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ITEM 7 / ENTERPRISE RISK MANAGEMENT.....................................................................................................................................................................................• whether the reinsurer is financially troubled (i.e., liquidated, insolvent, in receivership or otherwise subject to formalor informal regulatory restriction);• whether collateral and collateral arrangements exist; and• the credit quality of the underlying reinsurer.We record adjustments to reflect the results of the detailed review through an allowance for uncollectablereinsurance. At December 31, 2012, the allowance for estimated unrecoverable reinsurance was $338 million. AtDecember 31, 2012, we had no significant general reinsurance recoverables due from any individual reinsurer thatwas financially troubled. In the current environment of weaker economic conditions and strained financial markets,certain reinsurers are reporting losses and could be subject to rating downgrades. Our reinsurance recoverableexposures are primarily to the regulated subsidiaries of such companies which are subject to minimum regulatorycapital requirements. The RCD, in conjunction with the credit executives within ERM, reviews these developments,monitors compliance with credit triggers that may require the reinsurer to post collateral, and will seek to use otherappropriate means to mitigate any material risks arising from these developments. See Note 9 to the ConsolidatedFinancial Statements for additional information on reinsurance.AIG Life and Retirement Key Insurance Risks..............................................................................................................................................................................................For AIG Life and Retirement, the primary risks are the following:• Pricing risk – represents the potential exposure to loss if actual policy experience emerges adversely incomparison to the assumptions made in product pricing. These assumptions include investment results, mortality,morbidity, surrenders, other observed policyholder behavior and expenses;• Investment risk – represents the exposure to loss if the cash flows from the invested assets are less thanrequired to meet the obligations of the expected policy and contract liabilities and the necessary return oninvestments;• Interest rate risk – represents the exposure to loss due to the sensitivity of the liabilities and assets to changes ininterest rates; and• Equity market risk – represents the potential exposure to higher claim costs for guaranteed benefits associatedwith variable annuities and the potential reduction in expected fee revenue.AIG Life and Retirement manages these risks through product design, exposure limitations and active managementof the relationships between assets and liabilities. The emergence of significant adverse experience would require anadjustment to DAC and benefit reserves which could have a material adverse effect on our consolidated results ofoperations for a particular period. For a further discussion of this risk, see Item 1A. Risk Factors – Business andOperations.AIG Life and Retirement companies generally limit their maximum underwriting exposure on life insurance of a singlelife to $15 million or less of coverage. In certain circumstances, this is achieved by using yearly renewable termreinsurance. For the AIG Life and Retirement companies, the reinsurance programs provide risk mitigation per life forindividuals and group and for catastrophic risk events.United Guaranty Corporation Key Insurance Risks..............................................................................................................................................................................................For United Guaranty Corporation (UGC), risks emanate primarily from the following:• Residential Housing Market risk – represents the potential exposure to loss due to borrower default on afirst-lien residential mortgage; the primary drivers of this risk are home price depreciation, changes in theunemployment rate, changes in mortgage rates, and a borrower’s willingness to pay.• Pricing risk – represents the potential exposure to loss if actual policy experience emerges adversely incomparison to the assumptions made in product pricing. This may be related to adverse economic conditions,prepayment of policies, investment results, and expenses;UGC manages the quality of the loans it insures through use of a proprietary risk quality index. UGC uses this indexto determine an insurability threshold as well as to manage the risk distribution of its new business. Along withtraditional mortgage underwriting variables, UGC’s risk-based pricing model uses rating factors such as geographyand the quality of a lender’s origination process to establish premium rates.UGC’s risk appetite statement establishes various concentration limits on the business UGC insures (for example,geography), and defines underwriting characteristics for which UGC will not insure loans...................................................................................................................................................................................................................................170 AIG 2012 Form 10-K