AIG 2012 Annual Report Download - page 186

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At December 31, 2012, total reinsurance recoverable assets were $25.6 billion. These assets include general
reinsurance paid losses recoverable of $1.3 billion, ceded loss reserves of $19.2 billion including reserves for
incurred but not reported (IBNR) claims, and ceded reserves for unearned premiums of $3.6 billion, as well as life
reinsurance recoverables of $1.5 billion. The methods used to estimate IBNR and to establish the resulting ultimate
losses involve projecting the frequency and severity of losses over multiple years. These methods are continually
reviewed and updated by management. Any adjustments are reflected in income. We believe that the amount
recorded for ceded loss reserves at December 31, 2012 reflect a reasonable estimate of the ultimate losses
recoverable. Actual losses may, however, differ from the reserves currently ceded.
The Reinsurance Credit Department (RCD) conducts periodic detailed assessments of the financial strength and
condition of current and potential reinsurers, both foreign and domestic. The RCD monitors both the financial
condition of reinsurers as well as the total reinsurance recoverable ceded to reinsurers, and set limits with regard to
the amount and type or exposure we are willing to take with reinsurers. As part of these assessments, we attempt to
identify whether a reinsurer is appropriately licensed, assess its financial capacity and liquidity; and evaluate the local
economic and financial environment in which a foreign reinsurer operates. The RCD reviews the nature of the risks
ceded and the need for measures, including collateral to mitigate credit risk. For example, in our treaty reinsurance
contracts, we frequently include provisions that require a reinsurer to post collateral or use other measures to reduce
exposure when a referenced event occurs. Furthermore, we limit our unsecured exposure to reinsurers through the
use of credit triggers such as insurer financial strength rating downgrades, declines in regulatory capital, or relevant
risk-based capital (RBC) ratios fall below certain levels. We also set maximum limits for reinsurance recoverable
exposure, which in some cases is the recoverable amount plus an estimate of the maximum potential exposure from
unexpected events for a reinsurer. In addition, credit executives within ERM review reinsurer exposures and credit
limits and approve reinsurer credit limits above specified levels. Finally, even where we conclude that uncollateralized
credit risk is acceptable, we require collateral from active reinsurance counterparties where it is necessary for our
subsidiaries to recognize the reinsurance recoverable assets for statutory accounting purposes. At December 31,
2012, we held $8.6 billion of collateral, in the form of funds withheld, securities in reinsurance trust accounts and/or
irrevocable letters of credit, in support of reinsurance recoverable assets from unaffiliated reinsurers. We believe that
no exposure to a single reinsurer represents an inappropriate concentration of risk to AIG, nor is our business
substantially dependent upon any single reinsurance contract.
The following table presents information for each reinsurer representing in excess of five percent of our total
reinsurance recoverable assets:
Reinsurer:
Berkshire Hathaway Group of
Companies AA+ A++ $ 2,185(d) 8.5% $ 1,648 $ 537
Munich Reinsurance Group of
Companies AA- A+ $ 1,771 6.9% $ 813 $ 958
Swiss Reinsurance Group of
Companies AA- A+ $ 1,727 6.8% $ 565 $ 1,162
(a) The financial strength ratings reflect the ratings of the various reinsurance subsidiaries of the companies listed as of February 6, 2013.
(b) Total reinsurance assets include both Property Casualty and Life and Retirement reinsurance recoverable.
(c) Excludes collateral held in excess of applicable treaty balances.
(d) Includes $1.6 billion recoverable under the 2011 transaction pursuant to which a large portion of AIG Property Casualty’s net domestic
asbestos liabilities were transferred to NICO. Does not include reinsurance assets ceded to other reinsurers for which NICO has assumed the
collection risk. See Liability for Unpaid Claims and Claim Adjustment Expenses – Transfer of Domestic Asbestos Liabilities.
The estimation of reinsurance recoverables involves a significant amount of judgment, particularly for asbestos
exposures, due to their long-tail nature. We assess the collectability of its reinsurance recoverable balances through
detailed reviews of the underlying nature of the reinsurance balance, including:
• paid and unpaid recoverable;
• whether the balance is in dispute or a legal collection status;
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AIG 2012 Form 10-K 169
A.M. Gross Percent of Uncollateralized
At December 31, 2012
S&P Best Reinsurance Reinsurance Collateral Reinsurance
(in millions) Rating(a) Rating(a) Assets Assets(b) Held(c) Assets
ITEM 7 / ENTERPRISE RISK MANAGEMENT