AIG 2010 Annual Report Download - page 46

American International Group, Inc., and Subsidiaries
Adjustments to Deferred Policy Acquisition Costs for Life Insurance and Retirement Services Companies
Interest rate fluctuations, increased surrenders, investment returns and other events may require our subsidiaries to
accelerate the amortization of deferred policy acquisition costs (DAC), which could adversely affect our results of
operations. DAC represents the costs that vary with and are related primarily to the acquisition of new and
renewal insurance and annuity contracts. When interest rates rise or customers lose confidence in a company,
policy loans and policy surrenders and withdrawals of life insurance policies and annuity contracts may increase as
policyholders seek to buy products with perceived higher returns or more stability, resulting in an acceleration of
the amortization of DAC. To the extent such amortization exceeds surrender or other charges earned upon
surrender and withdrawals of certain life insurance policies and annuity contracts, our results of operations could
be negatively affected.
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 future profitability is substantially lower than estimated, we could be
required to accelerate DAC amortization, and such acceleration could adversely affect our 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 2 and 10 to the Consolidated Financial Statements.
Catastrophe Exposures
The occurrence of catastrophic events could adversely affect our 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 our consolidated financial condition or results of operations, including by
exposing our businesses to the following:
• widespread claim costs associated with property, workers’ compensation, mortality and morbidity claims;
• loss resulting from a decline in the value of invested assets 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. Our subsidiaries are major purchasers of reinsurance and utilize
reinsurance as part of our 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 our control determine the availability and cost of the reinsurance purchased by our
subsidiaries. For example, reinsurance may be more difficult or costly to obtain after a year with a large number
of major catastrophes. Accordingly, we may be forced to incur additional expenses for reinsurance or may be
unable to obtain sufficient reinsurance on acceptable terms, in which case we would have to accept an increase in
exposure risk, reduce the amount of business written by our subsidiaries or seek alternatives.
Reinsurance subjects us to the credit risk of our reinsurers and may not be adequate to protect us against losses.
Although reinsurance makes the reinsurer liable to our subsidiary to the extent the risk is ceded, it does not
relieve our subsidiary of the primary liability to its policyholders. Accordingly, we bear credit risk with respect to
our subsidiaries’ reinsurers to the extent the credit risk is 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
our subsidiaries could have a material adverse effect on our results of operations and liquidity. For additional
information on our reinsurance, see Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Risk Management — Insurance Risk Management — Reinsurance.
30 AIG 2010 Form 10-K