8. 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 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 $276 million and $338 million at December 31, 2013 and 2012, respectively. Changes in the allowance for doubtful accounts on reinsurance are reflected in Policyholder benefits and claims incurred within the Consolidated Statements of Income.

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




	2013						2012
At December 31, (in millions)	As Reported			Net of Reinsurance			As Reported			Net of Reinsurance

Liability for unpaid claims and claims adjustment expense^(a)	$	(81,547	)	$	(64,316	)	$	(87,991	)	$	(68,782	)
Future policy benefits for life and accident and health insurance contracts		(40,653	)		(39,619	)		(40,523	)		(39,591	)
Reserve for unearned premiums		(21,953	)		(18,532	)		(22,537	)		(18,934	)
Reinsurance assets^(b)		21,686			–			23,744			–

(a) In both 2013 and 2012, the Net of Reinsurance amount reflects the cession under the June 17, 2011 transaction with National Indemnity Company (NICO) of $1.6 billion.

(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									Mortgage Guaranty									Eliminations									Total
Years Ended December 31, (in millions)	AIG Property Casualty									Mortgage Guaranty									Eliminations									Total
Years Ended December 31, (in millions)	2013			2012			2011			2013			2012			2011			2013			2012			2011			2013			2012			2011

Premiums written:
Direct	$	39,545		$	40,428		$	41,710		$	1,099		$	938		$	898		$	–		$	–		$	–		$	40,644		$	41,366		$	42,608
Assumed		3,659			3,428			3,031			(13	)		(10	)		–			3			7			2			3,649			3,425			3,033
Ceded		(8,816	)		(9,420	)		(9,901	)		(38	)		(70	)		(97	)		(3	)		(7	)		(2	)		(8,857	)		(9,497	)		(10,000	)

Net	$	34,388		$	34,436		$	34,840		$	1,048		$	858		$	801		$	–		$	–		$	–		$	35,436		$	35,294		$	35,641

Premiums earned:
Direct	$	38,996		$	40,954		$	42,878		$	840		$	754		$	835		$	–		$	–		$	–		$	39,836		$	41,708		$	43,713
Assumed		3,521			3,254			3,294			7			31			55			(18	)		(30	)		(46	)		3,510			3,255			3,303
Ceded		(8,564	)		(9,335	)		(10,483	)		(38	)		(70	)		(98	)		18			30			46			(8,584	)		(9,375	)		(10,535	)

Net	$	33,953		$	34,873		$	35,689		$	809		$	715		$	792		$	—		$	–		$	–		$	34,762		$	35,588		$	36,481

For the years ended December 31, 2013, 2012 and 2011, reinsurance recoveries, which reduced loss and loss expenses incurred, amounted to $3.3 billion, $4.5 billion and $6.1 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:




	AIG Life and Retirement									Divested Businesses							Total
Years Ended December 31, (in millions)	AIG Life and Retirement									Divested Businesses							Total
Years Ended December 31, (in millions)	2013			2012			2011			2013		2012		2011			2013			2012			2011

Gross premiums	$	3,269		$	3,066		$	3,140		$	9	$	11	$	17		$	3,278		$	3,077		$	3,157
Ceded premiums		(673	)		(602	)		(591	)		–		–		(6	)		(673	)		(602	)		(597	)

Net	$	2,596		$	2,464		$	2,549		$	9	$	11	$	11		$	2,605		$	2,475		$	2,560

Long-duration reinsurance recoveries, which reduced Policyholder benefits and claims incurred, were approximately $714 million, $758 million and $611 million, respectively, for the years ended December 31, 2013, 2012 and 2011.

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




At December 31, (in millions)	2013		2012		2011^*

Long-duration insurance in force ceded	$	122,012	$	129,159	$	140,156

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

Long-duration insurance in force assumed represented 0.05 percent of gross long-duration insurance in force at December 31, 2013, 0.05 percent at December 31, 2012 and 0.07 percent at December 31, 2011, and premiums assumed by AIG Life and Retirement represented 0.4 percent, 0.6 percent and 0.7 percent of gross premiums for the years ended December 31, 2013, 2012 and 2011, respectively.

AIG Life and Retirement utilizes 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 manages the capital impact on its insurance subsidiaries of statutory reserve requirements under Regulation XXX and Guideline AXXX through intercompany reinsurance transactions. Under GAAP, these intercompany reinsurance transactions are eliminated in consolidation. Under one of these intercompany arrangements, AIG Life and Retirement obtains letters of credit to support statutory recognition of the ceded reinsurance. As of December 31, 2013, AIG Life and Retirement had obtained for this purpose a $260 million syndicated letter of credit facility and a $190 million bilateral letter of credit. As of December 31, 2013, all of the $450 million of letters of credit were due to mature on December 31, 2015. On February 7, 2014, these letters of credit were replaced with two new, renegotiated bilateral letters of credit totaling $450 million. These new letters of credit expire on February 7, 2018, 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 19 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.