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ITEM 7 / RESULTS OF OPERATIONS.....................................................................................................................................................................................reporting unit. Approximately 80 percent of the 2011 development was associated with accident years 2003 andprior.In addition to reserving actions, we have made significant changes to the ongoing environmental business included inCommercial with the goal of ensuring that the current policies are being written to earn an appropriate risk adjustedprofit. Underwriting guidelines have been revised to no longer cover known or expected clean up costs, which were asignificant driver of historical claims, and a ‘‘new emerging contaminants’’ team has been formed within the dedicatedenvironmental engineering staff to track any new cleanup standards that may be set by federal or state regulators.The percentage of long term policies (ten years or more) has decreased from a historical average of 6 percent to1.5 percent by policy count. In addition, minimum retentions have been increased, and engineering reviews arerequired for specific business segments (such as oil and gas, and landfills) that have traditionally generated higherlosses.Primary Workers’ Compensation and General Liability in Commercial Risk, Specialty Workers’ Compensation andEnergy Business unitsThe Commercial Risk division writes casualty insurance accounts for businesses with revenues of less than$700 million. The majority of the business is workers’ compensation. The Energy division writes casualty insuranceaccounts (including workers’ compensation) in the mining, oil and gas and power generation sectors. TheCommercial Specialty Workers’ Compensation division writes small monoline guaranteed cost risks. Our CommercialSpecialty Workers’ Compensation business unit grew significantly in the early to mid 2000s but has reduced premiumwritings by nearly 70 percent since 2007.During 2012, we significantly intensified our claims management efforts for those primary workers’ compensationclaims which are managed by AIG. These efforts include consulting with various specialists, including clinical andpublic health professionals and other advisors. We also continued to refine our actuarial methodologies for estimatingultimate loss costs incorporating a more refined segmentation by state (California and New York were analyzedseparately) and a more refined approach for business subject to deductibles as well as business subject to premiumadjustments (loss-sensitive business). Based on these enhanced reviews we increased reserves by $46 million. Wealso reviewed the General Liability (GL) loss experience of the primary casualty classes of business using a morerefined segmentation for business subject to a deductible as well as loss-sensitive business. Our review focused onapplying actuarial loss development analyses to those GL claims for which these techniques are appropriate. As aresult of this analysis, we determined that prior year reserves needed to be increased by $235 million for the primaryGL class of business in 2012 to reflect the worse than expected emergence of paid loss severities for both bodilyinjury and property damage claims from the more recent accident years (2008 and subsequent).The Commercial Risk, Commercial Specialty Workers’ Compensation and Energy divisions contributed $265 million,$145 million and $115 million, respectively, of adverse development in calendar year 2011. The vast majority of thisadverse development emanates from primary workers’ compensation exposure, which was largely from accident year2010. In 2011, losses for accident year 2010 continued to emerge at higher levels than anticipated at prior year end.A key driver was the effect of high unemployment on the frequency of higher severity lost time claims. The pooreconomic environment precluded some employers from offering ‘‘light duty’’ return-to-work alternatives that mightotherwise have mitigated lost time claims. At the same time, the increased use of pain management strategies hasled to increased medical claims. The increase in lost time frequency and the adverse effects of medical cost trendsresulted in higher loss ratios than anticipated at prior year end. For each of the three classes, our conclusion that theworsening experience necessitated a strengthening of the reserves was confirmed by an independent third-partyactuarial review during 2011.We recorded a total of $518 million of adverse loss development for Commercial Specialty Workers’ Compensation in2010. The need to strengthen the reserves was confirmed by an independent third-party actuarial review during thefourth quarter of 2010. Approximately 75 percent of the year-end 2010 reserve strengthening for this businesspertained to accident years 2007 through 2009. For similar reasons, the Commercial Risk division strengthenedworkers’ compensation reserves in 2010.For more information on our Loss Reserving Process, see Critical Accounting Estimates...................................................................................................................................................................................................................................AIG 2012 Form 10-K 95