AIG 2011 Annual Report Download - page 46

A downgrade in our credit ratings could require us to post additional collateral and result in the termination of
derivative transactions. Adverse ratings actions regarding our long-term debt ratings by the major rating agencies
would require us to post additional collateral payments pursuant to, and/or permit the termination of, derivative
transactions to which AIG is a party, which could adversely affect our business, our consolidated results of
operations in a reporting period or our liquidity. Credit ratings estimate a company’s ability to meet its obligations
and may directly affect the cost and availability to that company of financing. In the event of further downgrades
of two notches to our long-term senior debt ratings, AIG would be required to post additional collateral of
$267 million, and certain of AIG’s counterparties would be permitted to elect early termination of contracts.
For a further discussion of our liquidity, see Item 7. MD&A — Capital Resources and Liquidity.
We face intense competition in each of our businesses. Our businesses operate in highly competitive
environments, both domestically and overseas. Principal sources of competition are insurance companies, banks,
investment banks and other non-bank financial institutions. We consider our principal competitors to be other
large multi-national insurance organizations.
The insurance industry in particular is highly competitive. Within the U.S., Chartis subsidiaries compete with
approximately 3,200 other stock companies, specialty insurance organizations, mutual insurance companies and
other underwriting organizations. SunAmerica subsidiaries compete in the U.S. with approximately 2,000 life
insurance companies and other participants in related financial services fields. Overseas, our subsidiaries compete
for business with the foreign insurance operations of large U.S. insurers and with global insurance groups and
local companies.
As a result of the past reduction of our credit ratings and those of our subsidiaries and the lingering effects of
AIG’s negative publicity, we have faced and continue to face intense competition to retain existing customers and
to maintain business with existing customers and counterparties at historical levels. General insurance and life
insurance companies compete through a combination of risk acceptance criteria, product pricing, and terms and
conditions. Retirement services companies compete through crediting rates and the issuance of guaranteed
benefits. A decline in our position as to any one or more of these factors could adversely affect our profitability.
Interest rate fluctuations, increased surrenders, investment returns and other events may require our subsidiaries to
accelerate the amortization of deferred policy acquisition costs (DAC), and record additional liabilities for future policy
benefits, which could adversely affect our results of operations. DAC represents the costs that vary with and are
related primarily to the acquisition of new and renewal insurance and annuity contracts.
When interest rates rise or customers lose confidence in a company, policy loans, policy surrenders, withdrawals
of life insurance policies, and withdrawals of annuity contracts may increase as policyholders seek to buy products
with perceived higher returns or more stability, resulting in an acceleration of the amortization of DAC. To the
extent such amortization exceeds surrender or other charges earned upon surrender and withdrawals of certain life
insurance policies and annuity contracts, our results of operations could be negatively affected.
DAC for insurance-oriented and investment-oriented products, as well as retirement services products, is
reviewed for recoverability, which involves estimating the future profitability of in-force business. This review
involves significant management judgment. If future profitability is substantially lower than estimated, we could be
required to accelerate DAC amortization, and such acceleration could adversely affect our results of operations.
Periodically, AIG evaluates the estimates used in establishing liabilities for Future policy benefits for life and
A&H insurance contracts, which include liabilities for certain payout annuities. These estimates are evaluated
against actual experience and are adjusted based on management’s judgment regarding mortality, morbidity,
persistency, maintenance expenses, and investment returns, including the effect of the interest rate environment
and net realized capital gains (losses). If observed changes in actual experience or estimates result in projected
32 AIG 2011 Form 10-K
COMPETITION
ADJUSTMENTS TO DEFERRED POLICY ACQUISITION COSTS AND FUTURE
POLICY BENEFITS