AIG 2015 Annual Report Download - page 284

ITEM 8 / NOTE 7. REINSURANCE
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Long-duration insurance in-force assumed represented 0.04 percent of gross long-duration insurance in-force at December 31,
2015, 0.04 percent at December 31, 2014 and 0.05 percent at December 31, 2013, and premiums assumed by the Life
Insurance Companies represented 0.1 percent, 0.5 percent and 0.3 percent of gross premiums for the years ended December
31, 2015, 2014 and 2013, respectively.
The U.S. Life Insurance Companies utilize internal and third-party reinsurance relationships to manage insurance risks and to
facilitate capital management strategies, which allows them to minimize the use of letters of credit and utilize capital more
efficiently. Pools of highly-rated third-party reinsurers are utilized to manage net amounts at risk in excess of retention limits.
The U.S. Life Insurance Companies manage the capital impact on their statutory reserve requirements under the NAIC Model
Regulation “Valuation of Life Insurance Policies” (Regulation XXX) and NAIC Actuarial Guideline 38 (Guideline AXXX) through
intercompany reinsurance transactions. Under GAAP, these intercompany reinsurance transactions are eliminated in
consolidation. Under one arrangement, one of the U.S. Life Insurance Companies obtains letters of credit to support statutory
recognition of the ceded reinsurance. As of December 31, 2015, the U.S. Life Insurance Companies had two bilateral letters of
credit totaling $450 million with AIG entities, which were issued on February 7, 2014 and expire on February 7, 2019, but will
be automatically extended without amendment by one year on each anniversary of the issuance date, unless the issuer
provides notice of non-renewal. See Note 18 for additional information on the use of affiliated reinsurance for Regulation XXX
and Guideline AXXX reserves.
Reinsurance Security
Our third-party reinsurance arrangements do not relieve us from our direct obligations to our beneficiaries. Thus, a credit
exposure exists with respect to both short-duration and long-duration reinsurance ceded to the extent that any reinsurer fails to
meet the obligations assumed under any reinsurance agreement. We hold substantial collateral as security under related
reinsurance agreements in the form of funds, securities, and/or letters of credit. A provision has been recorded for estimated
unrecoverable reinsurance. We believe that no exposure to a single reinsurer represents an inappropriate concentration of
credit risk to AIG. Gross reinsurance assets with our three largest reinsurers aggregate to approximately $6.5 billion and $6.2
billion at December 31, 2015 and 2014, respectively, of which approximately $3.7 billion and $3.3 billion at December 31, 2015
and 2014, respectively, was not secured by collateral.
8. DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs (DAC) represent those costs that are incremental and directly related to the successful
acquisition of new or renewal of existing insurance contracts. We defer incremental costs that result directly from, and are
essential to, the acquisition or renewal of an insurance contract. Such deferred policy acquisition costs generally include agent
or broker commissions and bonuses, premium taxes, and medical and inspection fees that would not have been incurred if the
insurance contract had not been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable. We
partially defer costs, including certain commissions, when we do not believe that the entire cost is directly related to the
acquisition or renewal of insurance contracts.
We also defer a portion of employee total compensation and payroll-related fringe benefits directly related to time spent
performing specific acquisition or renewal activities, including costs associated with the time spent on underwriting, policy
issuance and processing, and sales force contract selling. The amounts deferred are derived based on successful efforts for
each distribution channel and/or cost center from which the cost originates.
Short-duration insurance contracts: Policy acquisition costs are deferred and amortized over the period in which the related
premiums written are earned, generally 12 months. DAC is grouped consistent with the manner in which the insurance
contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the profitability of
the underlying insurance contracts. Investment income is anticipated in assessing the recoverability of DAC. We assess the
recoverability of DAC on an annual basis or more frequently if circumstances indicate an impairment may have occurred. This
assessment is performed by comparing recorded net unearned premiums and anticipated investment income on in-force