AIG 2006 Annual Report Download - page 67

American International Group, Inc. and Subsidiaries
with a broader effect on the cities where those buildings are located. S&P would permit counterparties to call for approximately $864
If a disruption occurs in one location and AIG’s employees in that million of additional collateral. Further, additional downgrades
location are unable to occupy its offices and conduct business or could result in requirements for substantial additional collateral,
communicate with or travel to other locations, AIG’s ability to service which could have a material effect on how AIG manages its
and interact with its clients may suffer and it may not be able to liquidity. For a further discussion of AIG’s credit ratings and the
successfully implement contingency plans that depend on communi- potential effect of posting collateral on AIG’s liquidity, see
cation or travel. Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Capital Resources and Liquidity — Credit
Ratings and — Liquidity.
AIG’s Credit Ratings
Financial strength and credit ratings by major ratings agencies Liquidity
are an important factor in establishing the competitive position of
Liquidity risk represents the potential inability of AIG to meet all
insurance companies and other financial institutions and affect
payment obligations when they become due. AIG’s liquidity could
the availability and cost of borrowings. Any ratings downgrade may
be impaired by an inability to access the capital markets or by
lessen AIG’s ability to compete in certain businesses and may
unforeseen significant outflows of cash. This situation may arise
increase AIG’s interest expense. Financial strength ratings measure
due to circumstances that AIG may be unable to control, such as a
an insurance company’s ability to meet its obligations to contract
general market disruption or an operational problem that affects
holders and policyholders, help to maintain public confidence in a
third parties or AIG. AIG depends on dividends, distributions and
company’s products, facilitate marketing of products and enhance a
other payments from its subsidiaries to fund dividend payments and
company’s competitive position. Credit ratings measure a com-
to fund payments on AIG’s obligations, including debt obligations.
pany’s ability to repay its obligations and directly affect the cost
Regulatory and other legal restrictions may limit AIG’s ability to
and availability to that company of unsecured financing. Historically,
transfer funds freely, either to or from its subsidiaries. In particular,
AIG’s credit and financial strength ratings have provided AIG a
many of AIG’s subsidiaries, including AIG’s insurance subsidiaries,
competitive advantage.
are subject to laws and regulations that authorize regulatory bodies
From March through June of 2005, the major rating agencies
to block or reduce the flow of funds to the parent holding company,
downgraded the ratings of AIG and its insurance subsidiaries in a
or that prohibit such transfers altogether in certain circumstances.
series of actions. Many of the ratings were put on negative watch
These laws and regulations may hinder AIG’s ability to access funds
or negative outlook, which indicates a potential downgrade. Since
that AIG may need to make payments on its obligations. See also
then, however, the agencies have affirmed the ratings of AIG and
Item 1. Business — Regulation.
all of its subsidiaries with a stable outlook, which indicates that
the rating is not likely to change in the near term, except that S&P Some of AIG’s investments are relatively illiquid. AIG’s invest-
maintains a negative outlook on Transatlantic and on the senior ments in certain fixed income investments, certain structured
long-term debt rating of ILFC. securities, direct private equities, limited partnerships, hedge
A downgrade of the credit or financial strength ratings of AIG or funds and real estate are relatively illiquid. These asset classes
its subsidiaries could adversely affect AIG’s business and its represented nine percent of the carrying value of AIG’s total cash
consolidated results of operations in a number of ways, including: and invested assets as of December 31, 2006. If AIG requires
)increasing AIG’s interest expense; significant amounts of cash on short notice in excess of normal
)reducing AIGFP’s ability to compete in the structured prod- cash requirements, AIG may have difficulty selling these invest-
ucts and derivatives businesses; ments in a timely manner or be forced to sell them for less than
)reducing the competitive advantage of AIG’s insurance what AIG might otherwise have been able to, or both.
subsidiaries, which may result in reduced product sales Concentration of AIG’s investment portfolios in any particular
and/or lower prices; segment of the economy may have adverse effects. The
)adversely affecting relationships with agents and sales concentration of AIG’s investment portfolios in any particular
representatives; and industry, group of related industries or geographic sector could
)in the case of a downgrade of AGF or ILFC, increasing their have an adverse effect on the investment portfolios and conse-
interest expense and reducing their ability to compete in quently on AIG’s results of operations and financial position. While
their respective businesses. AIG seeks to mitigate this risk by having a broadly diversified
As a result of the downgrades in 2005 discussed above, AIG portfolio, events or developments that have a negative effect on
was required to post approximately $1.16 billion of collateral with any particular industry, group of related industries or geographic
counterparties to municipal guaranteed investment contracts and region may have a greater adverse effect on the investment
financial derivatives transactions. In the event of a further portfolios to the extent that the portfolios are concentrated rather
downgrade, AIG would be required to post additional collateral. It than diversified. Further, AIG’s ability to sell assets relating to
is estimated that, as of the close of business on February 15, such particular industry, group of related industries or geographic
2007, based on AIG’s outstanding municipal GIAs and financial region may be limited if other market participants are seeking to
derivatives transactions as of such date, a further downgrade of sell at the same time.
AIG’s long-term senior debt ratings to Aa3 by Moody’s or AA- by
Form 10-K 2006 AIG 17