AIG 2006 Annual Report Download - page 89

American International Group, Inc. and Subsidiaries
question, and no adjustment would be made to the profit center’s
(in millions) 2006 2005 2004 reserves for prior accident years. In other cases, the higher or lower
Prior Accident Year than expected emergence may result in a larger change, either
Development by Major favorable or unfavorable, than the difference between the actual and
Class of Business: expected loss emergence. Such additional analyses were conducted
Excess casualty (DBG) $ 102 $ 1,191 $ 1,240 for each profit center, as appropriate, in the first, second and third
D&O and related quarters of 2006 to determine the loss development from prior
management liability accident years for the first, second and third quarters of 2006. As
(DBG) (20) 1,627 930 part of its quarterly reserving process, AIG also considers notices of
Excess workers claims received with respect to emerging issues, such as those
compensation (DBG) 74 983 279 related to stock option backdating. In the fourth quarter of 2006, a
Reinsurance (Transatlantic) 181 269 317 comprehensive loss reserve review was completed for each AIG
Asbestos and environmental general insurance subsidiary. The prior accident year loss reserve
(primarily DBG) 208 930 1,006 development shown in the tables above for 2006 reflects the results
All other, net (598) (320) (585) of these comprehensive reviews, including the effect of actual loss
Prior years, other than emergence in the fourth quarter of 2006.
accretion of discount $ (53) $ 4,680 $ 3,187 In 2006, net loss development from prior accident years was
favorable by approximately $53 million, including approximately
Calendar Year $198 million in net adverse development from asbestos and
(in millions) 2006 2005 2004 environmental reserves resulting from the updated ground up
analysis of these exposures in the fourth quarter of 2006;
Prior Accident Year approximately $103 million of adverse development pertaining to
Development by
the major hurricanes in 2004 and 2005; and $181 million of
Accident Year:
adverse development from the general reinsurance operations of
2005 $(1,576)
Transatlantic; and excluding approximately $300 million from
2004 (511) $(3,853)
accretion of loss reserve discount. Excluding the fourth quarter
2003 (212) (63) $(1,483)
asbestos and environmental reserve increase, catastrophes and
2002 373 1,360 69
Transatlantic, as well as accretion of discount, net loss develop-
2001 29 1,749 1,123
2000 338 1,323 760 ment in 2006 from prior accident years was favorable by
1999 382 944 693 approximately $535 million. The overall favorable development of
1998 41 605 536 $53 million consisted of approximately $2.30 billion of favorable
1997 197 281 174 development from accident years 2003 through 2005, partially
1996 & Prior 886 2,334 1,315 offset by approximately $2.25 billion of adverse development from
accident years 2002 and prior. For 2006, most classes of AIG’s
Prior years, other than
business continued to experience favorable development for
accretion of discount $ (53) $ 4,680 $ 3,187
accident years 2003 through 2005. The adverse development
The loss ratios recorded by AIG for 2006 took into account the from accident years 2002 and prior reflected development from
results of the comprehensive reserve reviews that were completed excess casualty, workers compensation, excess workers compen-
in the fourth quarter of 2005. AIG’s year-end 2005 reserve review sation, and post-1986 environmental liability classes of business,
reflected careful consideration of the reserve analyses prepared all within DBG, from asbestos reserves within DBG and Foreign
by AIG’s internal actuarial staff with the assistance of third party General, and from Transatlantic.
actuaries. In determining the appropriate loss ratios for accident For 2005, net loss development from prior accident years was
year 2006 for each class of business, AIG gave consideration to adverse by approximately $4.68 billion, including approximately
the loss ratios resulting from the 2005 reserve analyses as well $269 million from the general reinsurance operations of Transat-
as all other relevant information including rate changes, expected lantic. This $4.68 billion adverse development in 2005 was
changes in loss costs, changes in coverage, reinsurance or mix of comprised of approximately $8.60 billion for the 2002 and prior
business, and other factors that may affect the loss ratios. accident years, partially offset by favorable development for
In 2006, AIG enhanced its process of determining the quarterly accident years 2003 and 2004 for most classes of business, with
loss development from prior accident years. In the first quarter of the notable exception of D&O. The adverse loss development for
2006, AIG began conducting additional analyses to determine the 2002 and prior accident years was attributable to approximately
change in estimated ultimate loss for each accident year for each $4.0 billion of development from the D&O and related manage-
profit center. For example, if loss emergence for a profit center is ment liability classes of business, excess casualty, and excess
different than expected for certain accident years, the actuaries now workers compensation, and to approximately $900 million of
take additional steps to examine the indicated effect such emer- adverse development from asbestos and environmental claims.
gence would have on the reserves of that profit center. In some The remaining portion of the adverse development from 2002 and
cases, the higher or lower than expected emergence may result in no
clear change in the ultimate loss estimate for the accident years in
Form 10-K 2006 AIG 39