AIG 2011 Annual Report Download - page 293

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AIG modifies loans to optimize their returns and improve their collectability, among other things. When such a
modification is undertaken with a borrower that is experiencing financial difficulty and the modification involves
AIG granting a concession to the troubled debtor, the modification is deemed to be a troubled debt restructuring
(TDR). AIG assesses whether a borrower is experiencing financial difficulty based on a variety of factors,
including the borrower’s current default on any of its outstanding debt, the probability of a default on any of its
debt in the foreseeable future without the modification, the insufficiency of the borrower’s forecasted cash flows to
service any of its outstanding debt (including both principal and interest), and the borrower’s inability to access
alternative third-party financing at an interest rate that would be reflective of current market conditions for a
non-troubled debtor. Concessions granted may include extended maturity dates, interest rate changes, principal
forgiveness, payment deferrals and easing of loan covenants.
As of December 31, 2011, there were no significant loans held by AIG that had been modified in a TDR during
2011.
In the ordinary course of business, AIG’s general insurance and life insurance companies place reinsurance with
other insurance companies in order to provide greater diversification of AIG’s business and limit the potential for
losses arising from large risks. In addition, AIG’s general insurance subsidiaries assume reinsurance from other
insurance companies.
The following table provides supplemental information for gross loss and benefit reserves net of ceded
reinsurance:
2011 2010
At December 31, As Net of As Net of
(in millions) Reported Reinsurance Reported Reinsurance
Liability for unpaid claims and claims adjustment expense(a) $ (91,145) $ (70,825) $ (91,151) $ (71,507)
Future policy benefits for life and accident and health insurance
contracts (34,317) (33,312) (31,268) (30,234)
Reserve for unearned premiums (23,465) (19,553) (23,803) (19,927)
Reinsurance assets(b) 25,237 - 24,554 -
(a) In 2011, the Net of Reinsurance amount reflects the cession under the June 17, 2011 transaction with National Indemnity Company (NICO) of
$1.7 billion.
(b) Represents gross reinsurance assets, excluding allowances and reinsurance recoverable on paid losses.
Short-duration reinsurance is effected under reinsurance treaties and by negotiation on individual risks. Certain
of these reinsurance arrangements consist of excess of loss contracts that protect AIG against losses above
stipulated amounts. Ceded premiums are considered prepaid reinsurance premiums and are recognized as a
reduction of premiums earned over the contract period in proportion to the protection received. Amounts
recoverable from reinsurers on short-duration contracts are estimated in a manner consistent with the claims
liabilities associated with the reinsurance and presented as a component of Reinsurance assets. Assumed
reinsurance premiums are earned primarily on a pro-rata basis over the terms of the reinsurance contracts. For
both ceded and assumed reinsurance, risk transfer requirements must be met in order for reinsurance accounting
to apply. If risk transfer requirements are not met, the contract is accounted for as a deposit, resulting in the
recognition of cash flows under the contract through a deposit asset or liability and not as revenue or expense. To
meet risk transfer requirements, a reinsurance contract must include both insurance risk, consisting of both
AIG 2011 Form 10-K 279
TROUBLED DEBT RESTRUCTURINGS
9. REINSURANCE
SHORT-DURATION REINSURANCE