AIG 2008 Annual Report Download - page 89

In determining the loss development from prior accident years, AIG conducts analyses to determine the change
in estimated ultimate loss for each accident year for each profit center. For example, if loss emergence for a profit
center is different than expected for certain accident years, the actuaries examine the indicated effect such
emergence would have on the reserves of that profit center. In some cases, the higher or lower than expected
emergence may result in no clear change in the ultimate loss estimate for the accident years in question, and no
adjustment would be made to the profit center’s reserves for prior accident years. In other cases, the higher or lower
than expected emergence may result in a larger change, either favorable or unfavorable, than the difference between
the actual and expected loss emergence. Such additional analyses were conducted for each profit center, as
appropriate, in 2008 to determine the loss development from prior accident years for 2008. As part of its reserving
process, AIG also considers notices of claims received with respect to emerging issues, such as those related to the
U.S. mortgage and housing market.
2008 Net Loss Development
In 2008, net loss development from prior accident years was adverse by approximately $118 million, including
approximately $339 million of favorable development relating to loss sensitive business in the first three months of
2008 (which was offset by an equal amount of negative earned premium development), and excluding approx-
imately $317 million from accretion of loss reserve discount. Excluding both the favorable development relating to
loss sensitive business and accretion of loss reserve discount, net loss development from prior accident years in
2008 was adverse by approximately $457 million. The overall adverse development of $118 million consisted of
approximately $1.75 billion of favorable development from accident years 2004 through 2007 offset by approx-
imately $1.87 billion of adverse loss development from accident years 2003 and prior. The adverse development
from accident years 2003 and prior was primarily related to excess casualty business within Commercial Insurance;
this business accounted for approximately $1.25 billion of the adverse development from accident years 2003 and
prior. The favorable development from accident years 2004 through 2007 included approximately $590 million in
favorable development from business written by Lexington Insurance Company, including healthcare, catastrophic
casualty, casualty and program businesses. Financial Services divisions within Commercial Insurance, including
D&O and related management liability business, contributed approximately $430 million to the favorable
development from accident years 2004 through 2007, relating primarily to D&O, and related management liability
business from accident years 2004 and 2005. The adverse development from accident years 2003 and prior included
approximately $200 million related to claims involving MTBE, a gasoline additive, primarily on excess casualty
business within Commercial Insurance from accident years 2000 and prior. In addition, the excess casualty adverse
development reflect continued emergence of latent claims such as construction defect, product aggregate, and
pharmaceutical related exposures, as well as higher than expected large loss activity from these accident years.
AIG’s exposure to these latent exposures was reduced after 2002 due to significant changes in policy terms and
conditions as well as underwriting guidelines. (See Net Loss Development by Class of Business below). Other
segments throughout AIG also contributed to the adverse development from accident year 2003 and prior, including
approximately $215 million relating to Transatlantic. Mortgage Guaranty contributed approximately $177 million
of overall adverse development in 2008, with $159 million relating to accident year 2007. See Year-to-Date
Mortgage Guaranty Results — 2008 and 2007 Comparison above.
2007 Net Loss Development
In 2007, net loss development from prior accident years was favorable by approximately $656 million,
including approximately $88 million of adverse development from Transatlantic; and excluding approximately
$327 million from accretion of loss reserve discount. Excluding Transatlantic, as well as accretion of discount, net
loss development in 2007 from prior accident years was favorable by approximately $744 million. The overall
favorable development of $656 million consisted of approximately $2.12 billion of favorable development from
accident years 2004 through 2006, partially offset by approximately $1.43 billion of adverse development from
accident years 2002 and prior and $37 million of adverse development from accident year 2003. In 2007, most
classes of AIG’s business continued to experience favorable development for accident years 2004 through 2006.
The majority of the adverse development from accident years 2002 and prior was related to development from
excess casualty and primary workers’ compensation business within Commercial Insurance and from Transatlantic.
The development from accident year 2003 was primarily related to adverse development from excess casualty and
primary workers’ compensation business within Commercial Insurance offset by favorable development from most
AIG 2008 Form 10-K 83
American International Group, Inc., and Subsidiaries