AIG 2008 Annual Report Download - page 82

2008, principally attributable to goodwill arising from the acquisitions of HSB, 21st Century, and Transatlantic as
well as the recognition of a premium deficiency reserve of $222 million in 2008 related to UGC’s second-lien
business. Also contributing to the operating loss was Personal Lines, primarily resulting from the goodwill
impairment charge noted above.
General Insurance net premiums written declined $1.8 billion in 2008 compared to 2007, including a decline in
U.S. workers’ compensation net premiums of $1.7 billion due to declining rates, lower employment levels and
increased competition. Declining rates in other casualty lines within Commercial Insurance and a reduction in
Personal Lines net premiums earned were largely offset by growth in Foreign General Insurance from both
established and new distribution channels and the positive effect of changes in foreign currency exchange rates.
See Results of Operations — Consolidated Results for further discussion on Net investment income and
Realized capital gains (losses).
2007 and 2006 Comparison
General Insurance operating income increased in 2007 compared to 2006 due to growth in net investment
income, partially offset by a decline in underwriting profit and net realized capital losses. The 2007 combined ratio
increased to 90.1, an increase of 0.9 points compared to 2006, primarily due to an increase in the loss ratio of
1.0 points. The loss ratio for accident year 2007 recorded in 2007 was 2.3 points higher than the loss ratio for
accident year 2006 recorded in 2006. Increases in Mortgage Guaranty losses accounted for a 2.1 point increase in
the 2007 accident year loss ratio. The higher 2007 accident year loss ratio was partially offset by favorable
development on prior years, which reduced incurred losses by $606 million and $53 million in 2007 and 2006,
respectively. Additional favorable loss development of $50 million (recognized in consolidation and related to
certain asbestos settlements) reduced overall incurred losses.
Commercial Insurance Results
2008 and 2007 Comparison
Commercial Insurance operating income decreased in 2008 compared to 2007, primarily due to significant
declines in underwriting results and net investment income, as well as significantly greater net realized capital
losses in 2008. The decline in underwriting results is also reflected in the combined ratio, which increased
21.6 points in 2008 compared to 2007. The loss ratio for accident year 2008 recorded in 2008 included a 6.0 point
effect related to catastrophe losses, and was 13.3 points higher than the loss ratio for accident year 2007 recorded in
2007. Prior year development and increases in the loss reserve discount reduced incurred losses by $169 million and
$555 million in 2008 and 2007, respectively, accounting for an additional 1.6 point increase in the combined ratio.
Commercial Insurance net premiums written declined in 2008 compared to 2007 primarily due to declines in
premiums from workers’ compensation and other casualty lines. Declines in other casualty lines were due to
declining rates and reduced activity in the construction and transportation industries. Management and Professional
liability lines declined due to increased competition, particularly in the fourth quarter of 2008.
Commercial Insurance expense ratio increased to 26.8 in 2008 compared to 18.4 in 2007. The most significant
driver of the increase was goodwill impairment charges principally attributable to goodwill arising from the
acquisition of HSB, representing 5.4 points of the increase in the expense ratio. Additionally, the provision for
uncollectible premiums and other provisions increased approximately $178 million due to economic conditions,
compared to a reduction of $18 million of expenses in 2007 as provisions established in 2006 were released,
accounting for 0.9 points of the increase in the expense ratio. The remaining increase is due to the decline in net
premiums earned and mix of business. While AIG is aggressively pursuing expense reductions, the impact of
expense savings will lag the decline in net written premiums.
2007 and 2006 Comparison
Commercial Insurance operating income increased in 2007 compared to 2006 primarily due to growth in both
net investment income and underwriting profit. The improvement is also reflected in the combined ratio, which
declined 4.9 points in 2007 compared to 2006, primarily due to an improvement in the loss ratio of 3.3 points.
Catastrophe-related losses increased the 2007 loss ratio by 0.4 points. The loss ratio for accident year 2007 recorded
76 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries