AIG 2011 Annual Report Download - page 44

Sustained low interest rates may affect our profitability. We have substantial investment portfolios that support
our policy liabilities. Low levels of interest rates on investments have reduced the level of investment income
earned by AIG. If a low interest-rate environment persists, we may experience slower investment income growth
and we may not be able to fully mitigate the interest rate risk of our assets relative to our liabilities. A decline in
interest rates could impair our ability to earn the returns assumed in the pricing and the reserving for our
products at the time they were sold and issued.
The value of our investment portfolio is subject to a number of risks and uncertainties, including changes in interest
rates. Changes in interest rates can negatively affect the performance of our investment securities. Interest rates
are highly sensitive to many factors, including monetary policies, domestic and international economic and political
issues and other factors beyond our control. Changes in monetary policy or other factors may cause interest rates
to rise, which would adversely affect the value of the fixed income securities that we hold and could adversely
affect our ability to sell these securities. In addition, the evaluation of available-for-sale securities for
other-than-temporary impairments is a quantitative and qualitative process that is subject to significant
management judgment.
Concentration of our investment portfolios in any particular segment of the economy may have adverse effects. Our
results of operations have been adversely affected and may continue to be adversely affected by a concentration in
residential mortgage-backed, commercial mortgage-backed and other asset-backed securities and commercial
mortgage loans. We also have significant exposures to: financial institutions and, in particular, to money center
and global banks; U.S. state and local government issuers and authorities (as described below); and Eurozone
financial institutions and governments and corporations. These types of concentrations in our investment portfolios
could have an adverse effect on the value of these portfolios and consequently on our consolidated results of
operations and financial condition. Events or developments that have a negative effect on any particular industry,
asset class, group of related industries or geographic region may have a greater adverse effect on the investment
portfolios to the extent that the portfolios are concentrated. Furthermore, our ability to sell assets relating to such
particular groups of related assets may be limited if other market participants are seeking to sell at the same time.
The value of our investment portfolio is exposed to the creditworthiness of state and municipal governments. We
hold a large portfolio of state and municipal bonds ($37.4 billion at December 31, 2011), primarily in Chartis, and,
because of the budgetary pressures that states and municipalities are continuing to face in the current economic
environment, the risks associated with this portfolio remain. Defaults, or the prospect of imminent defaults, by the
issuers of state and municipal bonds could cause our portfolio to decline in value and significantly reduce the
portfolio’s liquidity, which could also adversely affect AIG Parent’s liquidity if AIG Parent then needed, or was
required by its capital maintenance agreements, to provide additional capital support to the insurance subsidiaries
holding the affected state and municipal bonds. As with our fixed income security portfolio generally, rising
interest rates would also negatively affect the value of our portfolio of state and municipal bonds and could make
those instruments more difficult to sell. A decline in the liquidity or market value of these instruments, which are
carried at fair value for statutory purposes, could also result in a decline in the Chartis entities’ capital ratios and,
in turn, require AIG Parent to provide additional capital to those entities.
Concentration of our insurance and other risk exposures may have adverse effects. We seek to manage the risks to
which we are exposed as a result of the securities or loans we hold and the insurance policies, derivatives and
other obligations that we undertake to customers and counterparties by monitoring the accumulation of our
exposures by exposure type, industry, geographic region, counterparty and otherwise and by using reinsurance,
hedging and other arrangements to limit or offset exposures that exceed the limits we wish to retain. In certain
circumstances, or with respect to certain exposures, such risk management arrangements may not be available on
acceptable terms or may prove to be ineffective, or our exposure in absolute terms may be so large that even
slightly adverse experience compared to our expectations may have a material adverse effect on our consolidated
financial condition or results of operations or result in additional statutory capital requirements.
30 AIG 2011 Form 10-K
INVESTMENT PORTFOLIO AND CONCENTRATION OF INVESTMENTS,
INSURANCE AND OTHER EXPOSURES