AIG 2010 Annual Report Download - page 104

American International Group, Inc., and Subsidiaries
unchanged compared to the prior year. Increases in underwriting expenses were offset by decreases in
acquisition costs. The increase in other underwriting expenses in 2010 resulted primarily from the
impairment of intangible assets within the Far East region, Consumer lines business (unrelated to the Fuji
operations), and costs associated with separation activities from certain AIG divested entities. In addition,
other underwriting expenses in 2010 include the cost of enhancements to financial systems and related
control environment as well as expenses relating to long-term incentive programs that will continue to align
employee performance incentive programs with profitability, capital management, risk management and
compliance objectives. The decrease in acquisition costs in 2010 is primarily due to the credit card
indemnification program in Commercial Specialty, discussed above, which carried a high commission ratio.
The increase in the Chartis International combined ratio for 2009 compared to 2008 primarily resulted from the
following:
• a loss ratio for accident year 2009 recorded in 2009 which was 3.4 points higher than the loss ratio for
accident year 2008 recorded in 2008. The increase in the overall accident year loss ratio was due primarily to
increases relating to Commercial Specialty financial lines claims of $412 million arising from the disruption
in the financial markets as well as financial frauds. Partially offsetting these increases were the year-over-year
effects of catastrophe-related losses. No catastrophe-related losses were recorded in 2009, while 2008 was
affected by natural catastrophes of $143 million including Hurricanes Gustav and Ike.
• an increase in the expense ratio in 2009 compared to 2008 due to a decrease in net premiums earned and an
increase in general operating expenses. The increase in general operating expenses relates to separation and
restructuring charges, certain costs associated with bad debt-related expenses, and increased pension costs.
Chartis International Investing and Other Results
Chartis International net investment income increased in 2010 compared to 2009 primarily due to higher returns
from partnership investments, dividends earned, and other investment income which were partially offset by lower
mutual fund and interest income. Investment expense was also lower in 2010 as 2009 expenses included the equity
method losses from Fuji. In 2010, Fuji was consolidated as described below.
Chartis International net realized capital gains in 2010 were essentially unchanged from the prior year. On
March 31, 2010, AIG, through a Chartis International subsidiary, purchased additional voting shares in Fuji. The
acquisition of the additional voting shares resulted in Chartis International obtaining control of Fuji. This
acquisition resulted in a bargain purchase gain of approximately $332 million, which is included in the
Consolidated Statement of Income (Loss) in Other Income. See Note 5 to the Consolidated Financial Statements
for a complete discussion. The bargain purchase gain is primarily attributable to the depressed market value of
Fuji’s common stock, which AIG believes is the result of macro-economic, capital market and regulatory factors in
Japan coupled with Fuji’s financial condition and results of operations. AIG anticipates that the bargain purchase
gain will not be subject to U.S. or foreign income tax because the gain would only be recognized for tax purposes
upon the sale of the Fuji shares.
In May 2009, AIG completed the sale of its interest in the AIG Otemachi Building in Japan, including the land
and development rights. Approximately 60 percent of these interests were held by Chartis International
subsidiaries with the remainder held by Asset Management and reported in AIG’s Other operations category.
Although the transaction qualified as a legal sale, it did not qualify as a sale for U.S. GAAP purposes at the time
of sale due to AIG’s continued involvement as a lessee, primarily in the form of a lease deposit. As leases expired
in December 2010 and AIG vacated the building, a pre-tax gain of approximately $1.3 billion was recognized in
AIG’s consolidated results, of which $669 million was included in the Chartis International results.
Chartis International Net investment income decreased in 2009 compared to 2008 primarily due to losses from
an equity method investment, and lower yields on the fixed income portfolios, partially offset by improving mutual
fund income due to improved market conditions.
88 AIG 2010 Form 10-K