AIG 2009 Annual Report Download - page 34

American International Group, Inc., and Subsidiaries
expense and conducts an extensive analysis of its reserves at each year end, 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. For example, in
the fourth quarter of 2009, AIG’s general insurance operations recorded a $2.3 billion reserve strengthening charge.
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,
including the fourth quarter 2009 charge relating to an increase in the net loss and loss adjustment reserves, see
Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations —
Segment Results — General Insurance Operations — Liability for unpaid claims and claims adjustment expense.
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. AIG’s risk management policies, tools and processes have in the past been ineffective and could be
ineffective in the future as well. A failure of AIG’s risk management could materially 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.
Operational risks of asset dispositions. AIG is exposed to various operational risks associated with the dispositions
of subsidiaries and the resulting restructuring of AIG at the business and corporate levels. These risks include the
ability to deconsolidate systems and processes of divested operations without adversely affecting AIG, the ability of
AIG to fulfill its obligations under any transition separation agreements agreed upon with buyers, the ability of AIG
to downsize the corporation as dispositions are accomplished and the ability of AIG to continue to provide services
previously performed by divested entities.
AIGFP wind-down risks. An orderly and successful wind-down of AIGFP’s businesses and portfolios is subject to
numerous risks, including market conditions, counterparty willingness to transact or terminate transactions with
AIGFP and the retention of key personnel. An orderly and successful wind-down will also depend on the stability of
AIG’s credit ratings. Further downgrades of AIG’s credit ratings likely would have an adverse effect on the wind-down
of AIGFP’s businesses and portfolios.
Regulatory Capital Credit Default Swap Portfolio
A deterioration in the credit markets may cause AIG to recognize unrealized market valuation losses in AIGFP’s
regulatory capital super senior credit default swap portfolio in future periods which could have a material adverse effect on
AIG’s consolidated financial condition or consolidated results of operations. Moreover, depending on how the extension of
the Basel I capital floors is implemented, the period of time that AIGFP remains at risk for such deterioration could be
significantly longer than anticipated by AIGFP.
A total of $150.0 billion in net notional amount of the super senior credit default swap (CDS) portfolio of AIGFP
as of December 31, 2009, represented derivatives written for financial institutions, principally in Europe, which AIG
understands to have been originally written primarily for the purpose of providing regulatory capital relief rather than
AIG 2009 Form 10-K 26