AIG 2007 Annual Report Download - page 101

American International Group, Inc. and Subsidiaries
transfer of unearned premium reserves to DBG related to the estimates and to establish the resulting reserves are continually
Richmond commutation, accounting for 4 percent of the increase reviewed and updated by management. Any adjustments resulting
in 2006 compared to 2005. therefrom are reflected in operating income currently. Because
The loss ratio decreased 3.1 points in 2006 compared to loss reserve estimates are subject to the outcome of future
2005, as the absence of significant catastrophes in 2006 events, changes in estimates are unavoidable given that loss
resulted in a decrease in the loss ratio of 2.8 points. The loss trends vary and time is often required for changes in trends to be
ratio also decreased due to rate increases and lower current year recognized and confirmed. Reserve changes that increase previ-
losses by Ascot on its U.S. book of business and lower asbestos ous estimates of ultimate cost are referred to as unfavorable or
and environmental reserve increases. These declines were par- adverse development or reserve strengthening. Reserve changes
tially offset by lower favorable loss development from prior that decrease previous estimates of ultimate cost are referred to
accident years and adverse development on 2005 hurricanes. as favorable development.
The expense ratio increased 1.8 points in 2006 compared to Estimates for mortgage guaranty insurance losses and loss
2005 due to a $59 million out of period adjustment for adjustment expense reserves are based on notices of mortgage
amortization of deferred advertising costs and a premium reduc- loan delinquencies and estimates of delinquencies that have been
tion of $61 million related to reconciliation remediation activities, incurred but have not been reported by loan servicers, based
in aggregate accounting for 0.7 points of the increase in the upon historical reporting trends. Mortgage Guaranty establishes
expense ratio. The expense ratio also increased due to growth in reserves using a percentage of the contractual liability (for each
consumer business lines, which have higher acquisition expenses delinquent loan reported) that is based upon past experience
but historically lower loss ratios. regarding certain loan factors such as age of the delinquency,
Net investment income increased $540 million in 2006 dollar amount of the loan and type of mortgage loan. Because
compared to 2005 primarily due to a $424 million out of period mortgage delinquencies and claims payments are affected prima-
UCITS adjustment. rily by macroeconomic events, such as changes in home price
appreciation, interest rates and unemployment, the determination
of the ultimate loss cost requires a high degree of judgment. AIG
Reserve for Losses and Loss Expenses
believes it has provided appropriate reserves for currently delin-
The following table presents the components of the quent loans. Consistent with industry practice, AIG does not
General Insurance gross reserve for losses and loss establish a reserve for loans that are not currently delinquent, but
expenses (loss reserves) as of December 31, 2007 and that may become delinquent in future periods.
2006 by major lines of business on a statutory Annual At December 31, 2007, General Insurance net loss reserves
Statement basis(a):increased $6.66 billion from 2006 to $69.29 billion. The net loss
(in millions) 2007 2006(b) reserves represent loss reserves reduced by reinsurance recover-
able, net of an allowance for unrecoverable reinsurance and
Other liability occurrence $20,580 $19,327 applicable discount for future investment income.
Workers compensation 15,568 13,612
Other liability claims made 13,878 12,513 The following table classifies the components of the
Auto liability 6,068 6,070 General Insurance net loss reserve by business unit as of
International 7,036 6,006 December 31, 2007 and 2006:
Property 4,274 5,499
(in millions) 2007 2006
Reinsurance 3,127 2,979
Medical malpractice 2,361 2,347 DBG(a) $47,392 $44,119
Products liability 2,416 2,239 Transatlantic 6,900 6,207
Accident and health 1,818 1,693 Personal Lines(b) 2,417 2,440
Commercial multiple peril 1,900 1,651 Mortgage Guaranty 1,339 460
Aircraft 1,623 1,629 Foreign General Insurance(c) 11,240 9,404
Fidelity/surety 1,222 1,148 Total Net Loss Reserve $69,288 $62,630
Mortgage Guaranty/Credit 1,426 567
Other 2,203 2,719 (a) At December 31, 2007 and 2006, respectively, DBG loss reserves
include approximately $3.13 billion and $3.33 billion ($3.34 billion and
Total $85,500 $79,999 $3.66 billion, respectively, before discount), related to business written
by DBG but ceded to AIRCO and reported in AIRCO’s statutory filings.
(a) Presented by lines of business pursuant to statutory reporting DBG loss reserves also include approximately $590 million and
requirements as prescribed by the National Association of Insurance $535 million related to business included in AIUO’s statutory filings at
Commissioners. December 31, 2007 and 2006, respectively.
(b) Allocations among various lines were revised based on the 2007 (b) At December 31, 2007 and 2006, respectively, Personal Lines loss
presentation. reserves include $894 million and $861 million related to business
ceded to DBG and reported in DBG’s statutory filings.
AIG’s gross reserve for losses and loss expenses represents
(c) At December 31, 2007 and 2006, respectively, Foreign General
the accumulation of estimates of ultimate losses, including Insurance loss reserves include approximately $3.02 billion and
estimates for incurred but not yet reported reserves (IBNR) and $2.75 billion related to business repor ted in DBG’s statutory filings.
loss expenses. The methods used to determine loss reserve
AIG 2007 Form 10-K 47