AIG 2012 Annual Report Download - page 71

.....................................................................................................................................................................................
Use of Non-GAAP Measures
In Item 6. Selected Financial Data and throughout this MD&A, we present AIG’s financial condition and results of
operations in the way we believe will be most meaningful, representative and most transparent. Some of the
measurements we use are ‘‘non-GAAP financial measures’’ under SEC rules and regulations. GAAP is the acronym
for ‘‘accounting principles generally accepted in the United States.’’ The non-GAAP financial measures we present
may not be comparable to similarly-named measures reported by other companies.
Book Value Per Share Excluding Accumulated Other Comprehensive Income (Loss) (AOCI) is presented in
Item 6. Selected Financial Data and is used to show the amount of our net worth on a per-share basis. We believe
Book Value Per Share Excluding AOCI is useful to investors because it eliminates the effect of non-cash items that
can fluctuate significantly from period to period, including changes in fair value of our available for sale portfolio and
foreign currency translation adjustments. Book Value Per Share Excluding AOCI is derived by dividing Total AIG
shareholders’ equity, excluding AOCI, by Total common shares outstanding. The reconciliation to book value per
share, the most comparable GAAP measure, is presented in Item 6. Selected Financial Data.
We use the following operating performance measures because we believe they enhance understanding of the
underlying profitability of continuing operations and trends of AIG and our business segments. We believe they also
allow for more meaningful comparisons with our insurance competitors. When we use these measures,
reconciliations to the most comparable GAAP measure are provided in the Results of Operations section of this
MD&A.
•AIG – After-tax operating income (loss) is derived by excluding the following items from net income (loss):
income (loss) from discontinued operations, net loss (gain) on sale of divested businesses, income from divested
businesses, legacy FIN 48 and other tax adjustments, legal reserves (settlements) related to ‘‘legacy crisis
matters,’’ deferred income tax valuation allowance (releases) charges, amortization of the Federal Reserve Bank of
New York prepaid commitment fee asset, changes in fair value of AIG Life and Retirement fixed income securities
designated to hedge living benefit liabilities, change in benefit reserves and deferred policy acquisition costs (DAC),
value of business acquired (VOBA), and sales inducement assets (SIA) related to net realized capital (gains)
losses, (gain) loss on extinguishment of debt, net realized capital (gains) losses, non-qualifying derivative hedging
activities, excluding net realized capital (gains) losses and bargain purchase gain. ‘‘Legacy crisis matters’’ include
favorable and unfavorable settlements related to events leading up to and resulting from our September 2008
liquidity crisis. It also includes legal fees incurred by AIG as the plaintiff in connection with such legal matters.
•AIG Property Casualty
•Operating income (loss): In 2012, AIG Property Casualty revised its non-GAAP income measure from
underwriting income (loss) to operating income (loss), which includes both underwriting income (loss) and net
investment income, but not net realized capital (gains) losses or other (income) expense, legal settlements
related to legacy crisis matters described above and bargain purchase gain. Underwriting income (loss) is
derived by reducing net premiums earned by claims and claims adjustment expense and underwriting expenses;
which consist of the acquisition costs and general operating expenses;
•Ratios: AIG Property Casualty, along with most property and casualty insurance companies, uses the loss ratio,
the expense ratio and the combined ratio as measures of underwriting performance. These ratios are relative
measurements that describe, for every $100 of net premiums earned, the amount of claims and claims
adjustment expense, and the amount of other underwriting expenses that would be incurred. A combined ratio of
less than 100 indicates an underwriting profit and a combined ratio of over 100 indicates an underwriting loss.
The underwriting environment varies across countries and products, as does the degree of litigation activity, all
of which affect such ratios. In addition, investment returns, local taxes, cost of capital, regulation, product type
and competition can have an effect on pricing and consequently on profitability as reflected in underwriting profit
and associated ratios.
•Accident year loss ratio, as adjusted: the loss ratio excluding catastrophe losses and related reinstatement
premiums, prior year development, net of premium adjustments and the impact of reserve discount.
..................................................................................................................................................................................................................................
AIG 2012 Form 10-K54
ITEM 7 / USE OF NON-GAAP MEASURES