AIG 2009 Annual Report Download - page 27

American International Group, Inc., and Subsidiaries
Liquidity
AIG parent’s ability to access funds from its subsidiaries is limited. As a holding company, AIG parent depends on
dividends, distributions and other payments from its subsidiaries to fund payments due on AIG’s obligations,
including its outstanding debt. Further, the majority of AIG’s investments are held by its regulated subsidiaries. In
light of AIG’s current financial situation and the retained deficit resulting from the losses recorded in recent quarters,
certain of AIG’s regulated subsidiaries have been restricted from making dividend payments, or advancing funds, to
AIG, and AIG expects these restrictions to continue. In the case of subsidiaries not currently subject to these
restrictions, these subsidiaries may be limited in their ability to make dividend payments or advance funds to AIG in
the future because of the need to support their own capital levels.
In addition, in connection with the execution of the purchase agreement between AIG and AIRCO and the
FRBNY, dated June 25, 2009 (AIA Purchase Agreement), and the purchase agreement between AIG and the
FRBNY, dated June 25, 2009 (ALICO Purchase Agreement), on December 1, 2009, AIG, the FRBNY and each
special purpose vehicle (SPV) entered into limited liability company agreements, which set forth the terms and
conditions of the respective parties’ ownership and governance rights in each SPV. Under the terms of these
agreements, the AIA SPV and the ALICO SPV may only distribute funds to AIG parent (prior to the payment of the
preferred returns and liquidation preferences on the preferred interests in each respective SPV and, in the case of the
AIA SPV, a payment of 1 percent of the net income of the AIA SPV to the holders of the preferred interests in the
AIA SPV for all fiscal years prior to payment of the preferred return and liquidation preference) in an aggregate
amount not to exceed $200 million and $400 million, respectively, per fiscal year.
These factors may hinder AIG’s ability to access funds that AIG parent may need to make payments on its
obligations, including those arising from day-to-day business activities.
AIG parent’s ability to support its subsidiaries is limited. Historically, AIG has provided capital and liquidity to its
subsidiaries to maintain regulatory capital ratios, comply with rating agency requirements and meet unexpected cash
flow obligations. More recently, AIG has relied on the FRBNY Credit Facility and the Department of the Treasury
Commitment to meet these needs, given AIG’s inability to access its traditional sources of liquidity, including the
public debt markets, since the third quarter of 2008. AIG’s current limited access to liquidity may reduce or prevent
AIG from providing support to its subsidiaries. If AIG is unable to provide support to a subsidiary having an
immediate capital or liquidity need, the subsidiary could become insolvent or, in the case of an insurance subsidiary or
other regulated entity, could be seized by its regulator.
Certain of the investments held by AIG’s subsidiaries are illiquid and/or are difficult to sell, or to sell in significant
amounts or at acceptable prices, to generate cash to meet their needs. AIG’s subsidiaries’ investments in certain
securities, including certain fixed income securities and certain structured securities, private equity securities,
investment partnerships, mortgage loans, flight equipment, finance receivables and real estate are illiquid or may not
be disposed of quickly. These asset classes represented approximately 23 percent of the carrying value of AIG’s total
consolidated cash and invested assets at December 31, 2009. In addition, the steep decline in the U.S. real estate
market and tight credit markets have materially adversely affected the liquidity of other AIG securities portfolios,
including its residential and commercial mortgage-related securities and investment portfolios. In the event additional
liquidity is required by one or more AIG subsidiaries beyond what can be provided through cash generated by
operations or the sale or monetization of their more liquid assets, it may be difficult to generate additional liquidity by
selling, pledging or otherwise monetizing the less liquid investments described above.
Credit and Financial Strength Ratings
Adverse ratings actions regarding AIG’s long-term debt ratings by the major rating agencies would require AIG to post a
substantial amount of additional collateral payments pursuant to, and/or permit the termination of, derivative transactions
to which AIGFP is a party, which could further adversely affect AIG’s business and its consolidated results of operations,
financial condition and liquidity. Additional obligations to post collateral or the costs of assignment, termination or
obtaining alternative credit could significantly reduce the amounts then available under the FRBNY Credit Facility and the
Department of the Treasury Commitment. Credit ratings estimate a company’s ability to meet its obligations and may
19 AIG 2009 Form 10-K