AIG 2008 Annual Report Download - page 34

Preferred Stock will not result in a breach of any material contract or agreement, no assurances can be given that
AIG’s counterparties to such contracts and agreements will not claim that breaches have occurred. If AIG were to be
found to have breached any material contract or agreement, its consolidated financial condition, results of
operations or cash flows could be materially adversely affected.
Concentration of Investments and Exposures
Concentration of AIG’s investment portfolios in any particular segment of the economy may have adverse
effects. AIG 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.
AIG also has significant exposures to financial institutions and, in particular, to money center and global banks.
These types of concentrations in AIG’s investment portfolios could have an adverse effect on the investment
portfolios and consequently on AIG’s consolidated results of operations or financial condition. While AIG seeks to
mitigate this risk by having a broadly diversified portfolio, 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, AIG’s 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.
Concentration of AIG’s insurance and other risk exposures may have adverse effects. AIG seeks to manage
the risks to which it is exposed as a result of the insurance policies, derivatives and other obligations that it
undertakes to customers and counterparties by monitoring the diversification of its 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 it wishes to retain. In certain circumstances, or with respect to
certain exposures, such risk management arrangements may not be available on acceptable terms, or AIG’s
exposure in absolute terms may be so large that even slightly adverse experience compared to AIG’s expectations
may cause a material adverse effect on AIG’s consolidated financial condition or results of operations.
Casualty Insurance Underwriting and Reserves
Casualty insurance liabilities are difficult to predict and may exceed the related reserves for losses and loss
expenses. AIG has announced that it intends to focus its resources on its core property and casualty insurance
businesses while selling other businesses to repay the borrowing under the Fed Credit Agreement. As a result, AIG
expects to become more reliant on these businesses.
Although AIG annually reviews the adequacy of the established liability for unpaid claims and claims
adjustment expense, there can be no assurance that AIG’s loss reserves will not develop adversely and have a
material adverse effect on AIG’s results of operations. Estimation of ultimate net losses, loss expenses and loss
reserves is a complex process for long-tail casualty lines of business, which include excess and umbrella liability,
D&O, professional liability, medical malpractice, workers’ compensation, general liability, products liability and
related classes, as well as for asbestos and environmental exposures. Generally, actual historical loss development
factors are used to project future loss development. However, there can be no assurance that future loss development
patterns will be the same as in the past. Moreover, any deviation in loss cost trends or in loss development factors
might not be discernible for an extended period of time subsequent to the recording of the initial loss reserve
estimates for any accident year. Thus, there is the potential for reserves with respect to a number of years to be
significantly affected by changes in loss cost trends or loss development factors that were relied upon in setting the
reserves. These changes in loss cost trends or loss development factors could be attributable to changes in inflation
or in the judicial environment, or in other social or economic phenomena affecting claims, such as the effects that
the recent disruption in the credit markets could have on reported claims under D&O or professional liability
coverages. For a further discussion of AIG’s loss reserves see also Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Segment Results — General Insurance Operations — Liability
for unpaid claims and claims adjustment expense.
28 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries