AIG 2006 Annual Report Download - page 88

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
General reserves are carried by AIUO, AIRCO, and other smaller development and resulting increase in reserves is not likely to
AIG subsidiaries domiciled outside the United States. Statutory have a material adverse effect on AIG’s consolidated financial
filings in the U.S. by AIG companies reflect all the business condition, although it could have a material adverse effect on
written by U.S. domiciled entities only, and therefore exclude AIG’s consolidated results of operations for an individual reporting
business written by AIUO, AIRCO, and all other internationally period. See also Item 1A. Risk Factors — Casualty Insurance and
domiciled subsidiaries. The total reserves carried at year-end Underwriting Reserves.
2006 by AIUO and AIRCO were approximately $4.57 billion and The following table presents the reconciliation of net loss
$3.80 billion, respectively. AIRCO’s $3.80 billion in total general reserves for 2006, 2005 and 2004 as follows:
insurance reserves consists of approximately $3.33 billion from
(in millions) 2006 2005 2004
business assumed from the American Home/National Union pool
and an additional $467 million relating to Foreign General Net reserve for losses
Insurance business. and loss expenses at
beginning of year $57,476 $47,254 $36,228
Foreign exchange effect 741 (628) 524
Discounting of Reserves Acquisition(a) 55 ——
At December 31, 2006, AIG’s overall General Insurance net loss Losses and loss
reserves reflect a loss reserve discount of $2.26 billion, including expenses incurred:
tabular and non-tabular calculations. The tabular workers compen- Current year 27,805 28,426 26,793
Prior years, other than
sation discount is calculated using a 3.5 percent interest rate and
accretion of discount (53) 4,680(b) 3,187(c)
the 1979-81 Decennial Mortality Table. The non-tabular workers Prior years, accretion of
compensation discount is calculated separately for companies discount 300 (15) 377
domiciled in New York and Pennsylvania, and follows the statutory Losses and loss
regulations for each state. For New York companies, the discount expenses incurred 28,052 33,091 30,357
is based on a five percent interest rate and the companies’ own
Losses and loss
payout patterns. For Pennsylvania companies, the statute has expenses paid:
specified discount factors for accident years 2001 and prior, Current year 8,368 7,331 7,692
which are based on a six percent interest rate and an industry Prior years 15,326 14,910 12,163
payout pattern. For accident years 2002 and subsequent, the Losses and loss
discount is based on the yield of U.S. Treasury securities ranging expenses paid 23,694 22,241 19,855
from one to twenty years and the company’s own payout pattern, Net reserve for losses
with the future expected payment for each year using the interest and loss expenses at
rate associated with the corresponding Treasury security yield for end of year $62,630 $57,476 $47,254
that time period. The discount is comprised of the following: $662
(a) Reflects the opening balance with respect to the acquisition of the
million — tabular discount for workers compensation in DBG; Central Insurance Co., Ltd. in the third quarter of 2006.
$1.27 billion — non-tabular discount for workers compensation in (b) Includes fourth quarter charge of $1.8 billion.
DBG; and, $330 million — non-tabular discount for other liability (c) Includes fourth quarter charge of $850 million attributable to the
occurrence and products liability occurrence in AIRCO. The total change in estimate for asbestos and environmental exposures.
undiscounted workers compensation loss reserve carried by DBG
The following tables summarize development, (favorable) or
is approximately $11.5 billion as of year-end 2006. The other
unfavorable, of incurred losses and loss expenses for prior
liability occurrence and products liability occurrence business in
years (other than accretion of discount):
AIRCO that is assumed from DBG is discounted based on the
yield of U.S. Treasury securities ranging from one to twenty years (in millions) 2006 2005 2004
and the DBG payout pattern for this business. The undiscounted Prior Accident Year
reserves assumed by AIRCO from DBG totaled approximately Development by Reporting
$3.66 billion at December 31, 2006. Unit:
DBG $ 110 $4,871 $2,857
Results of 2006 Reserving Process Personal Lines (111) 14 75
UGC (115) (103) (102)
Management believes that the General Insurance net loss Foreign General (118) (371) 40
reserves are adequate to cover General Insurance net losses and Sub total (234) 4,411 2,870
loss expenses as of December 31, 2006. While AIG regularly Transatlantic 181 269 317
reviews the adequacy of established loss reserves, there can be Prior years, other than
no assurance that AIG’s ultimate loss reserves will not develop accretion of discount $ (53) $4,680 $3,187
adversely and materially exceed AIG’s loss reserves as of
December 31, 2006. In the opinion of management, such adverse
38 AIG 2006 Form 10-K