AIG 2011 Annual Report Download - page 200

fair value, if available. Management considers one or more of these estimates when determining the fair value of a
reporting unit to be used in the impairment test.
If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying
value of a reporting unit exceeds its estimated fair value, goodwill associated with that reporting unit is potentially
impaired. The amount of impairment, if any, is measured as the excess of the carrying value of goodwill over the
implied fair value of the goodwill. The implied fair value of the goodwill is measured as the excess of the fair
value of the reporting unit over the amounts that would be assigned to the reporting unit’s assets and liabilities in
a hypothetical business combination. An impairment charge is recognized in earnings to the extent of the excess.
During 2011, Chartis finalized its reorganization, operating design and related segment reporting changes. In
connection with this reorganization, total goodwill of $1.4 billion was allocated between Commercial Insurance
and Consumer Insurance based on their relative fair values as of September 30, 2011. Management tested the
allocated goodwill for impairment and determined that the fair values of the Commercial Insurance and
Consumer Insurance reporting units exceeded book value at both September 30, and December 31, 2011 and
therefore the goodwill of these reporting units was considered not impaired.
AIG will continue to monitor overall competitive, business and economic conditions, and other events or
circumstances, including Chartis operating results that might result in an impairment of goodwill in the future.
AIG estimates and records a liability for potential losses that may arise from litigation and regulatory
proceedings to the extent such losses are probable and can be estimated. Determining a reasonable estimate of
the amount of such losses requires significant management judgment. In many such proceedings, it is not possible
to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability
until the matter is close to resolution. In view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases in which claimants seek substantial or indeterminate damages, AIG often cannot predict the
outcome or estimate the eventual loss or range of reasonably possible losses related to such matters.
In the ordinary course of business, AIG’s general insurance and life insurance companies enter into reinsurance
arrangements with other insurance companies to provide greater diversification of AIG’s business and limit the
potential for losses arising from large risks.
General reinsurance is effected under reinsurance treaties and by negotiation on individual risks. Certain of
these reinsurance arrangements consist of excess of loss contracts which protect AIG against losses over stipulated
amounts. AIG determines what portion of the losses will be recoverable under the reinsurance policies by
reference to the terms of the reinsurance protection purchased. This determination is necessarily based on the
underlying loss estimates and, accordingly, is subject to the same uncertainties as the estimate of loss reserves
noted above. The sensitivity analysis presented above in the Liability for Unpaid Claims and Claims Adjustment
Expenses section is performed net of reinsurance, and therefore includes the variability of the key assumptions
used in estimating reinsurance recoverables. There can be no assurance, however, that actual reserve development
will be consistent with either the original or the adjusted loss trend or loss development factor assumptions, or
that other assumptions made in the reserving process will not materially affect reserve development for a
particular class of business.
AIG’s third-party reinsurance arrangements do not relieve AIG from its direct obligation to its insureds. Thus, a
credit exposure exists with respect to both general and life reinsurance ceded to the extent that any reinsurer fails
to meet the obligations assumed under any reinsurance agreement. AIG evaluates the financial condition of its
reinsurers and establishes limits per reinsurer. In the current environment of weaker economic conditions and
strained financial markets, certain reinsurers are reporting losses and could be subject to rating downgrades. AIG’s
reinsurance recoverable exposures are primarily to the regulated subsidiaries of such companies which are subject
to minimum regulatory capital requirements. AIG’s RCD, in conjunction with AIG’s credit executives within
corporate ERM, regularly reviews these developments, monitors compliance with credit triggers that may require
186 AIG 2011 Form 10-K
LIABILITY FOR LEGAL CONTINGENCIES:
REINSURANCE RECOVERABLES: