AIG 2005 Annual Report Download - page 87

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
subsequent years included products liability occurrence. six percent interest rate and an industry payout pattern. For
AIRCO’s loss reserves relating to these quota share cessions accident years 2002 and subsequent, the discount is based on
from DBG are recorded on a discounted basis. As of year-end the yield of U.S. Treasury securities ranging from one to
2005, AIRCO carried a discount of approximately $490 million twenty years and the company’s own payout pattern, with the
applicable to the $4.26 billion in undiscounted reserves it future expected payment for each year using the interest rate
assumed from the American Home/National Union pool via associated with the corresponding Treasury security yield for
this quota share cession. AIRCO also carries approximately that time period. The discount is comprised of the following:
$440 million in net loss reserves relating to Foreign General $512 million — tabular discount for workers compensation in
insurance business. These reserves are carried on an undis- DBG; $1.11 billion — non-tabular discount for workers com-
counted basis. pensation in DBG; and, $490 million — non-tabular discount
Beginning in 1997, the Personal Lines division ceded a for other liability occurrence and products liability occurrence
percentage of all business written by the companies participat- in AIRCO. The total undiscounted workers compensation loss
ing in the personal lines pool to the American Home/National reserve carried by DBG is approximately $9.5 billion as of year-
Union pool. As noted above, the total reserves carried by end 2005. The other liability occurrence and products liability
participants in the American Home/National Union pool occurrence business in AIRCO that is assumed from DBG is
relating to this cession amounted to $878 million as of year- discounted based on the yield of U.S. Treasury securities
end 2005. ranging from one to twenty years and the DBG payout pattern
The companies participating in the American Home/ for this business. The undiscounted reserves assumed by
National Union pool have maintained a participation in the AIRCO from DBG totaled approximately $4.26 billion at
business written by AIU for decades. As of year-end 2005, December 31, 2005.
these AIU reserves carried by participants in the American
Home/National Union pool amounted to approximately Results of 2005 Reserving Process
$2.15 billion. The remaining Foreign General reserves are It is management’s belief that the General Insurance net loss
carried by AIUO, AIRCO, and other smaller AIG subsidiaries reserves are adequate to cover General Insurance net losses and
domiciled outside the United States. Statutory filings in the loss expenses as of December 31, 2005. While AIG annually
U.S. by AIG companies reflect all the business written by U.S. reviews the adequacy of established loss reserves, there can be
domiciled entities only, and therefore exclude business written no assurance that AIG’s ultimate loss reserves will not develop
by AIUO, AIRCO, and all other internationally domiciled adversely and materially exceed AIG’s loss reserves as of
subsidiaries. The total reserves carried at year-end 2005 by December 31, 2005. In the opinion of management, such
AIUO and AIRCO were approximately $3.72 billion and adverse development and resulting increase in reserves is not
$4.21 billion, respectively. AIRCO’s $4.21 billion in total likely to have a material adverse effect on AIG’s consolidated
general insurance reserves consist of approximately $3.77 bil- financial position, although it could have a material adverse
lion from business assumed from the American Home/National effect on AIG’s consolidated results of operations for an
Union pool and an additional $440 million relating to Foreign individual reporting period. See ‘‘Risk Factors — Casualty
General Insurance business. Insurance and Underwriting Reserves’’ in Item 1A. Risk
Factors.
Discounting of Reserves As part of the 2005 year-end actuarial loss reserve analysis,
At December 31, 2005, AIG’s overall General Insurance net AIG expanded its review processes and conducted additional
loss reserves reflects a loss reserve discount of $2.11 billion, studies. In addition, in August 2005, AIG commissioned
including tabular and non-tabular calculations. The tabular Milliman to provide an independent, comprehensive review of
workers compensation discount is calculated using a 3.5 per- the loss reserves of AIG’s principal property-casualty insurance
cent interest rate and the 1979-81 Decennial Mortality Table. operations, including an independent ground up study of AIG’s
The non-tabular workers compensation discount is calculated asbestos and environmental exposures. The Milliman review
separately for companies domiciled in New York and Penn- encompassed nearly all of AIG’s carried loss reserves, other
sylvania, and follows the statutory regulations for each state. than those pertaining to the operations of Transatlantic and
For New York companies, the discount is based on a five 21st Century. AIG’s management carefully considered the
percent interest rate and the companies’ own payout patterns. analyses provided by its actuarial staff and by Milliman for
For Pennsylvania companies, the statute has specified discount each class of business in determining AIG’s best estimate of its
factors for accident years 2001 and prior, which are based on a loss reserves.
AIG m Form 10-K 35