2007 Annual Report - AIG.com

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American International Group, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations Continued The DBG net loss reserve of $47.4 billion is comprised sation discount is calculated using a 3.5 percent interest rate and principally of the business of AIG subsidiaries participating in the the 1979-81 Decennial Mortality Table. The non-tabular workers American Home Assurance Company (American Home)/National compensation discount is calculated separately for companies Union Fire Insurance Company of Pittsburgh, Pa. (National Union) domiciled in New York and Pennsylvania, and follows the statutory pool (10 companies) and the surplus lines pool (Lexington, AIG regulations for each state. For New York companies, the discount Excess Liability Insurance Company and Landmark Insurance is based on a five percent interest rate and the companies’ own Company). payout patterns. For Pennsylvania companies, the statute has DBG cedes a quota share percentage of its other liability specified discount factors for accident years 2001 and prior, occurrence and products liability occurrence business to AIRCO. which are based on a six percent interest rate and an industry The quota share percentage ceded was 15 percent in 2007 and payout pattern. For accident years 2002 and subsequent, the 20 percent in 2006 and covered all business written in these discount is based on the yield of U.S. Treasury securities ranging years for these lines by participants in the American Home/ from one to twenty years and the company’s own payout pattern, National Union pool. AIRCO’s loss reserves relating to these with the future expected payment for each year using the interest quota share cessions from DBG are recorded on a discounted rate associated with the corresponding Treasury security yield for basis. As of December 31, 2007, AIRCO carried a discount of that time period. The discount is comprised of the following: approximately $210 million applicable to the $3.34 billion in $794 million — tabular discount for workers compensation in undiscounted reserves it assumed from the American Home/ DBG; $1.42 billion — non-tabular discount for workers compensa- National Union pool via this quota share cession. AIRCO also tion in DBG; and, $210 million — non-tabular discount for other carries approximately $540 million in net loss reserves relating to liability occurrence and products liability occurrence in AIRCO. The Foreign General Insurance business. These reserves are carried total undiscounted workers compensation loss reserve carried by on an undiscounted basis. DBG is approximately $13.3 billion as of December 31, 2007. The companies participating in the American Home/National The other liability occurrence and products liability occurrence Union pool have maintained a participation in the business written business in AIRCO that is assumed from DBG is discounted based by AIU for decades. As of December 31, 2007, these AIU on the yield of U.S. Treasury securities ranging from one to twenty reserves carried by participants in the American Home/National years and the DBG payout pattern for this business. The Union pool totaled approximately $3.02 billion. The remaining undiscounted reserves assumed by AIRCO from DBG totaled Foreign General Insurance reserves are carried by AIUO, AIRCO, approximately $3.34 billion at December 31, 2007. and other smaller AIG subsidiaries domiciled outside the United States. Statutory filings in the United States by AIG companies Results of the Reserving Process reflect all the business written by U.S. domiciled entities only, and Management believes that the General Insurance net loss therefore exclude business written by AIUO, AIRCO, and all other reserves are adequate to cover General Insurance net losses and internationally domiciled subsidiaries. The total reserves carried at loss expenses as of December 31, 2007. While AIG regularly December 31, 2007 by AIUO and AIRCO were approximately reviews the adequacy of established loss reserves, there can be $5.16 billion and $3.67 billion, respectively. AIRCO’s $3.67 billion no assurance that AIG’s ultimate loss reserves will not develop in total general insurance reserves consist of approximately adversely and materially exceed AIG’s loss reserves as of $3.13 billion from business assumed from the American Home/ December 31, 2007. In the opinion of management, such adverse National Union pool and an additional $540 million relating to development and resulting increase in reserves is not likely to Foreign General Insurance business. have a material adverse effect on AIG’s consolidated financial Discounting of Reserves condition, although it could have a material adverse effect on AIG’s consolidated results of operations for an individual reporting At December 31, 2007, AIG’s overall General Insurance net loss period. See also Item 1A. Risk Factors — Casualty Insurance and reserves reflect a loss reserve discount of $2.43 billion, including Underwriting Reserves. tabular and non-tabular calculations. The tabular workers compen- 48 AIG 2007 Form 10-K
