AIG 2008 Annual Report Download - page 37

Regulation
AIG is subject to extensive regulation in the jurisdictions in which it conducts its businesses, and recent
regulatory actions have made it challenging for AIG to continue to engage in business in the ordinary course.
AIG’s operations around the world are subject to regulation by different types of regulatory authorities, including
insurance, securities, investment advisory, banking and thrift regulators in the United States and abroad. AIG’s
operations have become more diverse and consumer-oriented, increasing the scope of regulatory supervision and
the possibility of intervention. In light of AIG’s liquidity issues beginning in the third quarter of 2008, AIG and its
regulated subsidiaries have been subject to intense review and supervision around the world. Regulators have taken
significant steps to protect the businesses of the entities they regulate. These steps have included:
• Restricting or prohibiting the payment of dividends to AIG;
• Restricting or prohibiting other payments to AIG;
• Requesting additional capital contributions by AIG;
• Requesting that intercompany reinsurance reserves be covered by assets locally;
• Restricting the business in which the subsidiaries may engage; and
• Requiring pre-approval of all proposed transactions between the regulated subsidiaries and AIG or any
affiliate.
AIG does not expect these conditions to change unless its financial situation stabilizes.
Adjustments to Life Insurance & Retirement Services Deferred Policy Acquisition Costs
Interest rate fluctuations, increased surrenders and other events may require AIG subsidiaries to accelerate
the amortization of deferred policy acquisition costs (DAC) which could adversely affect AIG’s consolidated
financial condition or 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 and policy surrenders and withdrawals of life insurance policies and annuity
contracts may increase as policyholders seek to buy products with perceived higher returns or more stability,
requiring AIG subsidiaries to accelerate 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, AIG’s results of operations could be negatively affected.
DAC for both insurance-oriented and investment-oriented products, as well as retirement services products is
reviewed for recoverability, which involves estimating the future profitability of current business. This review
involves significant management judgment. If the actual emergence of future profitability were to be substantially
lower than estimated, AIG could be required to accelerate its DAC amortization and such acceleration could
adversely affect AIG’s results of operations. For a further discussion of DAC, see also Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates and Notes 1 and 8
to the Consolidated Financial Statements.
Risk Management
AIG is exposed to a number of significant risks, and AIG’s risk management policies, processes and controls
may not be effective in mitigating AIG’s risk exposures in all market conditions and to all types of risk. The major
risks to which AIG is exposed include credit risk, market risk, including credit spread risk, operational risk, liquidity
risk and insurance risk. Given continued capital markets volatility, persistent risk aversion, inadequate liquidity in
the markets of many asset classes, combined with AIG’s weakened financial condition, AIG may not have adequate
risk management policies, tools and processes and AIG may not have sufficient access to the markets and trading
counterparties to effectively implement risk mitigating strategies and techniques. This environment could mate-
rially and adversely affect AIG’s consolidated results of operations, liquidity or financial condition, result in
regulatory action or litigation or further damage AIG’s reputation. For a further discussion of AIG’s risk
management process and controls, see Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Risk Management.
AIG 2008 Form 10-K 31
American International Group, Inc., and Subsidiaries