AIG 2012 Annual Report Download - page 137

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Liquidity and Capital Resources
Overview
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Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as
cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We manage
our liquidity prudently through various risk committees, policies and procedures, and a stress testing and liquidity
framework established by ERM. See Enterprise Risk Management – Risk Governance Structure for additional
information. The liquidity framework is designed to measure both the amount and composition of our liquidity to meet
financial obligations in both normal and stressed markets. See Enterprise Risk Management – Risk Appetite,
Identification, and Measurement and Liquidity Risk Management for additional information.
Capital refers to the long-term financial resources available to support the operation of our businesses, fund business
growth, and cover financial and operational needs that arise from adverse circumstances. Our primary source of
ongoing capital generation is the profitability of our insurance subsidiaries. We and our insurance subsidiaries must
comply with numerous constraints on our minimum capital positions. These constraints drive the requirements for
capital adequacy for both the consolidated company and the individual businesses and are based on internally-
defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual
capital levels are monitored on a regular basis and using ERM’s stress testing methodology, we evaluate the capital
impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of
both the consolidated company and our insurance subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our
obligations to policyholders, customers, creditors and debt-holders, including reasonably foreseeable contingencies or
events.
Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or capital
resources. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory
surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may
result in significant additional cash or capital needs, loss of some sources of liquidity or capital, or both. In addition,
regulatory, and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.
Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various
liability and capital management actions. Liability management actions may include, but are not limited to
repurchasing or redeeming outstanding debt, issuing new debt or engaging in debt exchange offers. Capital
management actions may include, but are not limited to, paying dividends to our shareholders, share purchases and
acquisitions.
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AIG 2012 Form 10-K120
ITEM 7 / LIQUIDITY AND CAPITAL RESOURCES