AIG 2012 Annual Report Download - page 101

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business in the U.S. In addition, ceding commissions decreased as a result of restructuring of the Property and
Specialty reinsurance program as part of the strategic decision to retain more profitable business while continuing to
manage aggregate exposures.
The general operating expense ratio increased by 2.4 points due to increases in bad debt expense, investments in
strategic initiatives and human resources, coupled with a lower net premiums earned base. The lower net premiums
earned base contributed approximately 0.2 points to the increase in the general operating expense ratio. Bad debt
expense increased by approximately $143 million, which contributed approximately 0.7 points to the general
operating expense ratio increase in the year ended December 31, 2012. For the year ended December 31, 2012,
investments in strategic initiatives, commercial lines platform, our newly formed scientific group, underwriting and
pricing tools totaled approximately $51 million, representing an increase of approximately $41 million over the prior
year. The remainder of the general operating expense ratio increase was primarily due to higher personnel costs, as
part of AIG’s continued investment in its employees.
Consumer Insurance Ratios
The accident year loss ratio, as adjusted, in the year ended December 31, 2012 improved in both A&H and Personal
lines. The improvement in A&H is primarily attributable to favorable underwriting performance of individual personal
accident business in Asia Pacific, targeted underwriting actions, coupled with rate increases and risk selection of
group A&H in the U.S. and the overall travel business. The improvement in Personal lines is primarily attributable to
improved underwriting and risk selection in the warranty line of business, price sophistication and rate strengthening
for Japan, EMEA automobile and the U.S. private client group, and targeted business mix changes that resulted in
faster growth in non-automobile products than the automobile line of business. Included in the accident year loss
ratio, as adjusted, for the year ended December 31, 2012, are severe losses totaling $33 million. There were no
severe losses for the year ended December 31, 2011.
The acquisition ratio increased by 1.2 points primarily due to profit sharing arrangements in lines of business targeted
for growth, direct marketing expenses and the reduction in VOBA benefit. Overall direct marketing costs increased by
approximately 9 percent in 2012; total direct marketing spending outside the U.S. increased by approximately
18 percent in the same period. There was also a decrease of approximately $49 million in the benefit from the
amortization of VOBA liabilities recognized at the time of the Fuji acquisition.
The general operating expense ratio increased by 0.9 points as a result of incurring additional expenses to grow key
lines of business across a number of geographic areas and strategic expansion in growth economy nations. For the
year ended December 31, 2012, investments in strategic initiatives, including investments in an integrated consumer
lines platform and information systems infrastructure totaled approximately $44 million, representing an increase of
approximately $27 million or 0.2 points over the prior year. The remainder of the increase was primarily due to higher
personnel costs, as we continue our efforts to align employee performance across the globe with our strategic goals.
Other Category
We continued to invest in a number of strategic initiatives during 2012, including the implementation of global finance
and information systems, preparation for Solvency II compliance, readiness for regulation by the FRB, legal entity
restructuring, and underwriting and claims improvement initiatives. We also continued to streamline our finance,
policy and claims administration and human resources operations. The costs of these initiatives, which are not
specific to either Commercial Insurance or Consumer Insurance, are reported as part of the Other category. For the
year ended December 31, 2012, such costs totaled $391 million, representing an increase of approximately
$195 million over the prior year, and contributed approximately 1.1 points to the AIG Property Casualty general
operating expense ratio.
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AIG 2012 Form 10-K84
ITEM 7 / RESULTS OF OPERATIONS