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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................Excess Casualty – U.S.The excess casualty segment presents unique challenges for estimating the unpaid claims. Insureds are generallyrequired to provide notice of claims that exceed a threshold, either expressed as a proportion of the attachment(e.g., 50 percent of the attachment) or as particular types of claims (e.g., death, quadriplegia). This threshold isgenerally established well below our attachment point, in order to provide us with a precautionary notice of claimsthat could potentially pierce our layer of coverage. This means that the majority of claims close without paymentbecause the claims never pierce our layer, while the claims that close with payment can be large and highly variable.Thus, estimates of unpaid claims carry significant uncertainty.During 2012, the excess casualty class of business experienced $262 million of adverse development based onworse than expected emergence in 2012, primarily from adverse outcomes relating to certain large claims from olderaccident years, from the legacy public entity excess casualty class of business and from a refined analysis applied toclaims in excess of $10 million. This refined analysis considers the impact of changing attachment points (primarilyimpacting frequency of excess claims) and limit structures (primarily impacting severity of excess claims) throughoutthe loss development period.During 2011 the excess casualty business segment experienced better than expected loss emergence, based on theshorter-termed loss development pattern from the year-end 2010 reserve analysis. However, accident year 2010experienced some large catastrophic losses causing its results to be worse than expected.Loss development was affected by an increase in loss costs in 2010, primarily due to medical inflation, whichincreased the economic loss component of tort claims; advances in medical care, which extended the life span ofseverely injured claimants; and larger jury verdicts, which increased the value of severe tort claims.Director and Officer (D&O) and Related Management Liability – U.S.We experienced favorable development in 2012 and 2011. The favorable development over the two-year periodrelated primarily to accident years 2005-2007, 2010, and, to a lesser extent, accident years 2001 and 2002.Development in 2010 was slightly negative.For the year-end 2012 loss reserve review, our actuaries took into account the favorable emergence during 2012 forseveral accident years, especially accident year 2010, the claims department’s reviews of open claims and reducedthe ultimate losses for prior years accordingly. The 2012 actuarial review also adopted a refined segmentation for thisclass of business with the selection of differentiated frequency and severity trends. The overall loss cost trendadopted for this class of business in 2012 from the application of the refined segmentation was slightly lower thanthat adopted for the 2011 review reflecting the continued favorable emergence from this class of business.For the year-end 2011 loss reserve reviews, our actuaries took into account the favorable development from prioraccident years, as well as the continuing favorable development observed in the ground-up claims projections by ourclaims staff over the past five years.Excess Workers’ Compensation – U.S.This class of business has an extremely long tail and is one of the most challenging classes of business to reservefor, particularly when the excess coverage is provided above a self-insured retention layer. The class is highlysensitive to small changes in assumptions – in the rate of medical inflation or the longevity of injured workers, forexample – which can have a significant effect on the ultimate reserve estimate.During the 2012 loss reserve review, we augmented traditional reserve methodologies with an analysis of underlyingclaims cost drivers to inform our judgment of the ultimate loss costs for open reported claims from accident years2003 and prior (representing approximately 95 percent of all open reported claims) and used the refined analysis toinform our judgment of the ultimate loss cost for claims that have not yet been reported using a frequency/severityapproach for these accident years.The approach was deemed to be most suitable for injured workers whose medical conditions had largely stabilized(i.e., at least 9 to 10 years have elapsed since the date of injury). The reserves for accident years 2004 andsubsequent (13 percent of total case and IBNR reserves for this class) were determined using traditional methods.See Critical Accounting Estimates for additional information...................................................................................................................................................................................................................................AIG 2012 Form 10-K 93