AIG 2014 Annual Report Download - page 39

ITEM 1 / BUSINESS
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2014 compared to 2013. We continually evaluate the relative attractiveness of different forms of reinsurance contracts and
different markets that may be used to achieve our risk and profitability objectives.
Reinsurance markets include:
• Traditional local and global reinsurance markets including those in the United States, Bermuda, London and Europe,
accessed directly and through reinsurance intermediaries;
• Capital markets through insurance-linked securities and collateralized reinsurance transactions, such as catastrophe bonds,
sidecars and similar vehicles; and
• Other insurers that engage in both direct and assumed reinsurance.
The form of reinsurance that we may choose from time to time will generally depend on whether we are seeking:
• proportional reinsurance, whereby we cede a specified percentage of premium and losses to reinsurers;
• non-proportional or excess of loss reinsurance, whereby we cede all or a specified portion of losses in excess of a specified
amount on a per risk, per occurrence (including catastrophe reinsurance) or aggregate basis; or
• facultative contracts that reinsure individual policies.
Reinsurance contracts do not relieve our subsidiaries from their direct obligations to insureds. However, an effective
reinsurance program substantially mitigates our exposure to potentially significant losses.
In certain markets, we are required to participate on a proportional basis in reinsurance pools based on our relative share of
direct writings in those markets. Such mandatory reinsurance generally covers higher-risk consumer exposures such as
assigned-risk automobile and earthquake, as well as certain commercial exposures such as workers’ compensation.
In 2014, we continued our strategy to take advantage of the pricing differential between traditional reinsurance markets and
capital markets. In December 2014, we entered into capital markets reinsurance transactions, effective as of January 1, 2015,
with Tradewynd Re Ltd., which will provide $500 million of indemnity reinsurance protection against U.S., Caribbean,
Canadian, Mexican and Gulf of Mexico named storms and U.S., Caribbean, Mexican and Canadian earthquakes. To fund its
potential obligations to AIG, Tradewynd Re Ltd. issued three tranches of notes, one with a one-year term and two with three-
year terms. The transaction provides fully collateralized coverage against losses from the events described above on a per-
occurrence basis through December 2015 (on the one-year tranche) and December 2017 (on the three-year tranches). As of
January 2015, our outstanding catastrophe bond issuances result in us having $925 million of indemnity reinsurance protection
outstanding in the capital markets.
See Item 7. MD&A – Enterprise Risk Management – Insurance Operations Risks – Non-Life Insurance Companies Key
Insurance Risks – Reinsurance Recoverable for a summary of significant reinsurers.
REGULATION
Our operations around the world are subject to regulation by many different types of regulatory authorities, including insurance,
securities, derivatives, investment advisory and thrift regulators in the United States and abroad.
Our insurance subsidiaries are subject to regulation and supervision by the states and jurisdictions in which they do business.
The insurance and financial services industries generally have been subject to heightened regulatory scrutiny and supervision
in recent years.