2007 recorded
loss ratio was negatively affected by catastrophe-related losses of
in 2007 was 0.9 points lower than the loss ratio recorded in 2006
$1.8 billion and related reinstatement premiums of $136 million.
for accident year 2006. The loss ratio for accident year 2006 has
Adverse development on reserves for loss and loss adjustment
improved in each quarter since September 30, 2006. As a result,
expenses declined to $175 million in 2006 compared to $4.9 bil-
the 2007 accident year loss ratio is 2.8 points higher than the
lion in 2005, accounting for 20.7 points of the decrease in the
2006 accident year loss ratio, reflecting reductions in 2006
loss ratio.
accident year losses recorded through December 31, 2007. Prior
DBG’s expense ratio increased to 19.8 in 2006 compared to
year development reduced incurred losses by $390 million in 2007
19.5 in 2005, primarily due to an increase in other expenses that
and increased incurred losses by $175 million in 2006, accounting
amounted to $498 million in 2006 (including out of period
for 2.4 points of the improvement in the loss ratio.
charges of $356 million) compared to $372 million in 2005. This
DBG’s net premiums written declined in 2007 compared to
increase added 0.4 points to the expense ratio.
2006 as ceded premiums as a percentage of gross written
44 AIG 2007 Form 10-K