American International Group, Inc. and Subsidiaries The following table presents the reconciliation of net loss (in millions) 2007 2006 2005 reserves for 2007, 2006 and 2005 as follows: Prior Accident Year (in millions) 2007 2006 2005 Development by Major Net reserve for losses Class of Business: and loss expenses at Excess casualty (DBG) $ 73 $ 102 $1,191 beginning of year $62,630 $57,476 $47,254 D&O and related Foreign exchange effect 955 741 (628) management liability (DBG) (305) (20) 1,627 Acquisitions (a) 317 55 — Excess workers compensation (DBG) (14) 74 983 Losses and loss Reinsurance (Transatlantic) 88 181 269 expenses incurred: Asbestos and environmental Current year 30,261 27,805 28,426 (primarily DBG) 18 208 930 Prior years, other than All other, net (516) (598) (320) accretion of discount (656) (53) 4,680 (b) Prior years, accretion of Prior years, other than discount 327 300 (15) accretion of discount $ (656) $ (53) $4,680 Losses and loss expenses incurred 29,932 28,052 33,091 Accident Year Calendar Year Losses and loss (in millions) 2007 2006 2005 expenses paid: Prior Accident Year Development Current year 9,684 8,368 7,331 Prior years 14,862 15,326 14,910 by Accident Year: 2006 $ (1,248) Losses and loss 2005 (446) $ (1,576) expenses paid 24,546 23,694 22,241 2004 (428) (511) $ (3,853) Net reserve for losses 2003 37 (212) (63) and loss expenses at 2002 234 373 1,360 end of year $69,288 $62,630 $57,476 2001 263 29 1,749 (a) Reflects the opening balance with respect to the acquisitions of WüBa 2000 321 338 1,323 and the Central Insurance Co., Ltd. in 2007 and 2006, respectively. 1999 47 382 944 (b) Includes fourth quarter charge of $1.8 billion. 1998 154 41 605 1997 & Prior 410 1,083 2,615 The following tables summarize development, (favorable) or Prior years, other than accretion unfavorable, of incurred losses and loss expenses for prior of discount $ (656) $ (53) $ 4,680 years (other than accretion of discount): In determining the loss development from prior accident years, (in millions) 2007 2006 2005 AIG conducts analyses to determine the change in estimated Prior Accident Year ultimate loss for each accident year for each profit center. For Development by Reporting example, if loss emergence for a profit center is different than Unit: expected for certain accident years, the actuaries examine the DBG $(390) $ 175 $4,878 indicated effect such emergence would have on the reserves of Personal Lines 7 (111) 14 that profit center. In some cases, the higher or lower than UGC (25) (115) (103) Foreign General Insurance (286) (183) (378) expected emergence may result in no clear change in the ultimate loss estimate for the accident years in question, and no Sub total (694) (234) 4,411 adjustment would be made to the profit center’s reserves for prior Transatlantic 88 181 269 Asbestos settlements* (50) — — accident years. In other cases, the higher or lower than expected emergence may result in a larger change, either favorable or Prior years, other than accretion of discount $(656) $ (53) $4,680 unfavorable, than the difference between the actual and expected * Represents the effect of settlements of certain asbestos liabilities. loss emergence. Such additional analyses were conducted for each profit center, as appropriate, in 2007 to determine the loss development from prior accident years for 2007. As part of its reserving process, AIG also considers notices of claims received with respect to emerging issues, such as those related to the U.S. mortgage and housing market. The loss ratios recorded by AIG in 2006 took into account the results of the comprehensive reserve reviews that were completed in the fourth quarter of 2005. AIG’s year-end 2005 reserve review reflected careful consideration of the reserve analyses prepared by AIG’s internal actuarial staff with the assistance of third-party AIG 2007 Form 10-K 49
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AMERICAN INTERNATIONAL GROUP, INC.
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FINANCIAL HIGHLIGHTS (in millions,
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overall financial condition, althou
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Group Executive Committee We are ad
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AIG’s life insurance network is t
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We have also begun to address the e
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WHAT WE SEE The ability to see and
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The Major Accounts Practice within
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Around the world, the middle class
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WE SEE GROWTH OPPORTUNITIES IN EMER
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To grow the strength of the AIG glo
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Since 2003, the AIG Disaster Relief
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RESPECT Respect encompasses how we
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Life Insurance & Retirement Service
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Domestic Brokerage Group— Gross P
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In the summer of 2007, widespread f
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in gross premiums written. It launc
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It grew new business premiums from
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emerging markets for its services,
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ILFC—Revenues by Region Total = $
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AIG Investments acquired a 94 perce
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and changing interest rates, as wel
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American International Group, Inc.
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Index of Notes to Consolidated Fina
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SHAREHOLDER INFORMATION Corporate H
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