AIG 2011 Annual Report Download - page 114

Class of Business or Category and Actuarial Method Application of Actuarial Method
Mortgage Guaranty
AIG tests mortgage guaranty reserves using loss The reserve analysis projects ultimate losses for claims
development methods, supplemented by an internal claim within each of several categories of delinquency based on
analysis by actuaries and staff who specialize in the mortgage actual historical experience, using primarily a frequency/
guaranty business. severity loss development approach. Additional reserve tests
are also employed, such as tests measuring losses as a percent
of risk in force. Reserves are reviewed separately for each line
of business considering the loss development characteristics,
volume of claim data available and applicability of various
actuarial methods to each line.
Held reserves for mortgage guaranty insurance losses and
loss adjustment expenses are established for reported
mortgage loan delinquencies and estimates of delinquencies
that have been incurred but have not been reported by loan
servicers, based upon historical reporting trends. AIG
establishes held reserves using a percentage of the contractual
liability (for each delinquent loan reported) that is based upon
projected claim experience for each category of delinquency,
consistent in total with the overall reserve estimate. Mortgage
Guaranty losses and loss adjustment expenses have been
adversely affected by macroeconomic events, such as declining
home prices and increasing unemployment, among other
events, related to the turmoil in the financial markets.
Because these macroeconomic events are subject to adverse or
favorable change, the determination of the ultimate losses and
loss adjustment expenses requires a high degree of judgment.
Responding to these adverse macroeconomic influences,
numerous government and lender loan modification programs
have been implemented to mitigate mortgage losses. The loan
modification programs have produced additional cures of
delinquent loans in 2011 that may not continue in 2012 as
some modification programs are phased out or retired. In
addition, these loan modifications may re-default resulting in
new losses for Mortgage Guaranty.
Occurrences of fraudulent loans, underwriting violations,
and other deviations from contractual terms, mostly related to
the 2006 and 2007 blocks of business, have resulted in
historically high levels of claim rescissions and denials
(collectively referred to as rescissions) during 2011. As a
result, many lenders have increased their rescission appeals
activity as well as the success rate on those appeals by
focusing additional resources on the process. The increased
lender attention on tracking down missing loan documents
along with the heightened focus on appeals of rescissions
caused the estimated ultimate rescission rate (net of appeals)
assumed in the loss reserves to be lower than the rescission
level experienced in 2010. If this trend continues it may
unfavorably affect future results. AIG believes it has provided
appropriate reserves for currently delinquent loans, consistent
with industry practices.
100 AIG 2011 Form 10-K