AIG 2013 Annual Report Download - page 300

• The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and
Pennsylvania, and follows the statutory regulations (prescribed or approved) for each state. For New York
companies, the discount is based on a five percent interest rate and the companies’ own payout patterns. In 2012,
for Pennsylvania companies, the statute has specified discount factors for accident years 2001 and prior, which are
based on a six percent interest rate and an industry payout pattern. For accident years 2002 and subsequent, the
discount is based on the payout patterns and investment yields of the companies.
• Effective for the fourth quarter of 2013, our Pennsylvania regulator approved use of a consistent discount rate
(U.S. Treasury rate plus a liquidity premium) to all of our workers’ compensation reserves in our Pennsylvania-
domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers’
compensation portfolios. Prior to this change, workers’ compensation reserves held by a Pennsylvania-domiciled
insurer were discounted as follows: i) For loss reserves associated with accident year 2001 and prior accident
years, a prescribed discount factor based on a rate of 6 percent and industry payout patterns, were applied, ii) For
loss reserves associated with accident year 2002 and subsequent accident years, a rate of 4.25 percent and our
own payout patterns were applied; and iii) For a portion of loss reserves comprising excess workers’ compensation
reserves that were assumed into a Pennsylvania-domiciled insurer from New York-domiciled insurers during 2011,
we applied New York discounting rules, which include a prescribed rate of 5 percent on case reserves only (no
discounting of IBNR reserves). As a result of these changes, the total net discount increased by $427 million.
The discount consists of the following: $798 million of tabular discount for workers’ compensation in the domestic
operations of AIG Property Casualty and $2.7 billion of non-tabular discount for workers’ compensation in the
domestic operations of AIG Property Casualty; and $33 million — non-tabular discount for asbestos for AIG Property
Casualty.
Future policy benefits primarily include reserves for traditional life and annuity payout contracts, which represent an
estimate of the present value of future benefits less the present value of future net premiums. Included in Future
policy benefits are liabilities for annuities issued in structured settlement arrangements whereby a claimant has
agreed to settle a general insurance claim in exchange for fixed payments over a fixed determinable period of time
with a life contingency feature. Future policy benefits also include certain guaranteed benefits of variable annuity
products that are not considered embedded derivatives, primarily guaranteed minimum death benefits. See Note 13
for additional information on liabilities for guaranteed benefits included in Future policy benefits.
The liability for long duration future policy benefits has been established on the basis of the following assumptions:
• Interest rates (exclusive of immediate/terminal funding annuities), which vary by year of issuance and products,
range from 3.0 percent to 10.0 percent within the first 20 years. Interest rates on immediate/terminal funding
annuities are at a maximum of 13.5 percent and grade to not less than zero percent.
• Mortality and surrender rates are generally based on actual experience when the liability is established.
The liability for Policyholder contract deposits is primarily recorded at accumulated value (deposits received and net
transfers from separate accounts, plus accrued interest, less withdrawals and assessed fees). Deposits collected on
investment-oriented products are not reflected as revenues, because they are recorded directly to Policyholder
contract deposits upon receipt. Policyholder contract deposits also include our liability for (a) certain guaranteed
benefits and indexed features accounted for as embedded derivatives at fair value, (b) annuities issued in a
structured settlement arrangement with no life contingency and (c) certain contracts we have elected to account for
at fair value. See Note 13 herein for additional information on guaranteed benefits accounted for as embedded
derivatives.
Future Policy Benefits
Policyholder Contract Deposits
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AIG 2013 Form 10-K282
ITEM 8 / NOTE 12. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSE, FUTURE
POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS, AND
POLICYHOLDER CONTRACT DEPOSITS
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