AIG 2011 Annual Report Download - page 103

Excess Casualty
Excess Casualty Background
Loss reserves pertaining to the excess casualty class of business are generally included in the other liability
occurrence line of business, with a small portion of the excess casualty reserves included in the Other liability
claims made line of business, as presented in the loss reserves by major lines of business table above. Excess
Casualty reserves experienced favorable development in calendar year 2011 and significant adverse loss
development in 2010 and 2009.
Excess Casualty Discussion and Analysis
During calendar year 2011 the Excess Casualty business segment experienced better than expected loss
emergence, based on expected emergence using the shorter termed development pattern from the year-end 2010
reserve analysis noted below. Accident years 2009 and prior exhibited actual emergence approximately 20 percent
better than expected during 2011, while accident year 2010 experienced some large catastrophic losses causing its
results to be worse than expected. The loss development pattern used in the year-end 2011 reserve analysis was
based on a shorter termed average of approximately three years, consistent with 2010. This pattern, coupled with
the better than expected emergence seen during the year, resulted in the estimated ultimate losses improving by
approximately $273 million for this class of business, when compared to the year-end 2010 estimates. The accident
year contribution to this improvement is adverse development of $225 million in accident year 2010 offset by
favorable development of $62 million to accident year 2009, $163 million to accident year 2008, $90 million to
accident year 2007, $115 million to accident year 2006, $40 million to accident year 2005, and $29 million for
accident years 2004 and prior in the aggregate.
The increase in loss costs driving this development in 2009 and 2010 resulted primarily from medical inflation,
which increased the economic loss component of tort claims; advances in medical care, which extended the life
span of severely injured claimants; and larger jury verdicts, which increased the value of severe tort claims.
AIG increased its estimate for its year-end 2009 loss reserve for excess casualty liabilities by more than
$1 billion, primarily relating to accident years 2006 and prior. The majority of the 2009 charge resulted from
management’s decision to place greater reliance on the experience of the five most recent calendar years, resulting
in significantly higher loss development factor assumptions for the year-end 2009 loss reserve review. For the
year-end 2009 loss reserve review, in response to significantly higher than expected loss emergence, AIG reviewed
the indicated reserves for excess casualty under a variety of loss development assumptions. These assumptions
ranged from long term loss development averages, which used all or nearly all of the historical data for this class,
to short term averages which used only the latest three to five calendar years of loss development experience. AIG
gave greater recognition to the recent calendar year experience, resulting in significantly higher loss development
factor assumptions for the year-end 2009 loss reserve review. This change in loss development assumptions
increased the excess casualty reserves by approximately $815 million for accident years 2006 and prior.
Additionally, in conjunction with the selection of higher loss development factors described above, AIG assigned
greater credibility to the emerging loss development factors for product aggregate-related claims, which are
reviewed separately. This resulted in an increase of approximately $195 million in reserves, primarily for accident
years 2000 and prior.
Even with these higher loss development factors, during the fourth quarter of 2010, loss emergence across all
accident years for excess casualty was approximately $115 million worse than expected and was concentrated in
accident years 2007 and 2008. The concentration of such losses in more recent accident years resulted in much
higher loss estimates at year-end 2010 because the experience is extrapolated not only for these years, but to all
years through the application of the loss development factors. The higher than expected loss emergence in the last
half of 2010, particularly in the fourth quarter, led management to select higher loss development factors than
those selected in 2009 because greater weight was placed on the adverse development in the recent calendar years
(i.e., the three most recent calendar years). In these low frequency/high severity classes of business, AIG applied
significant judgment to select an appropriate averaging period for loss development that is long enough to be
statistically credible while recognizing changing trends in a sufficiently responsive manner. AIG also considered
recent trends in large products liability verdicts in the United States given the impact of the recession and the
AIG 2011 Form 10-K 89