AIG 2012 Annual Report Download - page 113

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Asbestos and Environmental Reserves
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Third-Party Actuarial Review of Asbestos Loss Reserve Estimates
As part of our more in-depth comprehensive loss-reserve review in the fourth quarter of 2010, we conducted a series
of top-down and ground-up reserve analyses to determine the appropriate loss reserve estimate for our asbestos
exposures. To ensure the most comprehensive analysis possible, we engaged an independent third-party actuarial
firm to assist in assessing these exposures. The ground-up study conducted by this firm used a proprietary model to
calculate the loss exposure on an insured-by-insured basis. We believe that the accuracy of the reserve estimate is
greatly enhanced through the combination of the actuarial firm’s industry modeling techniques and industry
knowledge and our own specific account-level experience.
Annually, we consider a number of factors and recent experience in addition to the results of the top-down and
ground-up analyses performed for asbestos and environmental reserves. We considered the significant uncertainty
that remains as to our ultimate liability for asbestos and environmental claims, which is due to several factors:
• the long latency period between asbestos exposure and disease manifestation, leading to the potential for
involvement of multiple policy periods for individual claims;
• claims filed under the non-aggregate premises or operations section of general liability policies;
• the number of insureds seeking bankruptcy protection and the effect of prepackaged bankruptcies;
• diverging legal interpretations; and
• the difficulty in estimating the allocation of remediation cost among various parties with respect to environmental
claims.
As a result of the top-down and ground-up reserve analyses and the factors considered, asbestos reserves were
strengthened by $3.3 billion gross and $1.5 billion net in 2010.
In 2011, we completed a top-down report year projection as well as a market share projection of our indicated
asbestos and environmental loss reserves. These projections consisted of a series of tests performed separately for
asbestos and for environmental exposures.
For asbestos, these tests project the losses expected to be reported through 2027. This projection was based on the
actual losses reported through 2011 and the expected future loss emergence for these claims. Three scenarios were
tested, with a series of assumptions ranging from more optimistic to more conservative.
For environmental claims, a comparable series of frequency/severity tests were produced. We updated the top-down
report year projections in 2012. In this updated projection, environmental claims from future report years (i.e., IBNR)
are projected out ten years, through the year 2022.
As a result of the studies, we determined that no additional strengthening was required for asbestos and
environmental in 2011.
After we carefully considered the recent experience compared to the results of the 2010 ground-up analysis, as well
as all of the above factors, no adjustment to gross and net asbestos reserves was recognized in 2012. Additionally
in 2012, a moderate amount of incurred loss pertaining to the asbestos loss reserve discount is reflected in the table
below and is related to the reserves not subject to the NICO reinsurance agreement.
Upon completion of the environmental top-down analysis performed in the fourth quarter of 2012, we concluded that
the $75 million net reserve strengthening recognized in the first half of 2012 was adequate.
In addition to the U.S. asbestos and environmental reserve amounts shown in the tables below, AIG Property
Casualty also has asbestos reserves relating to foreign risks written by non-U.S. entities of $140 million gross and
$116 million net as of December 31, 2012. The asbestos reserves relating to non-U.S. risks written by non-U.S.
entities were $233 million gross and $165 million net as of December 31, 2011.
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AIG 2012 Form 10-K96
ITEM 7 / RESULTS OF OPERATIONS