AIG 2008 Annual Report Download - page 90

other classes of business. The overall favorable development of $656 million included approximately $305 million
pertaining to the D&O and related management liability classes of business within Commercial Insurance,
consisting of approximately $335 million of favorable development from accident years 2003 through 2006,
partially offset by approximately $30 million of adverse development from accident years 2002 and prior. The
overall favorable development of $656 million also included approximately $300 million of adverse development
from primary workers’ compensation business within Commercial Insurance.
2006 Net Loss Development
In 2006, net loss development from prior accident years was favorable by approximately $53 million,
including approximately $198 million in net adverse development from asbestos and environmental reserves
resulting from the updated ground-up analysis of these exposures in the fourth quarter of 2006; approximately
$103 million of adverse development pertaining to the major hurricanes in 2004 and 2005; and $181 million of
adverse development from Transatlantic; and excluding approximately $300 million from accretion of loss reserve
discount. Excluding the fourth quarter asbestos and environmental reserve increase, catastrophes and Transatlantic,
as well as accretion of discount, net loss development in 2006 from prior accident years was favorable by
approximately $535 million. The overall favorable development of $53 million consisted of approximately
$2.30 billion of favorable development from accident years 2003 through 2005, partially offset by approximately
$2.25 billion of adverse development from accident years 2002 and prior. In 2006, most classes of AIG’s business
continued to experience favorable development for accident years 2003 through 2005. The adverse development
from accident years 2002 and prior reflected development from excess casualty, workers’ compensation, excess
workers’ compensation, and post-1986 environmental liability classes of business, all within Commercial Insur-
ance, from asbestos reserves within Commercial Insurance and Foreign General Insurance, and from Transatlantic.
Net Loss Development by Class of Business
The following is a discussion of the primary reasons for the development in 2008, 2007 and 2006 for those
classes of business that experienced significant prior accident year developments during the three-year period. See
Asbestos and Environmental Reserves below for a further discussion of asbestos and environmental reserves and
development.
Excess Casualty: Excess Casualty reserves experienced significant adverse loss development in 2008,
following relatively minor adverse development in 2006 and 2007. However, all three years exhibited significant
adverse development from accident years 2002 and prior. The increase in loss costs resulted primarily from medical
inflation, which increased the economic loss component of tort claims, advances in medical care, which extended
the life span of severely injured claimants, and larger jury verdicts, which increased the value of severe tort claims.
An additional factor affecting AIG’s excess casualty experience in recent years has been the exhaustion of
underlying primary policies for products liability coverage and for homebuilders. This has led to increased loss
emergence relating to claims involving exhaustion of underlying product aggregates and increased construction
defect-related claims activity on AIG’s excess and umbrella policies. Many excess casualty policies were written on
a multi-year basis in the late 1990s, which limited AIG’s ability to respond to emerging market trends as rapidly as
would otherwise be the case. In subsequent years, AIG responded to these emerging trends by increasing rates and
implementing numerous policy form and coverage changes. This led to a significant improvement in experience
beginning with accident year 2001. In 2007 and 2008, a significant portion of the adverse development from
accident years 2002 and prior also related to latent exposures, including pharmaceutical exposures as well as the
construction defect and product aggregate related exposures noted above. AIG’s exposure to these latent exposures
was sharply reduced after 2002 due to significant changes in policy terms and conditions as well as underwriting
guidelines. Another contributor to the adverse development during 2006 through 2008 is that actual loss devel-
opment for other large losses for accident years 1998 and subsequent have emerged at higher than expected levels as
compared to the loss emergence pattern exhibited from earlier accident years. This has caused significant additional
development for accident years 1998 to 2002, and to a lesser extent 2003. In 2008, this phenomenon also caused
some adverse development for accident year 2004; however the accident year results for accident years 2003 and
2004 both remain very favorable.
For the year-end 2007 loss reserve review, AIG claims staff updated its review of accounts with significant
exposure to construction defect-related claims. AIG’s actuaries determined that no significant changes in the
84 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries