2007 Annual Report - AIG.com

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
actuaries. In determining the appropriate loss ratios for accident lion of favorable development from accident years 2003 through
year 2006 for each class of business, AIG gave consideration to 2005, partially offset by approximately $2.25 billion of adverse
the loss ratios resulting from the 2005 reserve analyses as well development from accident years 2002 and prior. In 2006, most
as all other relevant information including rate changes, expected classes of AIG’s business continued to experience favorable
changes in loss costs, changes in coverage, reinsurance or mix of development for accident years 2003 through 2005. The adverse
business, and other factors that may affect the loss ratios.
development from accident years 2002 and prior reflected
development from excess casualty, workers compensation, excess
2007 Net Loss Development
workers compensation, and post-1986 environmental liability
classes of business, all within DBG, from asbestos reserves
In 2007, net loss development from prior accident years was
within DBG and Foreign General Insurance, and from Transatlantic.
favorable by approximately $656 million, including approximately
$88 million of adverse development from Transatlantic; and
excluding approximately $327 million from accretion of loss
2005 Net Loss Development
reserve discount. Excluding Transatlantic, as well as accretion of In 2005, net loss development from prior accident years was
discount, net loss development in 2007 from prior accident years adverse by approximately $4.68 billion, including approximately
was favorable by approximately $744 million. The overall favorable $269 million from Transatlantic. This $4.68 billion adverse
development of $656 million consisted of approximately $2.12 bil- development in 2005 was comprised of approximately $8.60 billion
of favorable development from accident years 2004 through lion for the 2002 and prior accident years, partially offset by
2006, partially offset by approximately $1.43 billion of adverse favorable development for accident years 2003 and 2004 for
development from accident years 2002 and prior and $37 million most classes of business, with the notable exception of D&O. The
of adverse development from accident year 2003. In 2007, most adverse loss development for 2002 and prior accident years was
classes of AIG’s business continued to experience favorable attributable to approximately $4.0 billion of development from the
development for accident years 2004 through 2006. The majority D&O and related management liability classes of business,
of the adverse development from accident years 2002 and prior excess casualty, and excess workers compensation, and to
was related to development from excess casualty and primary approximately $900 million of adverse development from asbesworkers
compensation business within DBG and from Transatlan- tos and environmental claims. The remaining portion of the
tic. The development from accident year 2003 was primarily adverse development from 2002 and prior accident years included
related to adverse development from excess casualty and primary approximately $520 million related to Transatlantic with the
workers compensation business within DBG offset by favorable balance spread across many other classes of business. Most
development from most other classes of business. The overall classes of business produced favorable development for accident
favorable development of $656 million includes approximately years 2003 and 2004, and adverse development for accident
$305 million pertaining to the D&O and related management years 2001 and prior.
liability classes of business within DBG, consisting of approximately
$335 million of favorable development from accident years Net Loss Development by Class of Business
2003 through 2006, partially offset by approximately $30 million
The following is a discussion of the primary reasons for the
of adverse development from accident years 2002 and prior. The
development in 2007, 2006 and 2005 for those classes of
overall favorable development of $656 million also includes
business that experienced significant prior accident year developapproximately
$300 million of adverse development from primary
ments during the three-year period. See Asbestos and Environworkers
compensation business within DBG. See Volatility of
mental Reserves below for a further discussion of asbestos and
Reserve Estimates and Sensitivity Analyses below.
environmental reserves and developments.
2006 Net Loss Development Excess Casualty: Excess Casualty reserves experienced significant
adverse loss development in 2005, but there was only a
In 2006, net loss development from prior accident years was
relatively minor amount of adverse development in 2006 and
favorable by approximately $53 million, including approximately
2007. The adverse development for all periods shown related
$198 million in net adverse development from asbestos and
principally to accident years 2002 and prior, and resulted from
environmental reserves resulting from the updated ground up
significant loss cost increases due to both frequency and severity
analysis of these exposures in the fourth quarter of 2006;
of claims. The increase in loss costs resulted primarily from
approximately $103 million of adverse development pertaining to
medical inflation, which increased the economic loss component
the major hurricanes in 2004 and 2005; and $181 million of
of tort claims, advances in medical care, which extended the life
adverse development from Transatlantic; and excluding approxispan
of severely injured claimants, and larger jury verdicts, which
mately $300 million from accretion of loss reserve discount.
increased the value of severe tort claims. An additional factor
Excluding the fourth quarter asbestos and environmental reserve
affecting AIG’s excess casualty experience in recent years has
increase, catastrophes and Transatlantic, as well as accretion of
been the accelerated exhaustion of underlying primary policies for
discount, net loss development in 2006 from prior accident years
homebuilders. This has led to increased construction defectwas
favorable by approximately $535 million. The overall favorable
related claims activity on AIG’s excess policies. Many excess
development of $53 million consisted of approximately $2.30 bilcasualty
policies were written on a multi-year basis in the late
50 AIG 2007 Form 10-K