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ITEM 8 / NOTE 13. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE AND FUTURE POLICYBENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS AND POLICYHOLDER CONTRACT DEPOSITS.....................................................................................................................................................................................13. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE AND FUTURE POLICYBENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS ANDPOLICYHOLDER CONTRACT DEPOSITS..............................................................................................................................................................................................The liability for unpaid claims and claims adjustment expense represents the accumulation of estimates of unpaidclaims, including estimates for claims incurred but not reported and claim adjustments expenses, less applicablediscount for future investment income. We continually review and update the methods used to determine loss reserveestimates and to establish the resulting reserves. Any adjustments resulting from this review are currently reflected inpre-tax income. Because these estimates are subject to the outcome of future events, changes in estimates arecommon given that loss trends vary and time is often required for changes in trends to be recognized and confirmed.Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adversedevelopment or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost arereferred to as favorable development.The following table presents the reconciliation of activity in the Liability for unpaid claims and claimsadjustment expense:Years Ended December 31,(in millions) 2012 2011 2010Liability for unpaid claims and claims adjustment expense, beginning of year $ 91,145 $ 91,151 $ 85,386Reinsurance recoverable (20,320) (19,644) (17,487)Net liability for unpaid claims and claims adjustment expense, beginning ofyear 70,825 71,507 67,899Foreign exchange effect 757 353 (126)Acquisitions (a) –– 1,538Dispositions (11) – (87)Changes in net loss reserves due to NICO transaction 90 (1,703) –Total 71,661 70,157 69,224Losses and loss expenses incurred (b) :Current year 25,385 27,931 24,455Prior years, other than accretion of discount (c) 421 195 4,182Prior years, accretion of discount (63) 34 (562)Total 25,743 28,160 28,075Losses and loss expenses paid (b) :Current year 9,297 11,534 9,873Prior years 19,325 15,958 15,919Total 28,622 27,492 25,792Balance, end of year:Net liability for unpaid claims and claims adjustment expense 68,782 70,825 71,507Reinsurance recoverable 19,209 20,320 19,644Total $ 87,991 $ 91,145 $ 91,151(a) Represents the acquisition of Fuji on March 31, 2010.(b) Includes amounts related to dispositions through the date of disposition.(c) In 2012, includes $262 million, $46 million and $326 million related to excess casualty, commercial specialty workers’ compensation andenvironmental, respectively. In 2011, includes $(414) million, $145 million and $413 million related to excess casualty, commercial specialty workers’compensation and environmental, respectively. In 2010, includes $1.1 billion, $793 million and $1.5 billion related to excess casualty, excessworkers’ compensation and asbestos, respectively.The net adverse development includes loss-sensitive business, for which we recognized a $54 million, $172 millionand $8 million loss-sensitive premium adjustment for the years ended December 31, 2012, 2011 and 2010,respectively.The 2010 net adverse loss development for prior accident years primarily relates to the asbestos, excess casualty,excess workers’ compensation and primary workers’ compensation. Further, this charge primarily relates to accidentyears 2007 and prior (accident years before the financial crisis in 2008) and a significant amount relates to accident2005 and prior (accident years prior to the start of the managed reduction in these long-tail lines of business). In2010, the reserve charges were primarily due to long-tail lines of business which have been reduced since 2006. In..................................................................................................................................................................................................................................AIG 2012 Form 10-K 283
ITEM 8 / NOTE 13. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE AND FUTURE POLICYBENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS AND POLICYHOLDER CONTRACT DEPOSITS.....................................................................................................................................................................................the case of asbestos, since 1985, standard policies have contained an absolute exclusion for asbestos and pollutionrelateddamages. The factors driving excess casualty loss cost were primarily due to medical inflation and theexhaustion of underlying primary policies for products liability coverage and for homebuilders. In 2010, excessworkers’ compensation also experienced significant prior year development related to the passage of the AffordableCare Act in March 2010 as we concluded that there is increased vulnerability to the risk of further cost-shifting to theexcess workers’ compensation class of business.Discounting of Reserves..............................................................................................................................................................................................At December 31, 2012, the liability for unpaid claims and claims adjustment expense reflects a net loss reservediscount of $3.2 billion, including tabular and non-tabular calculations based upon the following assumptions:• The tabular workers’ compensation discount is calculated using a 3.5 percent interest rate and the1979-81 Decennial Mortality Table.• The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York andPennsylvania, and follows the statutory regulations for each state. For New York companies, the discount is basedon a five percent interest rate and the companies’ own payout patterns. For Pennsylvania companies, the statutehas specified discount factors for accident years 2001 and prior, which are based on a six percent interest rateand an industry payout pattern. For accident years 2002 and subsequent, the discount is based on the payoutpatterns and investment yields of the companies.