AIG 2008 Annual Report Download - page 78

ignores the matching of revenues and expenses as required by GAAP. That is, for statutory purposes, expenses
(including acquisition costs) are recognized immediately, not over the same period that the revenues are earned.
Thus, statutory expenses exclude changes in DAC.
GAAP provides for the recognition of certain acquisition expenses at the same time revenues are earned, the
accounting principle of matching. Therefore, acquisition expenses are deferred and amortized over the period the
related net premiums written are earned. DAC is reviewed for recoverability, and such review requires management
judgment. The most comparable GAAP measure to statutory underwriting profit is income before income taxes,
minority interest and cumulative effect of change in accounting principles. A table reconciling statutory under-
writing profit to income before income taxes, minority interest and cumulative effect of change in accounting
principles is contained in footnote (b) to the following table. See also Critical Accounting Estimates herein and
Notes 1 and 8 to the Consolidated Financial Statements.
AIG, along with most property and casualty insurance companies, uses the loss ratio, the expense ratio and the
combined ratio as measures of underwriting performance. The loss ratio is the sum of claims and claims adjustment
expenses divided by net premiums earned. The expense ratio is underwriting expenses divided by net premiums
earned. These ratios are relative measurements that describe, for every $100 of net premiums earned, the cost of
losses and expenses, respectively. A combined ratio of less than 100 percent indicates an underwriting profit and
over 100 percent indicates an underwriting loss.
Net premiums written are initially deferred and earned based upon the terms of the underlying policies. The net
unearned premium reserve constitutes deferred revenues which are generally earned ratably over the policy period.
Thus, the net unearned premium reserve is not fully recognized in income as net premiums earned until the end of
the policy period.
The underwriting environment varies from country to country, as does the degree of litigation activity.
Regulation, product type and competition have a direct effect on pricing and consequently on profitability as
reflected in underwriting profit and general insurance ratios.
General Insurance Results
General Insurance operating income is comprised of statutory underwriting profit (loss), changes in
DAC, net investment income and net realized capital gains and losses. Operating income (loss), as well as net
premiums written, net premiums earned, net investment income and net realized capital gains (losses) and
statutory ratios were as follows:
2008 2007 2006 2008 vs. 2007 2007 vs. 2006
Years Ended December 31, Percentage Increase/(Decrease)
(In millions, except ratios)
Net premiums written:
AIG Property Casualty Group
Commercial Insurance ............... $21,099 $24,112 $24,312 (12)% (1)%
Transatlantic ...................... 4,108 3,953 3,633 4 9
Personal Lines ..................... 4,514 4,808 4,654 (6) 3
Mortgage Guaranty. ................. 1,123 1,143 866 (2) 32
Foreign General Insurance .............. 14,390 13,051 11,401 10 14
Total ................................ $45,234 $47,067 $44,866 (4)% 5%
72 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries