AIG 2011 Annual Report Download - page 116

For a discussion of the sensitivity analysis on the reserve for unpaid claims and claims adjustment expenses, see
Critical Accounting Estimates — Liability for Unpaid Claims and Claims Adjustment Expense (Chartis and
Mortgage Guaranty) herein.
Asbestos and Environmental Reserves
The estimation of loss reserves relating to asbestos and environmental claims on insurance policies written many
years ago is subject to greater uncertainty than other types of claims due to inconsistent court decisions as well as
judicial interpretations and legislative actions that in some cases have tended to broaden coverage beyond the
original intent of such policies and in others have expanded theories of liability. In addition, reinsurance
recoverable balances relating to asbestos and environmental loss reserves are subject to greater uncertainty due to
the underlying age of the claim, underlying legal issues surrounding the nature of the coverage, and determination
of proper policy period. As such, these balances tend to be subject to increased levels of disputes and legal
collection activity when actually billed. The insurance industry as a whole is engaged in extensive litigation over
these coverage and liability issues and is thus confronted with a continuing uncertainty in its efforts to quantify
these exposures.
AIG continues to receive claims asserting injuries and damages from toxic waste, hazardous substances, and
other environmental pollutants and alleged claims to cover the cleanup costs of hazardous waste dump sites,
referred to collectively as environmental claims, and indemnity claims asserting injuries from asbestos.
The vast majority of these asbestos and environmental claims emanate from policies written in 1984 and prior
years. Commencing in 1985, standard policies contained an absolute exclusion for pollution-related damage and an
absolute asbestos exclusion was also implemented. The current Chartis Environmental policies that AIG
underwrites on a claims-made basis have been excluded from the analysis. See discussion on Chartis
Environmental reserves herein for further discussion.
The majority of AIG’s exposures for asbestos and environmental claims are excess casualty coverages, not
primary coverages. Thus, the litigation costs are treated in the same manner as indemnity amounts. That is,
litigation expenses are included within the limits of the liability AIG incurs. Individual significant claim liabilities,
where future litigation costs are reasonably determinable, are established on a case-by-case basis.
On June 17, 2011, Chartis completed a transaction with NICO, a subsidiary of Berkshire Hathaway, Inc., under
which the bulk of Chartis’ net domestic asbestos liabilities were transferred to NICO as part of Chartis’ ongoing
strategy to reduce its overall loss reserve development risk. The transaction with NICO covers potentially volatile
U.S.-related asbestos exposures. The transaction does not cover asbestos accounts that Chartis believes have
already been reserved to their limit of liability or certain other ancillary asbestos exposure assumed by Chartis
subsidiaries.
Upon the closing of this transaction, but effective as of January 1, 2011, Chartis ceded the bulk of its net
domestic asbestos liabilities to NICO under a retroactive reinsurance agreement with an aggregate limit of
$3.5 billion. The aggregate limit includes NICO’s assumption of collection risk for existing third-party reinsurance
recoverable associated with these liabilities. Chartis paid NICO approximately $1.67 billion as consideration for
this cession and NICO assumed approximately $1.82 billion of net U.S. asbestos liabilities. As a result of this
transaction, Chartis recorded a deferred gain of $150 million in the second quarter of 2011, which is being
amortized into income over the settlement period of the underlying claims.
Estimation of asbestos and environmental claims loss reserves is a subjective process and reserves for asbestos
and environmental claims cannot be estimated using conventional reserving techniques such as those that rely on
historical accident year loss development factors. The methods used to determine asbestos and environmental loss
estimates and to establish the resulting reserves are continually reviewed and updated by management.
Significant factors which affect the trends that influence the asbestos and environmental claims estimation
process are the court resolutions and judicial interpretations which broaden the intent of the policies and scope of
coverage. The current case law can be characterized as still evolving, and there is little likelihood that any firm
direction will develop in the near future. Additionally, the exposures for cleanup costs of hazardous waste dump
sites involve issues such as allocation of responsibility among potentially responsible parties and the government’s
refusal to release parties from liability.
102 AIG 2011 Form 10-K