AIG 2010 Annual Report Download - page 45

American International Group, Inc., and Subsidiaries
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. For
example, in the fourth quarter of 2010, we recorded a net charge of $4.2 billion to strengthen Chartis loss
reserves, reflecting adverse development in classes of business with long reporting tails, primarily asbestos (which
includes policies written more than 25 years ago), excess casualty, excess workers’ compensation and primary
workers’ compensation. 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 our loss reserves, see Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Results of Operations — Segment Results — Chartis
Operations — Liability for unpaid claims and claims adjustment expense and Critical Accounting Estimates —
Liability for unpaid claims and claims adjustment expense (Chartis).
Competition
We face intense competition in each of our businesses. Our businesses operate in highly competitive
environments, both domestically and overseas. Principal sources of competition are insurance companies, banks,
investment banks and other non-bank financial institutions. We consider our principal competitors to be other
large multi-national insurance organizations.
The insurance industry in particular is highly competitive. Within the U.S., Chartis subsidiaries compete with
approximately 3,300 other stock companies, specialty insurance organizations, mutual companies and other
underwriting organizations. SunAmerica subsidiaries compete in the U.S. with approximately 1,800 life insurance
companies and other participants in related financial services fields. Overseas, our subsidiaries compete for
business with the foreign insurance operations of large U.S. insurers and with global insurance groups and local
companies.
As a result of the reduction of our credit ratings and those of our subsidiaries and the lingering effects of AIG’s
recent negative publicity, we have faced and continue to face intense competition to retain existing customers and
to maintain business with existing customers and counterparties at historical levels. General insurance and life
insurance companies compete through a combination of risk acceptance criteria, product pricing, and terms and
conditions. Retirement services companies compete through crediting rates and the issuance of guaranteed
benefits. A decline in our position as to any one or more of these factors could adversely affect our profitability.
Guarantees Within Variable Annuities
Guarantees Within Certain of Our Products May Decrease Our Earnings and Increase the Volatility of Our Results.
Certain variable annuity products that we offer guarantee a certain level of benefits to the policyholder. These
guarantee features include guaranteed minimum death benefits (GMDB), guaranteed minimum income benefits
(GMIB), guaranteed minimum withdrawal benefits (GMWB) and guaranteed minimum account value benefits
(GMAV). At December 31, 2010, our net liabilities associated with these guaranteed benefits, representing the
aggregate amount of the benefits in excess of the related account values, were $613 million. We use reinsurance in
combination with derivative instruments to mitigate the exposure associated with these liabilities, and while we
believe that these and other actions have mitigated the risks related to these guaranteed benefits, our exposure is
not fully hedged, and we remain liable in the event that reinsurers or counterparties are unable or unwilling to
pay. In addition, downturns in equity markets, increased equity volatility or reduced interest rates could result in
an increase in the valuation of the future policy benefits or policyholder account balances, increasing the liabilities
associated with the guaranteed benefits and resulting in a reduction in our net income.
AIG 2010 Form 10-K 29