AIG 2014 Annual Report Download - page 191

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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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, 2014, we held $7.4 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:
At December 31, 2014 A.M. Gross Percent of Uncollateralized
S&P Best Reinsurance Reinsurance Collateral Reinsurance
(in millions) Rating(a) Rating(a) Assets Assets(b) Held(c) Assets
Reinsurer:
Swiss Reinsurance Group of Companies AA- A+ $ 2,366 10.8 % $ 742 $ 1,624
Berkshire Hathaway Group of Companies AA+ A++ $ 1,920 (d) 8.7 % $ 1,547 $ 373
Munich Reinsurance Group of Companies AA- A+ $ 1,867 8.5 % $ 612 $ 1,255
(a) The financial strength ratings reflect the ratings of the various reinsurance subsidiaries of the companies listed as of February 10, 2015.
(b) Total reinsurance assets include both the Non-Life Insurance Companies and the Life Insurance Companies reinsurance recoverable.
(c) Excludes collateral held in excess of applicable balances.
(d) Includes $1.5 billion recoverable under the 2011 retroactive reinsurance transaction pursuant to which a large portion of the Non-Life Insurance Companies
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 Losses and Loss Adjustment Expenses — Transfer of Domestic Asbestos Liabilities.
At December 31, 2014, we had no significant general reinsurance recoverable due from any individual reinsurer that was
financially troubled. Reinsurer capital levels continued to increase in 2014, thereby increasing the industry’s underwriting
capacity. This increased capacity has resulted in increased competition and lower rates for 2015 renewals. Reduced
profitability associated with lower rates could potentially result in reduced capacity or rating downgrades for some reinsurers.
The RCD, in conjunction with the credit executives within ERM, reviews these developments, monitors compliance with credit
triggers that may require the reinsurer to post collateral, and seeks to use other appropriate means to mitigate any material
risks arising from these developments.
See Item 7. MD&A – Critical Accounting Estimates – Reinsurance Assets for further discussion of reinsurance recoverable.
Life Insurance Companies Key Insurance Risks
Life Insurance Companies manage these risks through product design, experience monitoring, pricing actions, risk limitations,
reinsurance and active monitoring and management of the relationships between assets and liabilities, including hedging. The
emergence of significant adverse experience would require an adjustment to DAC and benefit reserves, which could have a
material adverse effect on our consolidated results of operations for a particular period. For a further discussion of this risk, see
Item 1A. Risk Factors — Business and Operations.
For Life Insurance Companies, insurance risks primarily include the following:
• Mortality risk – represents the risk of loss arising from actual mortality rates being higher than expected mortality rates.
This risk could arise from pandemics or other events, including longer-term societal changes that cause higher than
expected mortality. This risk exists in a number of our product lines but is most significant for our life insurance products.
• Longevity risk – represents the risk of a change in value of a policy or benefit arising from actual mortality rates being
lower than the expected mortality rates. This risk could arise from longer-term societal health changes as well as other
factors. This risk exists in a number of our product lines but is most significant for our retirement, institutional and annuity
products.
• Client behavioral risk including surrender/lapse risk – there are many assumptions made when products are sold
including how long the contracts will persist. Actual experience can vary significantly from these assumptions. This risk is