AIG 2014 Annual Report Download - page 296

ITEM 8 / NOTE 13. INSURANCE LIABILITIES
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(a) For the 2012 amounts, $847 million was reclassified from "Foreign exchange effect" to "Losses and loss adjustment expenses paid (current year)". The
impact of this reclassification was a decrease of $847 million for foreign exchange and loss expenses paid (current year), with no income statement or balance
sheet impact.
(b) In 2014, included $545 million, $381 million, $(195) million, $135 million and $109 million related to primary casualty, environmental and asbestos, natural
catastrophes, financial lines and healthcare, respectively. In 2013, included $(144) million, $269 million, $498 million and $(54) million related to excess
casualty, environmental and pollution, primary casualty and healthcare, respectively. In 2012, includes $157 million, $200 million, $531 million and $68 million
related to excess casualty, environmental and pollution, primary casualty and healthcare, respectively.
(c) Includes amounts related to dispositions through the date of disposition.
The net adverse development includes loss-sensitive business, for which we recognized $105 million, $89 million and $54
million loss-sensitive premium adjustments for the years ended December 31, 2014, 2013 and 2012, respectively.
Discounting of Reserves
At December 31, 2014, the liability for unpaid losses and loss adjustment expenses reflects a net loss reserve discount of $3.1
billion, including tabular and non-tabular calculations based upon the following assumptions:
• Certain asbestos business that was written by Non-Life Insurance Companies is discounted, when allowed by the regulator
and when payments are fixed and determinable, based on the investment yields of the companies and the payout pattern
for this business.
• The tabular workers’ compensation discount is calculated based on a 3.5 percent interest rate and the 1999 U.S. Decennial
Life Table.
• The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and
Pennsylvania, and follows the statutory regulations (prescribed or permitted) 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 five percent on case reserves only (no discounting of IBNR reserves).
• In the fourth quarter of 2014, our Pennsylvania and Delaware regulators approved an updated discount rate that we applied
to our workers’ compensation loss reserves for the legal entities domiciled in those states.
The discount consists of the following: $852 million of tabular discount for workers’ compensation in the domestic operations of
Non-Life Insurance Companies and $2.2 billion of non-tabular discount for workers’ compensation in the domestic operations
of Non-Life Insurance Companies; and $11 million — non-tabular discount for asbestos for Non-Life Insurance Companies.
Future Policy Benefits
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.