Reinsurance

12 Months Ended

Dec. 31, 2012

Reinsurance

(9)  Reinsurance

In the ordinary course of business, the P&C Group assumes and cedes reinsurance with other insurance companies. Reinsurance is ceded to provide greater diversification of risk and to limit the P&C Group’s maximum net loss arising from large risks or catastrophic events.

A large portion of the P&C Group’s ceded reinsurance is effected under contracts known as treaties under which all risks meeting prescribed criteria are automatically covered. Most of these arrangements consist of excess of loss and catastrophe contracts that protect against a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. In certain circumstances, reinsurance is also effected by negotiation on individual risks.

Ceded reinsurance contracts do not relieve the P&C Group of the primary obligation to its policyholders. Thus, an exposure exists with respect to reinsurance ceded to the extent that any reinsurer is unable or unwilling to meet its obligations assumed under the reinsurance contracts. The P&C Group monitors the financial strength of its reinsurers on an ongoing basis.

Premiums earned and insurance losses and loss expenses are reported net of reinsurance in the consolidated statements of income.

The effect of reinsurance on the premiums written and earned of the P&C Group was as follows:

	Years Ended December 31
	2012			2011			2010
	(in millions)
Direct premiums written	$	12,647		$	12,452		$	12,072
Reinsurance assumed		423			398			271
Reinsurance ceded		(1,200	)		(1,092	)		(1,107	)
Net premiums written	$	11,870		$	11,758		$	11,236
Direct premiums earned	$	12,596		$	12,387		$	12,059
Reinsurance assumed		422			365			253
Reinsurance ceded		(1,180	)		(1,108	)		(1,097	)
Net premiums earned	$	11,838		$	11,644		$	11,215

Ceded losses and loss expenses, which reduce losses and loss expenses incurred, were $586 million, $308 million and $392 million in 2012, 2011, and 2010, respectively.