AIG 2009 Annual Report Download - page 28

American International Group, Inc., and Subsidiaries
directly affect the cost and availability to that company of unsecured financing. In the event of a further downgrade of
AIG’s long-term senior debt ratings, AIGFP would be required to post additional collateral, and certain of AIGFP’s
counterparties would be permitted to elect early termination of contracts.
For a further discussion of AIG’s liquidity, see Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Capital Resources and Liquidity — Liquidity.
It is estimated that as of the close of business on February 17, 2010, based on AIG’s outstanding financial derivative
transactions, including those of AIGFP at that date, a one-notch downgrade of AIG’s long-term senior debt ratings to
Baa1 by Moody’s Investors Service (Moody’s) and BBB+ by Standard & Poor’s Financial Services LLC, a subsidiary
of The McGraw-Hill Companies, Inc. (S&P), would permit counterparties to make additional collateral calls and
permit the counterparties to elect early termination of contracts, resulting in up to approximately $1.8 billion of
corresponding collateral postings and termination payments; a two-notch downgrade to Baa2 by Moody’s and BBB by
S&P would result in approximately $1.4 billion in additional collateral postings and termination payments above the
one-notch downgrade amount; and a three-notch downgrade to Baa3 by Moody’s and BBB- by S&P would result in
approximately $0.3 billion in additional collateral postings and termination payments above the two-notch downgrade
amount. Additional collateral postings upon downgrade are estimated based on the factors in the individual collateral
posting provisions of the Credit Support Annex (CSA) with each counterparty and current exposure as of February 17,
2010. Factors considered in estimating the termination payments upon downgrade include current market conditions,
the complexity of the derivative transactions, historical termination experience and other observable market events
such as bankruptcy and downgrade events that have occurred at other companies. The actual termination payments
could significantly differ from management’s estimates given market conditions at the time of downgrade and the level
of uncertainty in estimating both the number of counterparties who may elect to exercise their right to terminate and
the payment that may be triggered in connection with any such exercise.
Adverse rating actions could result in further reductions in credit limits extended to AIG and in a decline in the number
of counterparties willing to transact with AIG or its subsidiaries. To appropriately manage risk, AIG needs trading
counterparties willing to extend sufficient credit limits to purchase and sell securities, commodities and other assets, as
well as to conduct hedging activities. To the extent that counterparties are unwilling to trade with or to extend
adequate credit limits to AIG or its subsidiaries, AIG could be exposed to open positions or other unhedged risks,
resulting in increased volatility of results and increased losses.
A downgrade in the Insurer Financial Strength ratings of AIG’s insurance companies could prevent the companies from
writing new business and retaining customers and business. Insurer Financial Strength ratings are an important factor
in establishing the competitive position of insurance companies. Insurer Financial Strength ratings measure an
insurance company’s ability to meet its obligations to contract holders and policyholders, help maintain public
confidence in a company’s products, facilitate marketing of products and enhance a company’s competitive position.
Further downgrades of the Insurer Financial Strength ratings of AIG’s insurance companies may prevent these
companies from offering products and services or result in increased policy cancellations or termination of assumed
reinsurance contracts. Moreover, a downgrade in AIG’s credit ratings may, under credit rating agency policies
concerning the relationship between parent and subsidiary ratings, result in a downgrade of the Insurer Financial
Strength ratings of AIG’s insurance subsidiaries.
FRBNY Credit Facility
The FRBNY Credit Agreement requires AIG to devote significant resources to debt repayment for the foreseeable future,
thereby significantly reducing capital available for other purposes. AIG is required to repay the five-year FRBNY
Credit Facility primarily using the proceeds from sales of assets, including businesses. Unless otherwise agreed by the
FRBNY, the amount available under the FRBNY Credit Facility is generally permanently reduced by the amount of
the net cash proceeds from asset dispositions.
AIG’s significant obligations require it to dedicate all of its net cash proceeds from asset dispositions and a
considerable portion of its cash flows from operations to the repayment of the FRBNY Credit Facility, thereby
AIG 2009 Form 10-K 20