AIG 2011 Annual Report Download - page 47

future losses on long duration insurance contracts, AIG may be required to record additional liabilities through a
charge to policyholder benefit expense, which could negatively affect our results of operations.
For further discussion of DAC and Future policy benefits, see Item 7. MD&A — Critical Accounting Estimates
and Notes 2, 10 and 13 to the Consolidated Financial Statements.
Guarantees Within Certain of Our Products May Decrease Our Earnings and Increase the Volatility of Our Results.
Certain variable annuity products that we offer guarantee a certain level of benefits to the policyholder. These
guarantee features include guaranteed minimum death benefits (GMDB), guaranteed minimum income benefits
(GMIB), guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum account value benefits
(GMAV). At December 31, 2011, our net liabilities associated with these guaranteed benefits, representing the
aggregate amount of the benefits in excess of the related account values, were $1.2 billion. We use reinsurance in
combination with derivative instruments to mitigate the exposure associated with these liabilities, and while we
believe that these and other actions have mitigated the risks related to these guaranteed benefits, our exposure is
not fully hedged, and we remain liable in the event that reinsurers or counterparties are unable or unwilling to
pay. In addition, downturns in equity markets, increased equity volatility or reduced interest rates could result in
an increase in the valuation of the future policy benefits or policyholder account balances, increasing the liabilities
associated with the guaranteed benefits and resulting in a reduction in our net income and shareholders’ equity.
Reinsurance may not be available or affordable. Our subsidiaries are major purchasers of reinsurance and utilize
reinsurance as part of our overall risk management strategy. Reinsurance is an important risk management tool to
manage transaction and insurance line risk retention and to mitigate losses that may arise from catastrophes.
Market conditions beyond our control determine the availability and cost of the reinsurance purchased by our
subsidiaries. For example, reinsurance may be more difficult or costly to obtain after a year with a large number
of major catastrophes. Accordingly, we may be forced to incur additional expenses for reinsurance or may be
unable to obtain sufficient reinsurance on acceptable terms, in which case we would have to accept an increase in
exposure risk, reduce the amount of business written by our subsidiaries or seek alternatives.
Reinsurance subjects us to the credit risk of our reinsurers and may not be adequate to protect us against losses.
Although reinsurance makes the reinsurer liable to our subsidiary to the extent the risk is ceded, it does not
relieve our subsidiary of the primary liability to its policyholders. Accordingly, we bear credit risk with respect to
our subsidiaries’ reinsurers to the extent the credit risk is not mitigated by collateral or other credit enhancements.
A reinsurer’s insolvency or inability or refusal to make timely payments under the terms of its agreements with
our subsidiaries could have a material adverse effect on our results of operations and liquidity. For additional
information on our reinsurance, see Item 7. MD&A — Enterprise Risk Management — Business Unit Risk
Management — Reinsurance.
Claims under indemnity obligations may be material. We have provided financial guarantees and indemnities in
connection with the businesses we have sold, including ALICO, AGF, AIG Star and AIG Edison. While we do not
currently believe that the claims under these indemnities will be material, it is possible that significant indemnity
claims could be made against us. If such a claim were successful, our results of operations, cash flows and liquidity
could be materially adversely affected. See Note 16 to the Consolidated Financial Statements for more
information on these financial guarantees and indemnities.
The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act will subject us to substantial
additional federal regulation, which may materially and adversely affect our businesses, results of operations, cash flows,
financial condition and credit ratings. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer
AIG 2011 Form 10-K 33
GUARANTEES WITHIN VARIABLE ANNUITIES
REINSURANCE
INDEMNITY OBLIGATIONS
REGULATION