• Certain asbestos business that was written by AIG Property Casualty is discounted, when allowed by the regulatorand when payments are fixed and determinable, based on the investment yields of the companies and the payoutpattern for this business.The discount consists of the following: $801 million – tabular discount for workers’ compensation in the domesticoperations of AIG Property Casualty and $2.4 billion – non-tabular discount for workers’ compensation in thedomestic operations of AIG Property Casualty; and $51 million – non-tabular discount for asbestos for AIG PropertyCasualty.Future Policy Benefits..............................................................................................................................................................................................Future policy benefits for life and accident and health insurance contracts include provisions for future dividends toparticipating policyholders, accrued in accordance with all applicable regulatory or contractual provisions. Alsoincluded in Future policy benefits are liabilities for annuities issued in structured settlement arrangements whereby aclaimant has agreed to settle a general insurance claim in exchange for fixed payments over a fixed determinableperiod of time with a life contingency feature. Structured settlement liabilities are presented on a discounted basisbecause the settled claims are fixed and determinable. Policyholder contract deposits also include our liability for(a) certain guarantee benefits accounted for as embedded derivatives at fair value, (b) annuities issued in astructured settlement arrangement with no life contingency and (c) certain contracts we elected to account for at fairvalue.The following table presents the components of future policy benefits:At December 31,(in millions) 2012 2011Future policy benefits:Long duration and contracts $ 36,121 $ 33,322Short duration contracts 219 995Total future policy benefits $ 36,340 $ 34,317Long duration contract liabilities included in future policy benefits, as presented in the preceding table, result primarilyfrom life products. Short duration contract liabilities are primarily accident and health products. The liability for futurelife policy benefits has been established on the basis of the following assumptions:• Interest rates (exclusive of immediate/terminal funding annuities), which vary by year of issuance and products,range from 1 percent to 9.5 percent within the first 20 years. Interest rates on immediate/terminal funding annuitiesare at a maximum of 13.5 percent and grade to not greater than zero percent...................................................................................................................................................................................................................................284 AIG 2012 Form 10-K
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American International Group, Inc.2
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KEY FACTS & FIGURES52,000+ $65.7 bi
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■We said we would return to profi
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Financial HighlightsYears Ended Dec
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~63,000AIG EMPLOYEES AROUND THE WOR
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$115.1 millionAVERAGE CLAIMS PAID E
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$10,000MAXIMUM DONATION MADE BY AIG
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American International Group, Inc.F
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AMERICAN INTERNATIONAL GROUP, INC.A
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ITEM 1 / BUSINESS / AIG............
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ITEM 1 / BUSINESS / AIG............
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ITEM 1 / BUSINESS / AIG PROPERTY CA
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ITEM 1 / BUSINESS / AIG PROPERTY CA
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ITEM 1 / BUSINESS / AIG LIFE AND RE
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ITEM 1 / BUSINESS / OTHER OPERATION
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ITEM 1 / BUSINESS / OTHER OPERATION
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1A / RISK FACTORS.............
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ITEM 1B / UNRESOLVED STAFF COMMENTS
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ITEM 5 / MARKET FOR REGISTRANT’S
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ITEM 6 / SELECTED FINANCIAL DATA...
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ITEM 6 / SELECTED FINANCIAL DATA...
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ITEM 7 / MANAGEMENT’S DISCUSSION
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ITEM 7 / USE OF NON-GAAP MEASURES..
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ITEM 7 / EXECUTIVE SUMMARY.........
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ITEM 7 / RESULTS OF OPERATIONS.....
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ITEM 7 / LIQUIDITY AND CAPITAL RESO
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ITEM 7 / INVESTMENTS...............
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ITEM 7 / ENTERPRISE RISK MANAGEMENT
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ITEM 7 / GLOSSARY..................
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ITEM 7 / GLOSSARY..................
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ITEM 7A / QUANTITATIVE AND QUALITAT
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ITEM 8 / INDEX TO FINANCIAL STATEME
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AMERICAN INTERNATIONAL GROUP, INC.C
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ITEM 8 / NOTE 1. BASIS OF PRESENTAT
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ITEM 8 / NOTE 2. SUMMARY OF SIGNIFI
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ITEM 8 / NOTE 3. SEGMENT INFORMATIO
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ITEM 8 / NOTE 4. DIVESTED BUSINESSE
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ITEM 8 / NOTE 4. DIVESTED BUSINESSE
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ITEM 8 / NOTE 26. QUARTERLY FINANCI
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ITEM 8 / NOTE 27. INFORMATION PROVI
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PART II............................
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PART IV............................
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SignatureTitle/s/ ARTHUR C. MARTINE
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ExhibitNumber Description Location(
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Condensed Financial Information of
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Condensed Financial Information of
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Notes to Condensed Financial Inform
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Supplementary Insurance Information
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Valuation and Qualifying AccountsFo
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Subsidiaries of RegistrantExhibit 2
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Percentageof VotingSecuritiesJurisd
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Percentageof VotingSecuritiesJurisd
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CONSENT OF INDEPENDENT REGISTERED P
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CERTIFICATIONSI, Robert H. Benmosch
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CERTIFICATIONExhibit 32In connectio
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SECURITIES REGISTERED PURSUANT TO S
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American International Group, Inc.1
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