Ally Bank 2011 Annual Report Download - page 108

Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10−K
methodologies is used and weighted appropriately for each reporting unit. If actual results differ from these estimates, it may have an adverse impact on the
valuation of goodwill that could result in a reduction of the excess over carrying value and possible impairment of goodwill. At December 31, 2011, we did
not have material goodwill at our reporting units that is at risk of failing Step 1 of the goodwill impairment test.
Determination of Reserves for Insurance Losses and Loss Adjustment Expenses
Our Insurance operations include an array of insurance underwriting, including vehicle service contracts and consumer products that create a liability
for unpaid losses and loss adjustment expenses incurred (further described in the Insurance section of this MD&A). The reserve for insurance losses and
loss adjustment expenses represents an estimate of our liability for the unpaid cost of insured events that have occurred as of a point in time but have not yet
been paid. More specifically, it represents the accumulation of estimates for reported losses and an estimate for losses incurred, but not reported, including
claims adjustment expenses at the end of any given accounting period.
Our Insurance operations' claim personnel estimate reported losses based on individual case information or average payments for categories of claims.
An estimate for current incurred, but not reported, claims is also recorded based on the actuarially determined expected loss ratio for a particular product,
which also considers significant events that might change the expected loss ratio, such as severe weather events and the estimates for reported claims. These
estimates of the reserves are reviewed regularly by product line management, by actuarial and accounting staffs, and ultimately, by senior management.
Our Insurance operations' actuaries assess reserves for each business at the lowest meaningful level of homogeneous data in each type of insurance,
such as general or product liability and automobile physical damage. The purpose of these assessments is to confirm the reasonableness of the reserves
carried by each of the individual subsidiaries and product lines and, thereby, the Insurance operations' overall carried reserves. The selection of an actuarial
methodology is judgmental and depends on variables such as the type of insurance, its expected payout pattern, and the manner in which claims are
processed. Special characteristics such as deductibles, reinsurance recoverable, or special policy provisions are also considered in the reserve estimation
process. Estimates for salvage and subrogation recoverable are recognized at the time losses are incurred and netted against the provision for losses. Our
reserves include a liability for the related costs that are expected to be incurred in connection with settling and paying the claim. These loss adjustment
expenses are generally established as a percentage of loss reserves. Our reserve process considers the actuarially calculated reserves based on prior patterns
of claim incurrence and payment and the degree of incremental volatility associated with the underlying risks for the types of insurance; it represents
management's best estimate of the ultimate liability. Since the reserves are based on estimates, the ultimate liability may be more or less than our reserves.
Any necessary adjustments, which may be significant, are included in earnings in the period in which they are deemed necessary. These changes may be
material to our results of operations and financial condition and could occur in a future period.
Our determination of the appropriate reserves for insurance losses and loss adjustment expenses for significant business components is based on
numerous assumptions that vary based on the underlying business and related exposure.
• Vehicle service contracts — Vehicle service contract losses are generally reported and settled quickly through dealership service departments
resulting in a relatively small balance of outstanding claims at any point in time relative to the volume of claims processed annually. Vehicle
service contract claims are primarily composed of parts and labor for repair or replacement of the affected components or systems. Changes in
the cost of replacement parts and labor rates will affect the cost of settling claims. Considering the short time frame between a claim being
incurred and paid, changes in key assumptions (e.g., part prices, labor rates) would have a minimal impact on the loss reserve as of a point in
time. The loss reserve amount is influenced by the estimate of the lag between vehicles being repaired at dealerships and the claim being reported
by the dealership.
• Personal automobile — Automobile insurance losses are principally a function of the number of occurrences (e.g., accidents or thefts) and the
severity (e.g., the ultimate cost of settling the claim) for each occurrence. The number of incidents is generally driven by the demographics and
other indicators or predictors of loss experience of the insured customer base including geographic location, number of miles driven, age, sex,
type and cost of vehicle, and types of coverage selected. The severity of each claim, within the limits of the insurance purchased, is generally
random and settles to an average over a book of business, assuming a broad distribution of risks. Changes in the severity of claims have an
impact on the reserves established at a point in time. Changes in bodily injury claim severity are driven primarily by inflation in the medical
sector of the economy. Changes in automobile physical damage claim severity are caused primarily by inflation in automobile repair costs,
automobile parts prices, and used car prices. However, changes in the level of the severity of claims paid may not necessarily match or track
changes in the rate of inflation in these various sectors of the economy.
At December 31, 2011, we concluded that our insurance loss reserves were reasonable and appropriate based on the assumptions and data used in
determining the estimate. However, because insurance liabilities are based on estimates, the actual claims ultimately paid may vary from the estimates.
Legal and Regulatory Reserves
Our legal and regulatory reserves reflect management's best estimate of probable losses on legal and regulatory matters. As a legal or regulatory matter
develops, management, in conjunction with internal and external counsel handling the matter, evaluates on an ongoing basis whether such matter presents a
loss contingency that is both probable and estimable. If, at the time of evaluation, the loss contingency related to a legal or regulatory matter is not both
probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and
estimable. When the loss contingency related to a legal or regulatory matter is deemed to be both probable and estimable, we will establish a liability with
respect to such loss contingency and record a corresponding amount to
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