AIG 2005 Annual Report Download - page 94

Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
A summary of reserve activity, including estimates for applicable IBNR, relating to asbestos and environmental claims separately
and combined at December 31, 2005, 2004 and 2003 follows:
2005 2004 2003
(in millions) Gross Net Gross Net Gross Net
Asbestos:
Reserve for losses and loss expenses at beginning of year $2,559 $1,060 $1,235 $ 386 $1,304 $ 400
Losses and loss expenses incurred* 2,207(a) 903(a) 1,595(a) 772(a) 175 43
Losses and loss expenses paid* (325) (123) (271) (98) (244) (57)
Reserve for losses and loss expenses at end of year $4,441 $1,840 $2,559 $1,060 $1,235 $ 386
Environmental:
Reserve for losses and loss expenses at beginning of year $ 974 $ 451 $ 789 $ 283 $ 832 $ 296
Losses and loss expenses incurred* 47(b) 27(b) 314(b) 234(b) 133 52
Losses and loss expenses paid* (95) (68) (129) (66) (176) (65)
Reserve for losses and loss expenses at end of year $ 926 $ 410 $ 974 $ 451 $ 789 $ 283
Combined:
Reserve for losses and loss expenses at beginning of year $3,533 $1,511 $2,024 $ 669 $2,136 $ 696
Losses and loss expenses incurred* 2,254(c) 930(c) 1,909(c) 1,006(c) 308 95
Losses and loss expenses paid* (420) (191) (400) (164) (420) (122)
Reserve for losses and loss expenses at end of year $5,367 $2,250 $3,533 $1,511 $2,024 $ 669
* All amounts pertain to policies underwritten in prior years.
(a) Includes increases to gross losses and loss expense reserves of $2.0 billion and $1.2 billion in the fourth quarter of 2005 and 2004, respectively, and
increases to net losses and loss expense reserves of $843 million and $650 million for the fourth quarter of 2005 and 2004, respectively.
(b) Includes increases to gross losses and loss expense reserves of $56 million and $250 million in the fourth quarter of 2005 and 2004, respectively, and
increases to net losses and loss expense reserves of $30 million and $200 million for the fourth quarter of 2005 and 2004, respectively.
(c) Includes increases to gross losses and loss expense reserves of $2.0 billion and $1.5 billion in the fourth quarter of 2005 and 2004, respectively, and
increases to net losses and loss expense reserves of $873 million and $850 million for the fourth quarter of 2005 and 2004, respectively.
The gross and net IBNR included in the reserve for losses and loss expenses, relating to asbestos and environmental claims
separately and combined, at December 31, 2005, 2004 and 2003 were estimated as follows:
2005 2004 2003
(in millions) Gross Net Gross Net Gross Net
Asbestos $3,401 $1,465 $2,033 $ 876 $ 695 $200
Environmental 586 266 606 284 347 80
Combined $3,987 $1,731 $2,639 $1,160 $1,042 $280
A summary of asbestos and environmental claims count activity for the years ended December 31, 2005, 2004 and 2003 was as
follows:
2005 2004 2003
Asbestos Environmental Combined Asbestos Environmental Combined Asbestos Environmental Combined
Claims at beginning of year 7,575 8,216 15,791 7,474 8,852 16,326 7,085 8,995 16,080
Claims during year:
Opened 854 5,253* 6,107 909 2,592 3,501 669 2,106 2,775
Settled (67) (219) (286) (100) (279) (379) (86) (244) (330)
Dismissed or otherwise
resolved (1,069) (3,377) (4,446) (708) (2,949) (3,657) (194) (2,005) (2,199)
Claims at end of year 7,293 9,873 17,166 7,575 8,216 15,791 7,474 8,852 16,326
* The opened claims count increased substantially during 2005 because a court ruling led AIG to report separate opened claims for previously pending
cases relating to alleged MTBE exposures that AIG previously had counted in the aggregate as only a single claim on the assumption that the cases would
be consolidated into a single federal court proceeding.
The table below presents AIG’s survival ratios for asbestos before the current ending loss reserves for these claims would
and environmental claims for year end 2005, 2004 and 2003. be paid off using recent year average payments. Many factors,
The survival ratio is derived by dividing the year end carried such as aggressive settlement procedures, mix of business and
loss reserve by the average payments for the three most recent level of coverage provided, have a significant effect on the
calendar years for these claims. Therefore the survival ratio is a amount of asbestos and environmental reserves and payments
simplistic measure estimating the number of years it would be and the resultant survival ratio. Thus, caution should be
42 AIG m Form 10-K