AIG 2008 Annual Report Download - page 91

assumptions were required. Prior accident year loss development in 2007 was adverse by approximately $75 mil-
lion, a minor amount for this class of business. However, AIG continued to experience adverse development in this
class for accident years 2002 and prior, amounting to approximately $450 million in 2007. In addition, loss reserves
developed adversely for accident year 2003 by approximately $100 million in 2007 for this class. The loss ratio for
accident year 2003 remained very favorable for this class and had been relatively stable over the past several years.
Favorable development in 2007 for accident years 2004 through 2006 largely offset the adverse development from
accident years 2003 and prior. A significant portion of the adverse development from accident years 2002 and prior
related to the latent exposures described above.
For the year-end 2006 loss reserve review, AIG claims staff updated the separate review for accounts with
significant exposure to construction defect-related claims in order to assist the actuaries in determining the proper
reserve for this exposure. AIG’s actuaries determined that no significant changes in the assumptions were required.
Prior accident year loss development in 2006 was adverse by approximately $100 million, a relatively minor
amount for this class of business. However, AIG continued to experience adverse development for this class for
accident years prior to 2003.
For the year-end 2008 loss reserve review, AIG claims staff again updated its review of accounts with
significant exposure to construction defect-related claims. In response to the continued upward developments on
these claims, and based on an updated analysis of this development, AIG increased the reserves by an additional
$75 million beyond the increases identified in the claims review. In response to the continued adverse development
of product aggregate related claims during 2007 and 2008, AIG’s actuaries conducted a special analysis of product
aggregate-related claims development, resulting in an increase in the IBNR reserve for this exposure of $175 mil-
lion. In response to the high level of pharmaceutical related claim emergence during 2007 and 2008, AIG claims
staff reviewed the remaining exposure, and based on this review an additional reserve of $10 million was
established. In response to the much greater than expected actual loss emergence for other large losses for accident
years 1998 and subsequent during 2007 and 2008, AIG’s actuaries increased the loss development factor
assumptions for this business, resulting in a further increase of approximately $200 million in loss reserves for
this class. In total, the specific increases in reserves related to these items increased the excess casualty reserves by
approximately $460 million during 2008, of which $370 million was recognized in AIG’s fourth quarter 2008
results. In the first three months of 2008, AIG also recognized approximately $200 million of losses relating to
MTBE, a gasoline additive, which primarily related to excess casualty business from accident years 2000 and prior.
While the various adjustments described above were intended to respond appropriately to the recent adverse trends
in loss experience, excess casualty remains a highly volatile class of business and there cannot be any assurance that
further adjustments to assumptions in the loss reserve process for this class of business will not be necessary.
Loss reserves pertaining to the excess casualty class of business are generally included in the other liability
occurrence line of business, with a small portion of the excess casualty reserves included in the other liability claims
made line of business, as presented in the table above.
D&O and Related Management Liability Classes of Business: AIG experienced an insignificant amount of
favorable development in 2006 for the D&O and related management liability class of business, followed by
significant favorable development during 2007 and 2008. The favorable development throughout the three-year
period related primarily to accident years 2004 and 2005, and to a lesser extent accident years 2003 and 2006. Loss
cost trends for D&O and related management liability classes of business were adverse in accident years 2002 and
prior due to a variety of factors, including an increase in frequency and severity of corporate bankruptcies; the
increase in the frequency of financial restatements; the sharp rise in market capitalization of publicly traded
companies; and the increase in the number of initial public offerings. The 2003 through 2006 period was marked by
a significant reduction in claims related to these factors; thus the expected loss ratios initially established for these
accident years have developed favorably, particularly for 2004 and 2005. Beginning in accident year 2007, claims
relating to the credit crisis have resulted in increased overall claim activity, and accident year 2007 reserves
developed adversely by a relatively insignificant amount during 2008. AIG utilizes ground up claims projections by
AIG claims staff as a benchmark to select the loss reserves for this business; these projections are updated annually.
For the year-end 2008 loss reserve review, AIG’s actuaries took into account the continued favorable loss
emergence for accident years 2006 and prior. They determined that, in order to respond to the significant favorable
loss emergence during 2007 and 2008, greater weight should be applied to the improving loss experience for
AIG 2008 Form 10-K 85
American International Group, Inc., and Subsidiaries