2007 Annual Report - AIG.com
2007 Annual Report - AIG.com
2007 Annual Report - AIG.com
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American International Group, Inc. and Subsidiaries<br />
1990s, which limited <strong>AIG</strong>’s ability to respond to emerging market opment in 2005, but experienced slightly favorable development in<br />
trends as rapidly as would otherwise be the case. In subsequent 2006 and more significantly favorable development in <strong>2007</strong>. The<br />
years, <strong>AIG</strong> responded to these emerging trends by increasing adverse development in 2005 related principally to accident years<br />
rates and implementing numerous policy form and coverage 2002 and prior. This adverse development resulted from significhanges.<br />
This led to a significant improvement in experience cant loss cost escalation due to a variety of factors, including the<br />
beginning with accident year 2001. In <strong>2007</strong>, a significant portion following: the increase in frequency and severity of corporate<br />
of the adverse development from accident years 2002 and prior bankruptcies; the increase in frequency of financial statement<br />
also related to other latent exposures, including pharmaceutical restatements; the sharp rise in market capitalization of publicly<br />
and product aggregate-related exposures as well as the construc- traded <strong>com</strong>panies; and the increase in the number of initial public<br />
tion defect exposures noted above. <strong>AIG</strong>’s exposure to these latent offerings, which led to an unprecedented number of IPO allocaexposures<br />
was sharply reduced after 2002 due to significant tion/laddering suits in 2001. In addition, extensive utilization of<br />
changes in policy terms and conditions as well as underwriting multi-year policies during this period limited <strong>AIG</strong>’s ability to<br />
guidelines.<br />
respond to emerging trends as rapidly as would otherwise be the<br />
For the year-end 2005 loss reserve review, <strong>AIG</strong>’s actuaries case. <strong>AIG</strong> experienced significant adverse loss development during<br />
responded to the continuing adverse development by further the period 2002 through 2005 as a result of these issues. <strong>AIG</strong><br />
increasing the loss development factors applicable to accident responded to this development with rate increases and policy<br />
years 1999 and subsequent by approximately 5 percent. In<br />
form and coverage changes to better contain future loss costs in<br />
addition, to more accurately estimate losses for construction this class of business.<br />
defect-related claims, a separate review was performed by <strong>AIG</strong> For the year-end 2005 loss reserve review, <strong>AIG</strong>’s actuaries<br />
claims staff for accounts with significant exposure to these<br />
responded to the continuing adverse development by further<br />
claims.<br />
increasing the loss development factor assumptions. The loss<br />
For the year-end 2006 loss reserve review, <strong>AIG</strong> claims staff development factors applicable to 1997 and subsequent accident<br />
updated the separate review for accounts with significant expo- years were increased by approximately 4 percent. In addition,<br />
sure to construction defect-related claims in order to assist the <strong>AIG</strong>’s actuaries began to give greater weight to loss development<br />
actuaries in determining the proper reserve for this exposure. methods for accident years 2002 and 2003, in order to more fully<br />
<strong>AIG</strong>’s actuaries determined that no significant changes in the respond to the recent loss experience. <strong>AIG</strong>’s claims staff also<br />
assumptions were required. Prior accident year loss development conducted a series of ground-up claim projections covering all<br />
in 2006 was adverse by approximately $100 million, a relatively open claims for this business through accident year 2004. <strong>AIG</strong>’s<br />
minor amount for this class of business. However, <strong>AIG</strong> continued actuaries benchmarked the loss reserve indications for all<br />
to experience adverse development for this class for accident accident years through 2004 to these claim projections.<br />
years prior to 2003.<br />
For the year-end 2006 loss reserve review, <strong>AIG</strong>’s actuaries<br />
For the year-end <strong>2007</strong> loss reserve review, <strong>AIG</strong> claims staff determined that no significant changes in the assumptions were<br />
updated its review of accounts with significant exposure to<br />
required. Prior accident year loss development in 2006 was<br />
construction defect-related claims. <strong>AIG</strong>’s actuaries determined favorable by approximately $20 million, an insignificant amount for<br />
that no significant changes in the assumptions were required. these classes. <strong>AIG</strong>’s actuaries continued to benchmark the loss<br />
Prior accident year loss developments in <strong>2007</strong> were adverse by reserve indications to the ground-up claim projections provided by<br />
approximately $75 million, a minor amount for this class of <strong>AIG</strong> claims staff for this class of business. For the year-end 2006<br />
business. However, <strong>AIG</strong> continued to experience adverse develop- loss reserve review, the ground-up claim projections included all<br />
ment in this class for accident years 2002 and prior, amounting accident years through 2005.<br />
to approximately $450 million in <strong>2007</strong>. In addition, loss reserves For the year-end <strong>2007</strong> loss reserve review, <strong>AIG</strong>’s actuaries<br />
developed adversely for accident year 2003 by approximately determined that no significant changes in the assumptions were<br />
$100 million in <strong>2007</strong> for this class. The loss ratio for accident required. Prior accident year reserve development in <strong>2007</strong> was<br />
year 2003 remains very favorable for this class and has been favorable by approximately $305 million, due primarily to favorable<br />
relatively stable over the past several years. Favorable develop- development from accident years 2004 and 2005, and to a lesser<br />
ments in <strong>2007</strong> for accident years 2004 through 2006 largely extent 2003 and 2006. <strong>AIG</strong>’s actuaries continued to benchmark<br />
offset the adverse developments from accident years 2003 and the loss reserve indications to the ground-up claim projections<br />
prior. A significant portion of the adverse development from provided by <strong>AIG</strong> claims staff for this class of business. For the<br />
accident years 2002 and prior related to the latent exposures year-end <strong>2007</strong> loss reserve review, the ground-up claim projecdescribed<br />
above.<br />
tions included all accident years through 2006, and included<br />
Loss reserves pertaining to the excess casualty class of stock options backdating-related exposures from accident year<br />
business are generally included in the other liability occurrence 2006. Accident year 2006 reserves developed favorably notwithline<br />
of business, with a small portion of the excess casualty standing the effect of claims relating to stock options backdating,<br />
reserves included in the other liability claims made line of<br />
which totaled approximately $300 million. Further, <strong>AIG</strong> is closely<br />
business, as presented in the table above.<br />
monitoring claims activity in accident year <strong>2007</strong> relating to the<br />
U.S. residential mortgage market, consistent with the manner in<br />
D&O and Related Management Liability Classes of Business:<br />
which claims relating to stock options backdating were monitored<br />
These classes of business experienced significant adverse devel-<br />
<strong>AIG</strong> <strong>2007</strong> Form 10-K 51