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ITEM 7 / ENTERPRISE RISK MANAGEMENT.....................................................................................................................................................................................• Underwriting – The potential inadequacy of premium charged for risks underwritten in our portfolios can impactAIG Property Casualty’s ability to achieve an underwriting profit. We develop pricing based on our estimates oflosses and expenses, but factors such as market pressures and the inherent uncertainty and complexity inestimating losses may result in premiums that are inadequate to generate underwriting profit.• Catastrophe Exposure – Our business is exposed to various catastrophic events in which multiple losses canoccur and affect multiple lines of business in any calendar year. Natural disasters, such as hurricanes, earthquakesand other catastrophes, have the potential to adversely affect our operating results. Other risks, such as aman-made catastrophes or pandemic disease, could also adversely affect our business and operating results to theextent they are covered by our insurance products.• Reinsurance – Since we use reinsurance to limit our losses, we are exposed to risks associated with reinsuranceincluding the unrecoverability of expected payments from reinsurers either due to an inability or unwillingness topay, contracts do not respond as we intended, or that actual reinsurance coverage is different than anticipated.Catastrophe ExposuresTo control catastrophe exposure, we use a combination of techniques, including setting key business unit limitsbased on an aggregate PML, monitoring and modeling accumulated exposures, and purchasing catastrophereinsurance to supplement our other reinsurance protections. The majority of policies exposed to catastrophic eventsare one-year contracts allowing us to quickly adjust our exposure to catastrophic events if climate changes or otherevents increase the frequency or severity of catastrophes.We use industry recognized models and other tools to evaluate catastrophic events and assess the probability andmagnitude of such events. We periodically monitor the exposure risks of our worldwide AIG Property Casualtyoperations and adjust the models accordingly.The following is an overview of modeled losses for AIG Property Casualty exposure associated with the moresignificant natural perils. The modeled results assume that all reinsurers fulfill their obligations to AIG in accordancewith their terms.AIG Property Casualty utilizes industry recognized catastrophe models. The use of different methodologies andassumptions could materially change the projected losses. Therefore, these modeled losses may not be comparableto estimates made by other companies. These estimates are inherently uncertain and may not reflect our maximumexposures to these events. It is highly likely that our losses will vary, perhaps significantly, from these estimates.The modeled results provided in the table below were based on the Aggregate Exceedance Probability (AEP) losseswhich represent total property, workers’ compensation, and A&H losses that may occur in any single year from oneor more natural events. The values provided were based on 100-year return period losses, which have a one percentlikelihood of being exceeded in any single year. The A&H data include exposures for United States and Japanearthquakes. These exposures represent the largest share of A&H exposures to earthquakes. A&H losses weremodeled using April 2010 data. The property exposures were modeled with data as of September 2012. Allreinsurance program structures, domestic and international, reflect the reinsurance programs in place as ofJanuary 1, 2013. Losses include loss adjustment expenses and the net values include reinstatement premiums.Net of 2013At December 31, 2012 Net of 2013 Reinsurance, Percent of(in millions) Gross Reinsurance After Tax Total EquityNatural Peril:Earthquake $ 5,884 $ 3,766 $ 2,448 2.48%Tropical Cyclone * $ 6,190 $ 3,546 $ 2,305 2.34%* Includes hurricanes, typhoons and European windstorms.Gross earthquake and tropical cyclone modeled losses decreased $926 million and $2.3 billion, respectively,compared to 2011, while net losses decreased $335 million and $1.7 billion, respectively, compared to 2011.Changes in both gross and net losses are primarily due to underwriting decisions to actively manage catastropheexposure in the United States...................................................................................................................................................................................................................................AIG 2012 Form 10-K 167