AIG 2013 Annual Report Download - page 122

We consider a number of factors and recent experience, in addition to the results of both external and internal
analyses, to estimate asbestos and environmental loss reserves. Nonetheless, we believe that significant uncertainty
remains as to our ultimate liability for asbestos and environmental claims, which is due to several factors, including:
• 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.
We engaged an independent third-party actuarial firm to assist in assessing asbestos exposures. This external study
was completed in early 2011, based on losses evaluated in 2010.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.
In 2011, in addition to this third-party ground-up asbestos study, we internally completed a top-down report year
projections as well as market share projections 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. As a result of the studies, we concluded that no
additional strengthening was required for asbestos and environmental in 2011.
In 2012, 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 related to uncertainty, 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 a top-down analysis performed for environmental in the fourth quarter of 2012, we concluded that
the $150 million gross reserve strengthening and $75 million net reserve strengthening recognized in the first half of
2012 was adequate.
In 2013, we completed a ground-up review of all our remaining retained accounts for asbestos. In addition, a
subsidiary of the retrocessionaire for our retroactive reinsurance contract completed a ground-up asbestos study for
the largest accounts it assumed. After carefully considering the results of both ground-up studies, we increased gross
asbestos loss reserves by $220 million and net asbestos loss reserves by $110 million. These reserve increases also
reflect a small amount of estimated uncollectible reinsurance and accretion of discount. A significant portion of the
net loss reserve increase will be recoverable under our retroactive reinsurance arrangement. For environmental, we
increased gross environmental reserves by $98 million and net environmental reserves by $61 million as a result of
top-down actuarial analyses performed during the year as well as development on a number of large accounts.
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 $134 million gross and
$108 million net as of December 31, 2013 compared to $140 million gross and $116 million net as of December 31,
2012.
Asbestos and Environmental Reserves
Asbestos and Environmental Loss Reserve Estimates
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AIG 2013 Form 10-K104
ITEM 7 / RESULTS OF OPERATIONS / LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE
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