AIG 2010 Annual Report Download - page 43

American International Group, Inc., and Subsidiaries
market conditions, the complexity of the derivative transaction, historical termination experience and other
observable market events such as bankruptcy and downgrade events that have occurred at other companies.
Management’s estimates are also based on the assumption that counterparties will terminate based on their net
exposure to AIG. The actual termination payments could significantly differ from management’s estimates given
market conditions at the time of the 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.
For a further discussion of our liquidity, see Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Capital Resources and Liquidity — Liquidity.
Market Conditions
Our businesses, consolidated results of operations and financial condition have been and may continue to be
materially and adversely affected by market conditions. Our businesses are highly dependent on the business
environment in which they operate. In 2008 and through early 2009, the significant deterioration in worldwide
economic conditions materially and adversely affected our businesses. The global financial crisis resulted in a
serious lack of liquidity, highly volatile markets, a steep depreciation in asset values across all classes, an erosion
of investor and public confidence, a widening of credit spreads, a lack of price transparency in many markets and
the collapse or merger of several prominent financial institutions. Difficult economic conditions also resulted in
increased unemployment and a severe decline in business activity across a wide range of industries and regions.
While the markets and the business environment have generally stabilized and improved in mid- and late 2009 and
in 2010, asset values for many asset classes have not returned to previous levels, and business, financial and
economic conditions, particularly unemployment levels, continue to be negatively affected. Revenue and budget
constraints affecting U.S. municipalities, lending activities and the housing and commercial property markets also
continue to have a negative effect on asset values. There can be no assurance that the conditions supporting the
recent recovery will continue in the near or long term. If they do not, we may be negatively affected in a number
of ways, including, but not limited to:
• declines in the valuation and performance of our investment portfolio;
• declines in the value of our remaining shares in AIA and the MetLife securities received in the disposition
of ALICO;
• unrealized market valuation losses on our super senior credit default swap portfolio;
• increased credit losses;
• impairments of goodwill and other long-lived assets;
• additional statutory capital requirements
• limitations on our ability to recover deferred tax assets;
• a decline in new business levels;
• increased liability associated with interest rate guarantees in life annuity products;
• an increase in policy surrenders and cancellations; and
• a writeoff of deferred policy acquisition costs (DAC).
Investment Portfolio and Concentration of Investments, Insurance and Other Exposures
The value of our investment portfolio is subject to a number of risks and uncertainties, including changes in interest
rates. Changes in interest rates can negatively affect the performance of our investment securities. Interest rates
are highly sensitive to many factors, including monetary policies, domestic and international economic and political
issues and other factors beyond our control. Changes in monetary policy or other factors may cause interest rates
AIG 2010 Form 10-K 27