Almost two-thirds of that severity charge related to securities rated AAA, and nearly 80% related to AA and AAA combined. The securities continue to perform.
The $337 million after tax effect of the credit valuation adjustment relates to the effect of credit spreads on AIGFP''s assets and liabilities accounted for under the fair value option using the guidance in FAS 159. While credit spreads in the quarter widened on both AIGFP''s invested assets and on AIG''s own credit spreads, which affect the fair value of AIGFP''s liabilities, the net result was a loss.
Partnership and mutual fund income is volatile from quarter-to-quarter and the first half of 2007 generated very strong results.
While the second quarter of 2008 results includes $190 million in partnership and mutual fund income, this is still down $1.1 billion year-on-year, and affected most of the segments'' results. Looking ahead, the second half of 2007 also generated strong results, so AIG anticipates that year-on-year comparisons will remain difficult for the remainder of 2008.
In addition, the company has been building liquidity within the insurance companies as a prudent response to the market dislocation. However, this does have a negative effect on net investment income which is estimated in the range of $1 to $200 million pre-tax in the quarter.
First and second line losses increased 264 and 107% respectively over the second quarter of 2007 and include the effect of low reported tier rate probability assumption. AIG anticipates UGC''s operating losses will continue into 2009.
American General Finance net receivables were down 1% sequentially but up 6% year-on-year primarily due to the Equity One portfolio acquisition in February.
Loan loss provisions increased significantly in the quarter, and delinquency rates have increased to 3.56% which remains within AGF''s target band.
Commercial insurance is facing an increasingly challenging environment.
Nonetheless, the company’s overall view is that rates are still adequate, with the exception of certain lines of business, most notably workers comp and aviation. AIG continues to look for ways to shift product mix to compensate for declining rates. The underwriting results continued to suffer from the drag of adverse development in excess casualty in the 2003 and prior accident years, although in the second quarter this was substantially offset by positive developments in the 2004 and later accident years.
The effect of the Midwest flood was about 1.4 points on the loss ratio in the quarter, in fire and general results benefited from AIG''s broad global footprints and strong franchise up 15% in dollar terms, net premiums written rose 5% in original currency due to growth in Continental Europe, in the Middle East as well as due to high retention levels in major accounts despite declining rates in certain markets.
Underwriting income fell 5.9% due to an increase in severe but non-catastrophic losses and increased loss frequency as well as increased expenses due to the realignment of the legal entities through which fire and gen operates.
In personal lines good growth in AIG''s private client group was offset by reductions in net premiums written in aigdirect.com and, and agency auto, as a result of planned reduction in these lines.
Domestic life and retirement services generated 14% growth in premium, reflecting AIG''s off season''s product portfolio.
Private placement VUL and payout annuity sales were up strongly, while life insurance and home service were up 5%. With continued uncertainty in equity markets consumers favored individual fixed annuities where deposits increased by $450 million and surrender rates fell 300 basis points. Spreads on key products reflected lower investment income.
Foreign life results benefited from AIG''s product mix while growth in life products was muted, accident and health group, fixed annuities and variable annuities, all had strong growth. So growth was favorably affected by exchange rate movements. Life insurance and retirement services reserves continued to grow in excess of 15% reflecting AIG''s success in accumulating assets. Net investment income fell 5.9% primarily due to losses on investment linked products in the U.K., though reduced partnership and mutual fund income also affected results.
IOSC had record results in the quarter.
Revenues increased 14% while operating income was up 85%, on the back of higher lease rates and strong demand for IOSC''s modern fuel efficient aircraft. New aircraft are 100% leased through 2008 and 2009 and all of the 16 aircrafts returned to IOSC were released as of July 31st.
Results in asset management continued to be affected by the run-off of the GIC program.
External assets under management were down sequentially due to market price declines despite attracting new assets of $2 billion in the quarter.
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