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ITEM 7 / CRITICAL ACCOUNTING ESTIMATES.....................................................................................................................................................................................Class of Business Loss Cost Trend Loss Development FactorExcess CasualtyThe assumed loss cost trend was approximately After evaluating the historical loss developmentfive percent. After evaluating the historical loss factors from prior accident years since the earlycost trends from prior accident years since the 1990s, in our judgment, it is reasonably likely thatearly 1990s, in our judgment, it is reasonably actual loss development factors will range fromlikely that actual loss cost trends applicable to the approximately 3.3 percent below those actuallyyear-end 2012 loss reserve review for excess utilized in the year-end 2012 reserve review tocasualty will range from 0 percent to positive approximately 4.6 percent above those factors10 percent, or approximately 5 percent lower or actually utilized. Excess casualty is a long-tailhigher than the assumption actually utilized in the class of business and any deviation in lossyear-end 2012 reserve review. The loss cost development factors might not be discernible fortrend assumption is critical for the excessan extended period of time subsequent to thecasualty class of business due to the long-tail recording of the initial loss reserve estimates fornature of the claims and therefore is applied any accident year. Thus, there is the potential foracross many accident years. Thus, there is the the reserves with respect to a number of accidentpotential for the reserves with respect to a years to be significantly affected by changes innumber of accident years (the expected loss ratio loss development factors that were initially reliedyears) to be significantly affected by changes in upon in setting the reserves. These changes inloss cost trends that were initially relied upon in loss development factors could be attributable tosetting the reserves. These changes in loss changes in inflation or in the judicial environment,trends could be attributable to changes in inflation or in other social or economic conditions affectingor in the judicial environment, or in other social or claims.economic conditions affecting claims......................................................................................................................................................................................................................D&O and Related Management Liability Classes of BusinessThe assumed loss cost trend was approximately The assumed loss development factors are alsohalf of one percent. After evaluating the historical an important assumption but less critical than forloss cost trends from prior accident years since excess casualty. Because these classes arethe early 1990s, including the potential effect of written on a claims made basis, the loss reportingrecent claims relating to the credit crisis, in our and development tail is much shorter than forjudgment, it is reasonably likely that actual loss excess casualty. However, the high severitycost trends applicable to the year-end 2012 loss nature of the claims does create the potential forreserve review for these classes will range from significant deviations in loss development patternsnegative 25 percent to positive 27 percent, or from one year to the next. After evaluating theapproximately 25.5 percent lower or 26.5 percent historical loss development factors for thesehigher than the assumption actually utilized in the classes of business for accident years since theyear-end 2012 reserve review. Because the D&O early 1990s, in our judgment, it is reasonablyclass of business has exhibited highly volatile likely that actual loss development factors willloss trends from one accident year to the next, range from approximately 6.8 percent lower tothere is the possibility of an exceptionally high 11 percent higher than those factors actuallydeviation.utilized in the year-end 2012 loss reserve reviewfor these classes........................................................................................................................................................................................................................................................................................................................................................................................................................................................AIG 2012 Form 10-K 187