AIG 2005 Annual Report Download - page 86

Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
lion with respect to the ceded reserve for losses and loss quarter 2005 increase in net reserves of approximately $1.8 bil-
expenses, including ceded losses incurred but not reported lion, comprised of $960 million for non-asbestos and environ-
(IBNR) (ceded reserves) and $3.07 billion of ceded reserve for mental exposures, and $873 million for asbestos and
unearned premiums. The ceded reserve for losses and loss environmental exposures. The increase in non-asbestos and
expenses represent the accumulation of estimates of ultimate environmental reserves includes an increase of $1.44 billion for
ceded losses including provisions for ceded IBNR and loss DBG and decreases of $455 million for Foreign General
expenses. The methods used to determine such estimates and Insurance and $29 million for Mortgage Guaranty. The DBG
to establish the resulting ceded reserves are continually increase of $1.44 billion is $140 million greater than the
reviewed and updated by management. Any adjustments amount previously announced in AIG’s press release of
thereto are reflected in income currently. It is AIG’s belief that February 9, 2006 as a result of an additional change in
the ceded reserve for losses and loss expenses at December 31, estimate related to a commuted reinsurance agreement. The
2005 were representative of the ultimate losses recoverable. In aggregate increase in asbestos and environmental reserves
the future, as the ceded reserves continue to develop to includes increases of $706 million and $167 million, respec-
ultimate amounts, the ultimate loss recoverable may be greater tively, for DBG and Foreign General Insurance.
or less than the reserves currently ceded. As discussed in more detail below, the fourth quarter 2005
reserve increase was attributable to adverse development
primarily related to 2002 and prior accident years, partially
Reserve for Losses and Loss Expenses
offset by favorable development for accident years 2003
The table below classifies as of December 31, 2005 the through 2005. This reserve action reflects the completion of
components of the General Insurance gross reserve for losses both the Milliman, Inc. (Milliman) review and AIG’s own
and loss expenses (loss reserves) by major lines of business actuarial studies in the fourth quarter of 2005.
on a statutory Annual Statement basis*: The net loss reserves represent loss reserves reduced by
reinsurance recoverables, net of an allowance for unrecoverable
(in millions) reinsurance and applicable discount for future investment
Other liability occurrence $18,116 income. The table below classifies the components of the
Other liability claims made 12,447 General Insurance net loss reserves by business unit as of
Workers compensation 11,630 December 31, 2005.
Auto liability 6,569
Property 7,217 (in millions)
International 4,939 DBG(a) $ 40,782
Reinsurance 2,886 Personal Lines(b) 2,578
Medical malpractice 2,363 Transatlantic 5,690
Aircraft 1,844 Mortgage Guaranty 340
Products liability 1,937 Foreign General(c) 8,086
Commercial multiple peril 1,359
Total Net Loss Reserve $ 57,476
Accident and health 1,678
(a) DBG loss reserves include approximately $3.77 billion ($4.26 billion
Fidelity/surety 1,072
before discount) related to business written by DBG but ceded to
Other 3,112 AIRCO and reported in AIRCO’s statutory filings. DBG loss reserves
Total $77,169 also include approximately $407 million related to business included in
AIUO’s statutory filings.
* Presented by lines of business pursuant to statutory reporting requirements
as prescribed by the National Association of Insurance Commissioners. (b) Personal Lines loss reserves include $878 million related to business
ceded to DBG and reported in DBG’s statutory filings.
AIG’s reserve for losses and loss expenses represents the (c) Foreign General loss reserves include approximately $2.15 billion
accumulation of estimates of ultimate losses, including IBNR related to business reported in DBG’s statutory filings.
and loss expenses. The methods used to determine loss reserve The DBG net loss reserve of $40.78 billion is comprised
estimates and to establish the resulting reserves are continually principally of the business of AIG subsidiaries participating in
reviewed and updated by management. Any adjustments the American Home/National Union pool (11 companies) and
resulting therefrom are reflected in operating income currently. the surplus lines pool (Lexington, Starr Excess Liability
Because loss reserve estimates are subject to the outcome of Insurance Company and Landmark Insurance Company).
future events, changes in estimates are unavoidable given that Beginning in 1998, DBG ceded a quota share percentage of
loss trends vary and time is often required for changes in its other liability occurrence and products liability occurrence
trends to be recognized and confirmed. Reserve changes that business to AIRCO. The quota share percentage ceded was
increase previous estimates of ultimate cost are referred to as 40 percent in 1998, 65 percent in 1999, 75 percent in 2000
unfavorable or adverse development or reserve strengthening. and 2001, 50 percent in 2002 and 2003, 40 percent in 2004
Reserve changes that decrease previous estimates of ultimate and 35 percent in 2005 and covered all business written in
cost are referred to as favorable development. these years for these lines by participants in the American
At December 31, 2005, General Insurance net loss reserves Home/National Union pool. In 1998 the cession reflected only
were $57.5 billion, an increase of $10.22 billion from the prior the other liability occurrence business, but in 1999 and
year-end. The net loss reserve increase includes the fourth
34 AIG m Form 10-K