AIG 2007 Annual Report Download - page 105

American International Group, Inc. and Subsidiaries
1990s, which limited AIG’s ability to respond to emerging market opment in 2005, but experienced slightly favorable development in
trends as rapidly as would otherwise be the case. In subsequent 2006 and more significantly favorable development in 2007. The
years, AIG responded to these emerging trends by increasing adverse development in 2005 related principally to accident years
rates and implementing numerous policy form and coverage 2002 and prior. This adverse development resulted from signifi-
changes. This led to a significant improvement in experience cant loss cost escalation due to a variety of factors, including the
beginning with accident year 2001. In 2007, a significant portion following: the increase in frequency and severity of corporate
of the adverse development from accident years 2002 and prior bankruptcies; the increase in frequency of financial statement
also related to other latent exposures, including pharmaceutical restatements; the sharp rise in market capitalization of publicly
and product aggregate-related exposures as well as the construc- traded companies; and the increase in the number of initial public
tion defect exposures noted above. AIG’s exposure to these latent offerings, which led to an unprecedented number of IPO alloca-
exposures was sharply reduced after 2002 due to significant tion/laddering suits in 2001. In addition, extensive utilization of
changes in policy terms and conditions as well as underwriting multi-year policies during this period limited AIG’s ability to
guidelines. respond to emerging trends as rapidly as would otherwise be the
For the year-end 2005 loss reserve review, AIG’s actuaries case. AIG experienced significant adverse loss development during
responded to the continuing adverse development by further the period 2002 through 2005 as a result of these issues. AIG
increasing the loss development factors applicable to accident responded to this development with rate increases and policy
years 1999 and subsequent by approximately 5 percent. In form and coverage changes to better contain future loss costs in
addition, to more accurately estimate losses for construction this class of business.
defect-related claims, a separate review was per formed by AIG For the year-end 2005 loss reserve review, AIG’s actuaries
claims staff for accounts with significant exposure to these responded to the continuing adverse development by further
claims. increasing the loss development factor assumptions. The loss
For the year-end 2006 loss reserve review, AIG claims staff development factors applicable to 1997 and subsequent accident
updated the separate review for accounts with significant expo- years were increased by approximately 4 percent. In addition,
sure to construction defect-related claims in order to assist the AIG’s actuaries began to give greater weight to loss development
actuaries in determining the proper reserve for this exposure. methods for accident years 2002 and 2003, in order to more fully
AIG’s actuaries determined that no significant changes in the respond to the recent loss experience. AIG’s claims staff also
assumptions were required. Prior accident year loss development conducted a series of ground-up claim projections covering all
in 2006 was adverse by approximately $100 million, a relatively open claims for this business through accident year 2004. AIG’s
minor amount for this class of business. However, AIG continued actuaries benchmarked the loss reserve indications for all
to experience adverse development for this class for accident accident years through 2004 to these claim projections.
years prior to 2003. For the year-end 2006 loss reserve review, AIG’s actuaries
For the year-end 2007 loss reserve review, AIG claims staff determined that no significant changes in the assumptions were
updated its review of accounts with significant exposure to required. Prior accident year loss development in 2006 was
construction defect-related claims. AIG’s actuaries determined favorable by approximately $20 million, an insignificant amount for
that no significant changes in the assumptions were required. these classes. AIG’s actuaries continued to benchmark the loss
Prior accident year loss developments in 2007 were adverse by reserve indications to the ground-up claim projections provided by
approximately $75 million, a minor amount for this class of AIG claims staff for this class of business. For the year-end 2006
business. However, AIG continued to experience adverse develop- loss reserve review, the ground-up claim projections included all
ment in this class for accident years 2002 and prior, amounting accident years through 2005.
to approximately $450 million in 2007. In addition, loss reserves For the year-end 2007 loss reserve review, AIG’s actuaries
developed adversely for accident year 2003 by approximately determined that no significant changes in the assumptions were
$100 million in 2007 for this class. The loss ratio for accident required. Prior accident year reserve development in 2007 was
year 2003 remains very favorable for this class and has been favorable by approximately $305 million, due primarily to favorable
relatively stable over the past several years. Favorable develop- development from accident years 2004 and 2005, and to a lesser
ments in 2007 for accident years 2004 through 2006 largely extent 2003 and 2006. AIG’s actuaries continued to benchmark
offset the adverse developments from accident years 2003 and the loss reserve indications to the ground-up claim projections
prior. A significant portion of the adverse development from provided by AIG claims staff for this class of business. For the
accident years 2002 and prior related to the latent exposures year-end 2007 loss reserve review, the ground-up claim projec-
described above. tions included all accident years through 2006, and included
Loss reserves pertaining to the excess casualty class of stock options backdating-related exposures from accident year
business are generally included in the other liability occurrence 2006. Accident year 2006 reserves developed favorably notwith-
line of business, with a small portion of the excess casualty standing the effect of claims relating to stock options backdating,
reserves included in the other liability claims made line of which totaled approximately $300 million. Further, AIG is closely
business, as presented in the table above. monitoring claims activity in accident year 2007 relating to the
U.S. residential mortgage market, consistent with the manner in
D&O and Related Management Liability Classes of Business: which claims relating to stock options backdating were monitored
These classes of business experienced significant adverse devel-
AIG 2007 Form 10-K 51