AIG 2015 Annual Report Download - page 145

ITEM 7 / INSURANCE RESERVES / NON-LIFE INSURANCE COMPANIES
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Losses and loss adjustment expenses incurred:
Undiscounted 227 281 134 124 267 67
Change in discount 9439 22 51 18
Losses and loss adjustment expenses incurred 236 285 173 146 318 85
Losses and loss adjustment expenses paid (581) (162) (721) (406) (537) (119)
Other changes - 6 - - 60 127
Liability for unpaid losses and loss adjustment expenses
at end of year $4,140 $722 $ 4,485 $ 573 $ 5,033 $ 692
* These amounts exclude benefit from retroactive reinsurance.
On June 17, 2011, we completed a transaction under which the bulk of AIG Property Casualty’s net domestic asbestos
liabilities were transferred to National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway, Inc. This was part of
our ongoing strategy to reduce our overall loss reserve development risk. This transaction covers potentially volatile U.S.-
related asbestos exposures. It does not, however, cover asbestos accounts that we believe have already been reserved to
their limit of liability or certain other ancillary asbestos exposure assumed by AIG Property Casualty subsidiaries.
Upon the closing of this transaction, but effective as of January 1, 2011, we ceded the bulk of AIG Property Casualty’s net
domestic asbestos liabilities to NICO under a retroactive reinsurance agreement with an aggregate limit of $3.5 billion. Within
this aggregate limit, NICO assumed collection risk for existing third-party reinsurance recoverable associated with these
liabilities. AIG Property Casualty paid NICO approximately $1.67 billion as consideration for this cession and NICO assumed
approximately $1.82 billion of net U.S. asbestos liabilities. As a result of this transaction, AIG Property Casualty recorded a
deferred gain of $150 million in the second quarter of 2011, which is being amortized into income over the settlement period of
the underlying claims.
Under retroactive reinsurance arrangements any recoveries for development associated with the ceded losses are not
recognized immediately; rather this development increases or decreases the deferred gain, which is amortized into income as
described above. During 2015, 2014 and 2013, we recognized approximately $233 million, $0 and $72 million, respectively, of
adverse loss development that was ceded under this reinsurance arrangement. This development, which is net of the deferred
gain amortization, is being reported in Other income/expense, consistent with the way we manage the business and assess
performance and is therefore excluded from net losses incurred and our loss ratios to avoid distortion of our ongoing insurance
business.
IBNR Loss Reserve Estimates — Asbestos and Environmental
The following table presents the estimate of the gross and net IBNR included in the Liability for unpaid losses and
loss adjustment expenses, relating to asbestos and environmental claims:
December 31, 2015 2014 2013
(in millions) Gross Net*Gross Net* Gross Net*
Asbestos $1,680 $162 $ 2,363 $ 79 $ 3,190 $ 16
Environmental 331 171 157 87 94 51
Combined $2,011 $333 $ 2,520 $ 166 $ 3,284 $ 67
* Net IBNR includes the reduction due to the NICO reinsurance transaction of $912 million, $803 million and $1,284 million as of December 31, 2015, 2014
and 2013, respectively.