AIG 2013 Annual Report Download - page 208

We test mortgage guaranty reserves using loss development The reserve analysis projects ultimate losses for claims within
methods, supplemented by an internal claim analysis by each of several categories of delinquency based on actual
actuaries and staff who specialize in the mortgage guaranty historical experience, using primarily a frequency/severity loss
business. 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.
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. We establish 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 affected by macroeconomic events, such as
improving home prices and decreasing unemployment.
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 previous periods of adverse
macroeconomic influences, numerous government and lender
loan modification programs have been implemented to
mitigate mortgage losses. The loan modification programs
along with improving home values and declining
unemployment have produced higher cure rates of delinquent
loans in 2013, particularly in the most recent accident periods
that may not continue in 2014. In addition, these loan
modifications may re-default resulting in new losses for
Mortgage Guaranty if adverse economic conditions were to
return. In addition to improved cure rates, the favorable
economic conditions have resulted in a decline of newly
reported delinquencies. The declining new delinquencies and
improved cure rates have combined to reduce UGC’s first-lien
delinquency rate to 5.9 percent at year end 2013, which is the
lowest level reported since 2007. Offsetting these favorable
trends were lender’s efforts to overturn previously denied and
rescinded claims.
Occurrences of fraudulent loans, underwriting violations, and
other deviations from contractual terms, mostly related to the
2006 and 2007 blocks of business, resulted in historically high
levels of claim rescissions and denials (collectively referred to
as rescissions) during 2011 and 2012. As a result, many
lenders have increased their efforts to provide missing
documents or appeal rescissions. The lender’s success at
tracking down missing loan documents along with the
heightened focus on appeals of rescissions have significantly
reduced the future rescission rate (net of appeals) assumed in
the loss reserves to an immaterial level, particularly on the
older accident periods. As a result, UGC experienced some
unfavorable loss development on older accident periods
during the quarter. We believe we have provided appropriate
reserves for currently delinquent loans, consistent with
industry practices.
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AIG 2013 Form 10-K190
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
Mortgage Guaranty
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Class of Business or Category and Actuarial Method Application of Actuarial Method