AIG 2015 Annual Report Download - page 282

ITEM 8 / NOTE 6. LENDING ACTIVITIES

282
the troubled debtor, the modification is a troubled debt restructuring (TDR). We assess 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 or interest
forgiveness, payment deferrals and easing of loan covenants.
During 2015 and 2014, loans with a carrying value of $36 million and $218 million were modified in TDRs, respectively.
7. REINSURANCE
In the ordinary course of business, our insurance companies may use both treaty and facultative reinsurance to minimize their
net loss exposure to any single catastrophic loss event or to an accumulation of losses from a number of smaller events or to
provide greater diversification of our businesses. In addition, our general insurance subsidiaries assume reinsurance from
other insurance companies. We determine the portion of the incurred but not reported (IBNR) loss that will be recoverable
under our reinsurance contracts by reference to the terms of the reinsurance protection purchased. This determination is
necessarily based on the estimate of IBNR and accordingly, is subject to the same uncertainties as the estimate of IBNR.
Reinsurance assets include the balances due from reinsurance and insurance companies under the terms of our reinsurance
agreements for paid and unpaid losses and loss adjustment expenses incurred, ceded unearned premiums and ceded future
policy benefits for life and accident and health insurance contracts and benefits paid and unpaid. Amounts related to paid and
unpaid losses and benefits and loss expenses with respect to these reinsurance agreements are substantially collateralized.
We remain liable to the extent that our reinsurers do not meet their obligation under the reinsurance contracts, and as such,
we regularly evaluate the financial condition of our reinsurers and monitor concentration of our credit risk. The estimation of the
allowance for doubtful accounts requires judgment for which key inputs typically include historical trends regarding
uncollectible balances, disputes and credit events as well as specific reviews of balances in dispute or subject to credit
impairment. The allowance for doubtful accounts on reinsurance assets was $272 million and $258 million at December 31,
2015 and 2014, respectively. Changes in the allowance for doubtful accounts on reinsurance assets are reflected in
Policyholder benefits and losses incurred within the Consolidated Statements of Income.
The following table provides supplemental information for loss and benefit reserves, gross and net of ceded
reinsurance:
At December 31, 2015 2014
As Net of As Net of
(in millions) Reported Reinsurance Reported Reinsurance
Liability for unpaid losses and loss adjustment expenses(a) $(74,942) $(60,603) $ (77,260) $ (61,612)
Future policy benefits for life and accident and health insurance contracts (43,585) (42,506) (42,749) (41,767)
Reserve for unearned premiums (21,318) (18,380) (21,324) (18,278)
Reinsurance assets(b) 18,356 19,676
(a) In 2015 and 2014, the Net of Reinsurance amount reflects the cession under the June 17, 2011 transaction with National Indemnity Company (NICO) of $1.8
billion and $1.5 billion, respectively.
(b) Represents gross reinsurance assets, excluding allowances and reinsurance recoverable on paid losses.
Short-Duration Reinsurance
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 us 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