AIG 2008 Annual Report Download - page 84

aggregate loss limits on certain pools of loans, usually 10 percent of the full amount of loans insured in each pool.
Mortgage Guaranty may record net losses on this business in future periods because the timing of future
delinquencies may precede recognition of future premiums in an amount in excess of the premium deficiency
reserve.
UGC’s domestic mortgage risk in force totaled $30.1 billion as of December 31, 2008 and the 60-day
delinquency ratio was 7.5 percent (based on number of policies, consistent with mortgage industry practice)
compared to domestic mortgage risk in force of $29.8 billion and a delinquency ratio of 3.7 percent at December 31,
2007. Approximately 84 percent of the domestic mortgage risk is secured by first-lien, owner-occupied properties.
2007 and 2006 Comparison
Mortgage Guaranty incurred an operating loss in 2007 compared to operating income in 2006 as the
deteriorating U.S. residential housing market adversely affected losses incurred for both the domestic first- and
second-lien businesses. Domestic first- and second-lien losses incurred increased 362 percent and 346 percent
respectively, compared to 2006, resulting in loss ratios of 122.0 and 357.0, respectively, in 2007. Increases in
domestic losses incurred resulted in an overall loss ratio of 168.6 in 2007 compared to 47.2 in 2006. Prior year
development reduced incurred losses in 2007 by $25 million compared to a reduction of $115 million in 2006,
which accounted for 10.2 points of the increase in the loss ratio.
Net premiums written increased in 2007 compared to 2006 primarily due to growth in the international
markets, accounting for 58 percent of the increase in net premiums written. In addition, the increased use of
mortgage insurance for credit enhancement as well as better persistency resulted in an increase in domestic first-lien
premiums.
The expense ratio in 2007 was 21.2, down from 23.4 in 2006 as premium growth offset the effect of increased
expenses related to UGC’s international expansion and the employment of additional operational resources in the
second-lien business.
Foreign General Insurance Results
2008 and 2007 Comparison
Foreign General Insurance operating income decreased in 2008 compared to 2007 due to a decrease in
statutory underwriting profit and change in DAC of $724 million, an increase in net realized capital losses reflecting
other-than-temporary-impairment charges related to the deterioration in the fixed income markets (see — Results
of Operations — Consolidated Results-Net Realized Gains (losses) for further discussion), and a decrease in net
investment income reflecting lower mutual fund and partnership income related to poor performance in the equity
markets (see Results of Operations — Consolidated Results — Net Investment Income for further discussion).
Net premiums written increased 10 percent (5 percent in original currency) in 2008 compared to 2007 due to
growth in commercial and consumer lines driven by new business from established and new distribution channels,
including the late 2007 acquisition of Wu
¨rttembergische und Badische Versicherungs — AG (Wu ¨Ba) in Germany.
New business in the commercial lines in the U.K. and Europe and decreases in the use of reinsurance increased net
premiums earned, but were partially offset by declines in premium rates. Growth in personal accident business in
Latin America, South East Asia and Europe also contributed to the increase, however, premiums from the Lloyd’s
Syndicate Ascot continued to decline.
The loss ratio in 2008 increased 5.1 points compared to 2007 due to:
• The loss ratio for accident year 2008 recorded in 2008 was 3.2 points higher than the loss ratio recorded in
2007 for accident year 2007 primarily due to continued rate erosion and increased lower level claims
frequency.
• Loss development on prior accident years increased the loss ratio by 1.9 points.
78 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries