AIG 2009 Annual Report Download - page 194

American International Group, Inc., and Subsidiaries
A significant global pandemic could have a material adverse effect on the life insurance & retirement services
companies operating results and liquidity from increased mortality and morbidity rates.
Utilizing a scenario-based approach and an industry standard model, AIG has analyzed its insurance risk associated
with pandemic influenza. For a severe event, considered to be a recurrence of the 1918 Flu Pandemic, the analysis
indicates AIG could incur a pre-tax loss of approximately $6.3 billion if this event were to recur. For a mild event,
considered to be a recurrence of the influenza epidemic of 1968, the analysis indicates AIG could incur a pre-tax loss
of approximately $0.6 billion if such an event were to recur. These analyses were based on 2008 policy data
representing approximately 95 percent of AIG’s individual life, group life and credit life books of business, net of
reinsurance at that point in time. These estimates do not include claims that could be made under other policies, such
as business interruption or general liability policies, and do not reflect estimates for losses resulting from disruption of
AIG’s own business operations or asset valuation losses that may arise consequent to such a pandemic. These related
losses may be significant and in some scenarios exceed the losses incurred from AIG’s life insurance coverages.
Financial Services
AIG’s Financial Services subsidiaries engage in diversified activities including aircraft leasing, capital markets,
consumer finance and insurance premium finance. Together, the Aircraft Leasing, Capital Markets and Consumer
Finance operations generate the majority of the revenues produced by the Financial Services operations. A.I. Credit
also contributes to Financial Services income principally by providing insurance premium financing for both AIG’s
policyholders and those of other insurers.
Capital Markets
Capital Markets represents the operations of AIGFP, which engaged as principal in a wide variety of financial
transactions, including standard and customized financial products involving commodities, credit, currencies, energy,
equities and interest rates. AIGFP also invested in a diversified portfolio of securities and principal investments and
engaged in borrowing activities that involve issuing standard and structured notes and other securities and entering
into GIAs. AIGFP is currently being wound down. See Capital Resources and Liquidity — AIG’s Strategy for
Stabilization and Repayment of its Obligations as They Come Due — AIGFP Wind-down.
The senior management of AIG defines the policies and establishes general operating parameters for Capital
Markets operations. AIG’s senior management has established various oversight committees to monitor on an
ongoing basis the various financial market, operational and credit risk attendant to the Capital Markets operations.
The senior management of AIGFP reports the results of its operations to and reviews future strategies with AIG’s
senior management.
AIGFP actively manages its exposures to limit potential economic losses, and in doing so, AIGFP must continually
manage a variety of exposures including credit, market, liquidity, operational and legal risks.
Derivative Transactions
A counterparty may default on any obligation to AIG, including a derivative contract. Credit risk is a consequence
of extending credit and/or carrying trading and investment positions. Credit risk exists for a derivative contract when
that contract has a positive fair value to AIG. The maximum potential exposure will increase or decrease during the
life of the derivative commitments as a function of maturity and market conditions. To help manage this risk, AIGFP’s
credit department operates within the guidelines set by the CRC. Transactions which fall outside these pre-established
guidelines require the specific approval of the CRC. It is also AIG’s policy to include credit valuation adjustments for
potential counterparty default when necessary.
In addition, AIGFP utilizes various credit enhancements, including letters of credit, guarantees, collateral, credit
triggers, credit derivatives and margin agreements to reduce the credit risk relating to its outstanding financial
derivative transactions. AIGFP requires credit enhancements in connection with specific transactions based on,
among other things, the creditworthiness of the counterparties, and the transaction’s size and maturity. Furthermore,
AIGFP generally seeks to enter into agreements that have the benefit of set-off and close-out netting provisions.
AIG 2009 Form 10-K 186