AIG 2009 Annual Report Download - page 36

American International Group, Inc., and Subsidiaries
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 Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Critical Accounting Estimates and Notes 1 and 9 to the Consolidated
Financial Statements.
Catastrophe Exposures
The occurrence of catastrophic events could adversely affect AIG’s consolidated financial condition or results of
operations. The occurrence of events such as hurricanes, earthquakes, pandemic disease, acts of terrorism and other
catastrophes could adversely affect AIG’s consolidated financial condition or results of operations, including by
exposing AIG’s businesses to the following:
• widespread claim costs associated with property, workers’ compensation, mortality and morbidity claims;
• loss resulting from the value of invested assets declining to below the amount required to meet policy and
contract liabilities; and
• loss resulting from actual policy experience emerging adversely in comparison to the assumptions made in the
product pricing related to mortality, morbidity, termination and expenses.
Reinsurance
Reinsurance may not be available or affordable. AIG subsidiaries are major purchasers of reinsurance and utilize
reinsurance as part of AIG’s overall risk management strategy. Reinsurance is an important risk management tool to
manage transaction and insurance line risk retention and to mitigate losses that may arise from catastrophes. Market
conditions beyond AIG’s control determine the availability and cost of the reinsurance purchased by AIG subsidiaries.
For example, reinsurance may be more difficult to obtain after a year with a large number of major catastrophes.
Accordingly, AIG may be forced to incur additional expenses for reinsurance or may be unable to obtain sufficient
reinsurance on acceptable terms, in which case AIG would have to accept an increase in exposure risk, reduce the
amount of business written by its subsidiaries or seek alternatives.
Reinsurance subjects AIG to the credit risk of its reinsurers and may not be adequate to protect AIG against losses.
Although reinsurance makes the reinsurer liable to the AIG subsidiary to the extent the risk is ceded, it does not
relieve the AIG subsidiary of the primary liability to its policyholders. Accordingly, AIG bears credit risk with respect
to its subsidiaries’ reinsurers to the extent not mitigated by collateral or other credit enhancements. A reinsurer’s
insolvency or inability or refusal to make timely payments under the terms of its agreements with the AIG subsidiaries
could have a material adverse effect on AIG’s results of operations and liquidity. For additional information on AIG’s
reinsurance, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk
Management — Insurance Risk Management — Reinsurance.
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 parent and its subsidiaries;
• restricting or prohibiting other payments to AIG parent and its subsidiaries;
AIG 2009 Form 10-K 28