AIG 2015 Annual Report Download - page 38

ITEM 1A / RISK FACTORS
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Certain of our products have guarantees that may increase the volatility of our results. We offer variable annuity and life
insurance products with features that guarantee a certain level of benefits, including guaranteed minimum death benefits
(GMDB), guaranteed minimum income benefits (GMIB), guaranteed minimum withdrawal benefits (GMWB), guaranteed
minimum accumulation benefits (GMAB), and products with guaranteed interest crediting rates tied to an index. In addition to
risk-mitigating features in our variable annuity product design, we have an economic hedging program designed to manage
market risk from GMWB and GMAB, including exposures to changes in equity prices, interest rates, credit spreads and
volatilities. The hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts,
interest rate swap and swaption contracts, as well as fixed maturity securities with a fair value election. See Enterprise Risk
Management – Life Insurance Companies Key Insurance Risks – Variable Annuity Risk Management and Hedging Program for
additional discussion of market risk management related to these product features. Nevertheless, differences between the
change in fair value of GMWB and GMAB embedded derivatives and the related hedging portfolio can be caused by extreme
and unanticipated movements in the equity markets, interest rates and market volatility, policyholder behavior and our inability
to purchase hedging instruments at prices consistent with the desired risk and return trade-off. While we believe that our
actions have reduced the risks related to guaranteed benefits and guaranteed interest crediting, our exposure may not be fully
hedged, and we may be liable if counterparties are unable or unwilling to pay, although the majority of our hedging derivative
instruments are exchange-traded, exchange-cleared and/or highly collateralized. We also remain exposed to the risk that
policyholder behavior and mortality may differ from our assumptions. Finally, while we believe the impact of downturns in
equity markets, increased equity volatility or reduced interest rates would be mitigated by our economic hedging program, the
occurrence of one or more of these events could result in an increase in the liabilities associated with the guaranteed benefits
that is not fully offset by the hedging program, reducing our net income and shareholders’ equity. See Notes 4 and 13 to the
Consolidated Financial Statements, Item 1 – Business – Regulation, and Item 7. MD&A – Critical Accounting Estimates for
more information regarding these products.
Indemnity claims could be made against us in connection with divested businesses. We have provided financial
guarantees and indemnities in connection with the businesses we have sold, as described in greater detail in Note 15 to the
Consolidated Financial Statements. While we do not currently believe the claims under these indemnities will be material, it is
possible that significant indemnity claims could be made against us. If such a claim or claims were successful, it could have a
material adverse effect on our results of operations, cash flows and liquidity. See Note 15 to the Consolidated Financial
Statements for more information on these financial guarantees and indemnities.
Our foreign operations expose us to risks that may affect our operations. We provide insurance, investment and other
financial products and services to both businesses and individuals in more than 100 countries and jurisdictions. A substantial
portion of our business is conducted outside the United States, and we intend to continue to grow this business. Operations
outside the United States may be affected by regional economic downturns, changes in foreign currency exchange rates,
political upheaval, nationalization and other restrictive government actions, which could also affect our other operations.
The degree of regulation and supervision in foreign jurisdictions varies. AIG subsidiaries operating in foreign jurisdictions must
satisfy local regulatory requirements and it is possible that local licenses may require AIG Parent to meet certain conditions.
Licenses issued by foreign authorities to our subsidiaries are subject to modification and revocation. Consequently, our
insurance subsidiaries could be prevented from conducting future business in some of the jurisdictions where they currently
operate. Adverse actions from any single country could adversely affect our results of operations, depending on the magnitude
of the event and our financial exposure at that time in that country.
We may experience difficulty in marketing and distributing products through our current and future distribution
channels. Although we distribute our products through a wide variety of distribution channels, we maintain relationships with
certain key distributors. Distributors have in the past, and may in the future, elect to renegotiate the terms of existing
relationships, or reduce or terminate their distribution relationships with us, including for such reasons as industry consolidation
of distributors or other industry changes that increase the competition for access to distributors, developments in legislation or
regulation that affect our business, adverse developments in our business, adverse rating agency actions or concerns about
market-related risks. An interruption in certain key relationships could materially affect our ability to market our products and
could have a material adverse effect on our businesses, operating results and financial condition.