AIG 2008 Annual Report Download - page 86

Reserves for non-U.S. domiciled companies are carried in the International line of business. As a result of
restructuring of certain foreign operations in 2008, reserves for the International line of business included amounts
formerly reported in other lines of business.
AIG’s gross liability for unpaid claims and claims adjustment expense represents the accumulation of
estimates of ultimate losses, including estimates for incurred but not yet reported reserves (IBNR) and loss
expenses. The methods used to determine loss reserve estimates and to establish the resulting reserves are
continually reviewed and updated. Any adjustments resulting therefrom are currently reflected in operating income.
Because loss reserve estimates are subject to the outcome of future events, changes in estimates are unavoidable
given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve
changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or
reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable
development.
Estimates for mortgage guaranty insurance losses and loss adjustment expense reserves are based on notices of
mortgage loan delinquencies and estimates of delinquencies that have been incurred but have not been reported by
loan servicers, based upon historical reporting trends. Mortgage Guaranty establishes reserves using a percentage of
the contractual liability (for each delinquent loan reported) that is based upon past experience regarding certain loan
factors such as age of the delinquency, cure rates, dollar amount of the loan and type of mortgage loan. Because
mortgage delinquencies and claims payments are affected primarily by macroeconomic events, such as changes in
home price appreciation or depreciation, interest rates and unemployment, the determination of the ultimate loss
cost requires a high degree of judgment. AIG believes it has provided appropriate reserves for currently delinquent
loans. Consistent with industry practice, AIG does not establish a reserve for insured loans that are not currently
delinquent, but that may become delinquent in future periods.
At December 31, 2008, General Insurance net loss reserves increased $3.17 billion from 2007 to $72.46 billion.
The net loss reserves represent loss reserves reduced by reinsurance recoverable, net of an allowance for
unrecoverable reinsurance and applicable discount for future investment income.
The following table classifies the components of the General Insurance net liability for unpaid claims
and claims adjustment expense by business unit:
2008 2007
At December 31,
(In millions)
Commercial Insurance........................................... $48,789 $47,392
Transatlantic .................................................. 7,349 6,900
Personal Lines ................................................ 2,460 2,417
Mortgage Guaranty ............................................. 3,004 1,339
Foreign General Insurance........................................ 10,853 11,240
Total net loss reserves ........................................... $72,455 $69,288
Discounting of Reserves
At December 31, 2008, AIG’s overall General Insurance net loss reserves reflect a loss reserve discount of
$2.57 billion, including tabular and non-tabular calculations. The tabular workers’ compensation discount is
calculated using a 3.5 percent interest rate and the 1979-81 Decennial Mortality Table. The non-tabular workers’
compensation discount is calculated separately for companies domiciled in New York and Pennsylvania, and
follows the statutory regulations for each state. For New York companies, the discount is based on a five percent
interest rate and the companies’ own payout patterns. For Pennsylvania companies, the statute has specified
discount factors for accident years 2001 and prior, which are based on a six percent interest rate and an industry
payout pattern. For accident years 2002 and subsequent, the discount is based on the payout patterns and investment
yields of the companies. Certain other liability occurrence and products liability occurrence business in AIRCO that
was written by Commercial Insurance is discounted based on the yield of United States Department of the Treasury
securities ranging from one to twenty years and the Commercial Insurance payout pattern for this business. The
discount is comprised of the following: $733 million — tabular discount for workers’ compensation in Commercial
80 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries