AIG 2010 Annual Report Download - page 44

American International Group, Inc., and Subsidiaries
to rise, which would adversely affect the value of the fixed income securities that we hold and could adversely
affect our ability to sell these securities. In addition, the evaluation of available-for-sale securities for
other-than-temporary impairments is a quantitative and qualitative process that is subject to significant
management judgment.
Concentration of our investment portfolios in any particular segment of the economy may have adverse effects. Our
results of operations have been adversely affected and may continue to be adversely affected by a concentration in
residential mortgage-backed, commercial mortgage-backed and other asset-backed securities and commercial
mortgage loans. We also have significant exposures to: financial institutions and, in particular, to money center
and global banks; U.S. state and local government issuers and authorities (as described below); and Eurozone
governments and corporations. These types of concentrations in our investment portfolios could have an adverse
effect on the value of these portfolios and consequently on our consolidated results of operations and financial
condition. Events or developments that have a negative effect on any particular industry, asset class, group of
related industries or geographic region may have a greater adverse effect on the investment portfolios to the
extent that the portfolios are concentrated. Furthermore, our ability to sell assets relating to such particular groups
of related assets may be limited if other market participants are seeking to sell at the same time.
The value of our investment portfolio is exposed to the creditworthiness of state and municipal governments. We
hold a large portfolio of state and municipal bonds ($46.6 billion at December 31, 2010), primarily in Chartis, and,
because of the budget deficits that most states and many municipalities are continuing to incur in the current
economic environment, the risks associated with this portfolio have increased. Negative publicity surrounding
certain states and municipal issues has negatively affected the value of our portfolio and reduced the liquidity in
the state and municipal bond market. Defaults, or the prospect of imminent defaults, by the issuers of state and
municipal bonds could cause our portfolio to decline in value and significantly reduce the portfolio’s liquidity,
which could also adversely affect AIG Parent’s liquidity if AIG Parent then needed, or was required by its capital
maintenance agreements, to provide additional capital support to the insurance subsidiaries holding the affected
state and municipal bonds. As with our fixed income security portfolio generally, rising interest rates would also
negatively affect the value of our portfolio of state and municipal bonds and could make those instruments more
difficult to sell. A decline in the liquidity or market value of these instruments, which are carried at fair value for
statutory purposes, could also result in a decline in the Chartis entities’ capital ratios and, in turn, require AIG
Parent to provide additional capital to those entities.
Concentration of our insurance and other risk exposures may have adverse effects. We seek to manage the risks to
which we are exposed as a result of the insurance policies, derivatives and other obligations that we undertake to
customers and counterparties by monitoring the diversification of our exposures by exposure type, industry,
geographic region, counterparty and otherwise and by using reinsurance, hedging and other arrangements to limit
or offset exposures that exceed the limits we wish to retain. In certain circumstances, or with respect to certain
exposures, such risk management arrangements may not be available on acceptable terms or may prove to be
ineffective, or our exposure in absolute terms may be so large that even slightly adverse experience compared to
our expectations may have a material adverse effect on our consolidated financial condition or results of
operations or result in additional statutory capital requirements.
Casualty Insurance Underwriting and Reserves
Casualty insurance liabilities are difficult to predict and may exceed the related reserves for losses and loss expenses.
Although we regularly review the adequacy of the established Liability for unpaid claims and claims adjustment
expense and conduct an extensive analysis of our reserves at each year end, there can be no assurance that our
loss reserves will not develop adversely and have a material adverse effect on our results of operations. 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.
28 AIG 2010 Form 10-K