AIG 2015 Annual Report Download - page 186

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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• Paid losses recoverable – balances due from reinsurers for losses and loss adjustment expenses paid by our subsidiaries
and billed, but not yet collected.
• Ceded loss reserves – ultimate ceded reserves for losses and loss adjustment expenses, including reserves for claims
reported but not yet paid and estimates for IBNR.
• Ceded reserves for unearned premiums.
At December 31, 2015, total reinsurance recoverable assets were $20.4 billion. These assets include general reinsurance paid
losses recoverable of $1.2 billion, ceded loss reserves of $14.5 billion including reserves for IBNR, and ceded reserves for
unearned premiums of $3.0 billion, as well as life reinsurance recoverables of $1.7 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, 2015 reflects a reasonable estimate of the ultimate losses
recoverable. Actual losses may, however, differ, perhaps materially, 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 allow us to 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 specified declines in risk-based capital (RBC) ratios. 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, 2015, 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 us, 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, 2015 A.M. Gross Percent of Uncollateralized
S&P Best Reinsurance Reins urance Collatera l Reins urance
(in millions) Rating(a) Rating(a) Assets Assets(b) Held(c) Assets
Reinsurer:
Swiss Reinsurance Group of Companies AA- A+ $ 2,553 12.5 % $ 733 $ 1,820
Berkshire Hathaway Group of Companies AA+ A++ $ 2,275 (d) 11.1 % $ 1,408 $ 867
Munich Reinsurance Group of Companies AA- A+ $ 1,637 8.0 % $ 660 $ 977
(a) The financial strength ratings reflect the ratings of the various reinsurance subsidiaries of the companies listed as of February 5, 2016.
(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 $1.8 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, 2015, we had no significant general reinsurance recoverable due from any individual reinsurer that was
financially troubled. Reinsurer capital levels continued to increase in 2015, thereby increasing the industry’s underwriting
capacity. This increased capacity has resulted in increased competition and lower rates for 2016 renewals. Reduced
profitability associated with lower rates could potentially result in reduced capacity or rating downgrades for some reinsurers.