AIG 2010 Annual Report Download - page 42

American International Group, Inc., and Subsidiaries
Item 1A. Risk Factors
We were significantly and adversely affected by the market turmoil in late 2008 and early 2009 and, despite the
recovery in the markets in mid-2009 through 2010 and our recapitalization activities, are subject to significant
risks, as discussed below.
The risks described below are not the only ones we face. Additional risks that are not currently known to us or
that we currently believe are immaterial may also adversely affect our business, results of operations, financial
condition or liquidity. Many of these risks are interrelated and occur under similar business and economic
conditions, and the occurrence of certain of them may in turn cause the emergence, or exacerbate the effect, of
others. Such a combination could materially increase the severity of the impact on us. As a result, should certain
of these risks emerge, we may need to raise additional capital or obtain other sources of commercial funding, such
as through additional credit facilities, which may not be available.
Credit and Financial Strength Ratings
A downgrade in the Insurer Financial Strength ratings of our insurance companies could prevent the companies from
writing new business and retaining customers and business. Insurer Financial Strength (IFS) ratings are an
important factor in establishing the competitive position of insurance companies. IFS ratings measure an insurance
company’s ability to meet its obligations to contract holders and policyholders. High ratings help maintain public
confidence in a company’s products, facilitate marketing of products and enhance a company’s competitive
position.
Further downgrades of the IFS ratings of our 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 Parent’s credit ratings may, under credit rating agency policies concerning the
relationship between parent and subsidiary ratings, result in a downgrade of the IFS ratings of our insurance
subsidiaries.
A downgrade in our credit ratings could require us to post additional collateral and result in the termination of
derivative transactions. Adverse ratings actions regarding our long-term debt ratings by the major rating agencies
would require us to post additional collateral payments pursuant to, and/or permit the termination of, derivative
transactions to which AIGFP is a party, which could adversely affect our business, our consolidated results of
operations in a reporting period or our liquidity. Credit ratings estimate a company’s ability to meet its obligations
and may directly affect the cost and availability to that company of financing. In the event of a further downgrade
of our 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.
Based on our financial derivative transactions, including those of AIGFP, outstanding at December 31, 2010 (as
if the downgrade by Moody’s Investors’ Services (Moody’s) on January 12, 2011 had occurred on December 31,
2010), a one notch downgrade of our long-term senior debt rating to BBB+ by Standard & Poor’s Financial
Services LLC, a subsidiary of The McGraw-Hill Companies, Inc (S&P), would have permitted counterparties to
make additional collateral calls and permit the counterparties to elect early termination of contracts, resulting in
up to approximately $0.7 billion of corresponding collateral postings and termination payments; a one-notch
downgrade to Baa2 by Moody’s and a two-notch downgrade to BBB by S&P would have resulted in approximately
$0.4 billion in additional collateral postings and termination payments above the aforementioned $0.7 billion; and
a two-notch downgrade to Baa3 by Moody’s and a three-notch downgrade to BBB- by S&P would have resulted in
approximately $0.2 billion of additional collateral posting and termination payments above the aforementioned
$1.1 billion.
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
December 31, 2010. Factors considered in estimating the termination payments upon downgrade include current
26 AIG 2010 Form 10-K