AIG 2007 Annual Report Download - page 102

American International Group, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations Continued
The DBG net loss reserve of $47.4 billion is comprised sation discount is calculated using a 3.5 percent interest rate and
principally of the business of AIG subsidiaries participating in the the 1979-81 Decennial Mortality Table. The non-tabular workers
American Home Assurance Company (American Home)/National compensation discount is calculated separately for companies
Union Fire Insurance Company of Pittsburgh, Pa. (National Union) domiciled in New York and Pennsylvania, and follows the statutory
pool (10 companies) and the surplus lines pool (Lexington, AIG regulations for each state. For New York companies, the discount
Excess Liability Insurance Company and Landmark Insurance is based on a five percent interest rate and the companies’ own
Company). payout patterns. For Pennsylvania companies, the statute has
DBG cedes a quota share percentage of its other liability specified discount factors for accident years 2001 and prior,
occurrence and products liability occurrence business to AIRCO. which are based on a six percent interest rate and an industry
The quota share percentage ceded was 15 percent in 2007 and payout pattern. For accident years 2002 and subsequent, the
20 percent in 2006 and covered all business written in these discount is based on the yield of U.S. Treasury securities ranging
years for these lines by participants in the American Home/ from one to twenty years and the company’s own payout pattern,
National Union pool. AIRCO’s loss reserves relating to these with the future expected payment for each year using the interest
quota share cessions from DBG are recorded on a discounted rate associated with the corresponding Treasury security yield for
basis. As of December 31, 2007, AIRCO carried a discount of that time period. The discount is comprised of the following:
approximately $210 million applicable to the $3.34 billion in $794 million — tabular discount for workers compensation in
undiscounted reserves it assumed from the American Home/ DBG; $1.42 billion — non-tabular discount for workers compensa-
National Union pool via this quota share cession. AIRCO also tion in DBG; and, $210 million — non-tabular discount for other
carries approximately $540 million in net loss reserves relating to liability occurrence and products liability occurrence in AIRCO. The
Foreign General Insurance business. These reserves are carried total undiscounted workers compensation loss reserve carried by
on an undiscounted basis. DBG is approximately $13.3 billion as of December 31, 2007.
The companies participating in the American Home/National The other liability occurrence and products liability occurrence
Union pool have maintained a participation in the business written business in AIRCO that is assumed from DBG is discounted based
by AIU for decades. As of December 31, 2007, these AIU on the yield of U.S. Treasury securities ranging from one to twenty
reserves carried by participants in the American Home/National years and the DBG payout pattern for this business. The
Union pool totaled approximately $3.02 billion. The remaining undiscounted reserves assumed by AIRCO from DBG totaled
Foreign General Insurance reserves are carried by AIUO, AIRCO, approximately $3.34 billion at December 31, 2007.
and other smaller AIG subsidiaries domiciled outside the United
States. Statutory filings in the United States by AIG companies Results of the Reserving Process
reflect all the business written by U.S. domiciled entities only, and Management believes that the General Insurance net loss
therefore exclude business written by AIUO, AIRCO, and all other reserves are adequate to cover General Insurance net losses and
internationally domiciled subsidiaries. The total reserves carried at loss expenses as of December 31, 2007. While AIG regularly
December 31, 2007 by AIUO and AIRCO were approximately reviews the adequacy of established loss reserves, there can be
$5.16 billion and $3.67 billion, respectively. AIRCO’s $3.67 billion no assurance that AIG’s ultimate loss reserves will not develop
in total general insurance reserves consist of approximately adversely and materially exceed AIG’s loss reserves as of
$3.13 billion from business assumed from the American Home/ December 31, 2007. In the opinion of management, such adverse
National Union pool and an additional $540 million relating to development and resulting increase in reserves is not likely to
Foreign General Insurance business. have a material adverse effect on AIG’s consolidated financial
condition, although it could have a material adverse effect on
Discounting of Reserves AIG’s consolidated results of operations for an individual reporting
At December 31, 2007, AIG’s overall General Insurance net loss period. See also Item 1A. Risk Factors — Casualty Insurance and
reserves reflect a loss reserve discount of $2.43 billion, including Underwriting Reserves.
tabular and non-tabular calculations. The tabular workers compen-
48 AIG 2007 Form 10-K