AIG 2014 Annual Report Download - page 195

ITEM 7 / CRITICAL ACCOUNTING ESTIMATES
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merits, upon examination by the relevant taxing authorities before any part of the benefit can be recognized in the financial
statements. A tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon
settlement.
We classify interest expense and penalties recognized on income taxes as a component of income taxes.
U.S. Income Taxes on Earnings of Certain Foreign Subsidiaries
The U.S. federal income tax laws applicable to determining the amount of income taxes related to differences between the
book carrying amounts and tax bases of subsidiaries are complex. Determining the amount also requires significant judgment
and reliance on reasonable assumptions and estimates.
Insurance Liabilities
Liability for Unpaid Losses and Loss Adjustment Expenses (Non-Life Insurance Companies)
The estimate of the Liability for unpaid losses and loss adjustment expenses consists of several key judgments:
• the determination of the actuarial models used as the basis for these estimates;
• the relative weights given to these models by class;
• the underlying assumptions used in these models; and
• the determination of the appropriate groupings of similar classes and, in some cases, the segmentation of dissimilar claims
within a class.
We use numerous assumptions in determining the best estimate of reserves for each class of business. The importance of any
specific assumption can vary by both class of business and accident year. Because actual experience can differ from key
assumptions used in establishing reserves, there is potential for significant variation in the development of loss reserves. This
is particularly true for long-tail casualty classes of business such as excess casualty, asbestos, D&O, and primary or excess
workers’ compensation.
All of our methods to calculate net reserves include assumptions about estimated reinsurance recoveries and their
collectability. Reinsurance collectability is evaluated independently of the reserving process and appropriate allowances for
uncollectible reinsurance are established.
In some of our estimation processes we rely on the claims department estimates of our case reserves as an input to our best
estimate of the ultimate loss cost.