AIG 2011 Annual Report Download - page 45

Casualty insurance liabilities are difficult to predict and may exceed the related reserves for losses and loss expenses.
Although we regularly review the adequacy of the established Liability for unpaid claims and claims adjustment
expense and conduct extensive analyses of our reserves during the year, there can be no assurance that our loss
reserves will not develop adversely and have a material adverse effect on our results of operations. Estimation of
ultimate net losses, loss expenses and loss reserves is a complex process for long-tail casualty lines of business,
which include but are not limited to general liability, commercial automobile liability, environmental, workers’
compensation, excess casualty and crisis management coverages, insurance and risk management programs for
large corporate customers and other customized structured insurance products, as well as excess and umbrella
liability, D&O and products liability. A number of analytical reserve development techniques are used to project
future loss development. However, there can be no assurance that future loss development patterns will be the
same as in the past. Moreover, any deviation in loss cost trends or in loss development factors might not be
discernible for an extended period of time subsequent to the recording of the initial loss reserve estimates for any
accident year. There is the potential for reserves with respect to a number of years to be significantly affected by
changes in loss cost trends or loss development factors that were relied upon in setting the reserves. These
changes in loss cost trends or loss development factors could be attributable to changes in inflation or in the
judicial environment, or in other social or economic phenomena affecting claims. For a further discussion of our
loss reserves, see Item 7. MD&A — Results of Operations — Segment Results — Chartis Operations — Liability
for Unpaid Claims and Claims Adjustment Expense and Critical Accounting Estimates — Liability for Unpaid
Claims and Claims Adjustment Expenses (Chartis and Mortgage Guaranty).
The occurrence of catastrophic events could adversely affect our consolidated financial condition, results of
operations and liquidity. The occurrence of events such as hurricanes, windstorms, flooding, earthquakes,
pandemic disease, acts of terrorism and other catastrophes has in the past and could in the future adversely affect
our consolidated financial condition, results of operations and liquidity, including by exposing our businesses to
the following:
• widespread claim costs associated with property, workers’ compensation, business interruption, mortality and
morbidity claims;
• loss resulting from a decline in the value of invested assets to below the amount required to meet policy and
contract liabilities; and
• loss resulting from actual policy experience emerging adversely in comparison to the assumptions made in
the product pricing related to frequency, severity, mortality, morbidity, termination and expenses.
For a sensitivity analysis of our exposure to certain catastrophes, see Item 7. MD&A — Enterprise Risk
Management — Business Unit Risk Management — Insurance Operations — Chartis — Catastrophe Exposures.
A downgrade in the Insurer Financial Strength ratings of our insurance companies could prevent the companies from
writing new business and retaining customers and business. Insurer Financial Strength (IFS) ratings are an
important factor in establishing the competitive position of insurance companies. IFS ratings measure an insurance
company’s ability to meet its obligations to contract holders and policyholders. High ratings help maintain public
confidence in a company’s products, facilitate marketing of products and enhance a company’s competitive
position.
Downgrades of the IFS ratings of our insurance companies could prevent these companies from offering, or
make it more difficult for them to offer products and services or result in increased policy cancellations or
termination of assumed reinsurance contracts. Moreover, a downgrade in AIG Parent’s credit ratings could, under
credit rating agency policies concerning the relationship between parent and subsidiary ratings, result in a
downgrade of the IFS ratings of our insurance subsidiaries.
AIG 2011 Form 10-K 31
CASUALTY INSURANCE RESERVES
CATASTROPHE EXPOSURES
CREDIT AND FINANCIAL STRENGTH RATINGS