9. 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 expenses, 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 allowance for doubtful accounts on reinsurance assets was $338 million and $365 million at December 31, 2012 and 2011, respectively.

The following table provides supplemental information for loss and benefit reserves, gross and net of ceded reinsurance:




	2012						2011
At December 31, (in millions)	As Reported			Net of Reinsurance			As Reported			Net of Reinsurance

Liability for unpaid claims and claims adjustment expense^(a)	$	(87,991	)	$	(68,782)		$	(91,145	)	$	(70,825	)
Future policy benefits for life and accident and health insurance contracts		(36,340	)		(35,408	)		(34,317	)		(33,312	)
Reserve for unearned premiums		(22,537	)		(18,934	)		(23,465	)		(19,553	)
Reinsurance assets^(b)		23,744			–			25,237			–

(a) In 2012 and 2011, the Net of Reinsurance amount reflects the cession under the June 17, 2011 transaction with National Indemnity Company (NICO) of $1.6 billion and $1.7 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 reinsurance contracts and the portion of premiums relating to the unexpired terms of coverage is included in the reserve for unearned premiums. For both ceded and assumed reinsurance, risk transfer requirements must be met for reinsurance accounting to apply. If risk transfer requirements are not met, the contract is accounted for as a deposit, resulting in the recognition of cash flows under the contract through a deposit asset or liability and not as revenue or expense. To meet risk transfer requirements, a reinsurance contract must include both insurance risk, consisting of both underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. Similar risk transfer criteria are used to determine whether directly written insurance contracts should be accounted for as insurance or as a deposit.

The following table presents short-duration insurance premiums written and earned:




	AIG Property Casualty									Other Businesses^*									Eliminations								Total
Years Ended December 31, (in millions)	AIG Property Casualty									Other Businesses^*									Eliminations								Total
Years Ended December 31, (in millions)	2012			2011			2010			2012			2011^*			2010^*			2012			2011			2010		2012			2011			2010

Premiums written:
Direct	$	40,428		$	41,710		$	38,965		$	938		$	898		$	927		$	–		$	–		$	–	$	41,366		$	42,608		$	39,892
Assumed		3,428			3,031			2,442			(10	)		–			(2	)		7			2			–		3,425			3,033			2,440
Ceded		(9,420	)		(9,901	)		(9,795	)		(70	)		(97	)		(169	)		(7	)		(2	)		–		(9,497	)		(10,000	)		(9,964	)

Net	$	34,436		$	34,840		$	31,612		$	858		$	801		$	756		$	–		$	–		$	–	$	35,294		$	35,641		$	32,368

Premiums earned:
Direct	$	40,954		$	42,878		$	39,082		$	754		$	835		$	1,065		$	–		$	–		$	–	$	41,708		$	43,713		$	40,147
Assumed		3,254			3,294			2,488			31			55			80			(30	)		(46	)		–		3,255			3,303			2,568
Ceded		(9,335	)		(10,483	)		(9,049	)		(70	)		(98	)		(170	)		30			46			–		(9,375	)		(10,535	)		(9,219	)

Net	$	34,873		$	35,689		$	32,521		$	715		$	792		$	975		$	–		$	–		$	–	$	35,588		$	36,481		$	33,496

* Includes results of Mortgage Guaranty.

For the years ended December 31, 2012, 2011 and 2010, reinsurance recoveries, which reduced loss and loss expenses incurred, amounted to $4.5 billion, $6.1 billion and $8.0 billion, respectively.

Long-Duration Reinsurance

Long-duration reinsurance is effected principally under yearly renewable term treaties. The premiums with respect to these treaties are earned over the contract period in proportion to the protection provided. Amounts recoverable from reinsurers on long-duration contracts are estimated in a manner consistent with the assumptions used for the underlying policy benefits and are presented as a component of Reinsurance assets.

The following table presents premiums for our long-duration insurance and retirement services operations:




Years Ended December 31, (in millions)	AIG Life and Retirement									Divested Businesses^*								Total
Years Ended December 31, (in millions)	2012			2011			2010			2012		2011			2010			2012			2011			2010

Gross premiums	$	3,030		$	3,104		$	3,141		$	11	$	17		$	9,670		$	3,041		$	3,121		$	12,811
Ceded premiums		(602	)		(591	)		(621	)		–		(6	)		(435	)		(602	)		(597	)		(1,056	)

Net	$	2,428		$	2,513		$	2,520		$	11	$	11		$	9,235		$	2,439		$	2,524		$	11,755

* Primarily represents results of AIA, which was deconsolidated during 2010.

Long-duration reinsurance recoveries, which reduced death and other benefits, approximated $758 million, $611 million and $810 million, respectively, for the years ended December 31, 2012, 2011 and 2010.

The following table presents long-duration insurance in force ceded to other insurance companies:




At December 31, (in millions)	2012		2011		2010^*

Long-duration insurance in force ceded	$	129,159	$	140,156	$	148,605

* Excludes amounts related to held-for-sale entities.

Long-duration insurance assumed in force represented 0.1 percent of gross long-duration insurance in force at December 31, 2012, 0.07 percent at December 31, 2011 and 0.1 percent at December 31, 2010, and premiums assumed by AIG Life and Retirement represented 0.5 percent, 0.5 percent and 0.3 percent of gross premiums for the years ended December 31, 2012, 2011 and 2010, respectively.

AIG Life and Retirement operations utilize internal and third-party reinsurance relationships to manage insurance risks and to facilitate capital management strategies. As a result of these reinsurance arrangements AIG Life and Retirement is able 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. AIG Life and Retirement's domestic long-duration insurance companies also cede excess, non-economic reserves carried on a statutory-basis on certain term and universal life insurance policies and certain fixed annuities to onshore and offshore affiliates.

AIG Life and Retirement generally obtains letters of credit to obtain statutory recognition of its intercompany reinsurance transactions, particularly with respect to redundant statutory reserves requirements on term insurance and universal life with secondary guarantees (XXX and AXXX reserves). For this purpose, AIG Life and Retirement has a $585 million syndicated letter of credit facility outstanding at December 31, 2012, all of which relates to long-duration intercompany reinsurance transactions. AIG Life and Retirement has also obtained approximately $215 million of letters of credit on a bilateral basis all of which relates to long-duration intercompany reinsurance transactions. All of these approximately $800 million of letters of credit are due to mature on December 31, 2015.

Reinsurance Security

Our third-party reinsurance arrangements do not relieve us from our direct obligation to our insureds. 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.