AIG 2008 Annual Report Download - page 15

The liability for unpaid claims and claims adjustment expense (loss reserves) established with respect to
foreign business are set and monitored in terms of the currency in which payment is expected to be made. Therefore,
no assumption is included for changes in currency rates. See also Note 1(dd) to the Consolidated Financial
Statements.
Management reviews the adequacy of established loss reserves utilizing a number of analytical reserve
development techniques. Through the use of these techniques, management is able to monitor the adequacy of
AIG’s established reserves and determine appropriate assumptions for inflation. Also, analysis of emerging specific
development patterns, such as case reserve redundancies or deficiencies and IBNR emergence, allows management
to determine any required adjustments.
The “Analysis of Consolidated Losses and Loss Expense Reserve Development” table presents the devel-
opment of net losses and loss expense reserves for calendar years 1998 through 2008. Immediately following this
table is a second table that presents all data on a basis that excludes asbestos and environmental net losses and loss
expense reserve development. The opening reserves held are shown at the top of the table for each year-end date.
The amount of loss reserve discount included in the opening reserve at each date is shown immediately below the
reserves held for each year. The undiscounted reserve at each date is thus the sum of the discount and the reserve
held.
The upper half of the table presents the cumulative amounts paid during successive years related to the
undiscounted opening loss reserves. For example, in the table that excludes asbestos and environmental losses, with
respect to the net losses and loss expense reserve of $25.29 billion at December 31, 2001, by the end of 2008 (seven
years later) $36.35 billion had actually been paid in settlement of these net loss reserves. In addition, as reflected in
the lower section of the table, the original undiscounted reserve of $26.71 billion was reestimated to be
$46.69 billion at December 31, 2008. This increase from the original estimate generally results from a combination
of a number of factors, including reserves being settled for larger amounts than originally estimated. The original
estimates will also be increased or decreased as more information becomes known about the individual claims and
overall claim frequency and severity patterns. The redundancy (deficiency) depicted in the table, for any particular
calendar year, presents the aggregate change in estimates over the period of years subsequent to the calendar year
reflected at the top of the respective column heading. For example, the deficiency of $107 million at December 31,
2008 related to December 31, 2007 net losses and loss expense reserves of $70.03 billion represents the cumulative
amount by which reserves in 2007 and prior years have developed unfavorably during 2008.
The bottom of each table below presents the remaining undiscounted and discounted net loss reserve for each
year. For example, in the table that excludes asbestos and environmental losses, for the 2003 year-end, the
remaining undiscounted reserves held at December 31, 2008 are $15.40 billion, with a corresponding discounted
net reserve of $14.36 billion.
AIG 2008 Form 10-K 9
American International Group, Inc., and Subsidiaries