AIG 2012 Annual Report Download - page 51

.....................................................................................................................................................................................
expense and conduct extensive analyses of our reserves during the year. Our loss reserves, however, may develop
adversely. Estimation of ultimate net losses, loss expenses and loss reserves is a complex process, particularly for
long-tail casualty lines of business. These include, but are not limited to, general liability, commercial automobile
liability, environmental, workers’ compensation, excess casualty and crisis management coverages, insurance and
risk management programs for large corporate customers and other customized structured insurance products, as
well as excess and umbrella liability, D&O and products liability.
While we use a number of analytical reserve development techniques to project future loss development, reserves
may 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 due to difficulties in
predicting changes, such as changes in inflation, the judicial environment, or other social or economic factors
affecting claims. Any deviation in loss cost trends or in loss development factors might not be identified for an
extended period of time after we record the initial loss reserve estimates for any accident year or number of years.
For a further discussion of our loss reserves, see Item 7. MD&A – Results of Operations – Segment Results – AIG
Property Casualty Operations – Liability for Unpaid Claims and Claims Adjustment Expense and Critical Accounting
Estimates – Liability for Unpaid Claims and Claims Adjustment Expense (AIG Property Casualty and Mortgage
Guaranty).
Reinsurance may not be available or affordable and may not be adequate to protect us against losses. Our
subsidiaries are major purchasers of reinsurance and we use reinsurance as part of our overall risk management
strategy. While reinsurance does not discharge our subsidiaries from their obligation to pay claims for losses insured
under our policies, it does make the reinsurer liable to them for the reinsured portion of the risk. For this reason,
reinsurance is an important risk management tool to manage transaction and insurance line risk retention and to
mitigate losses from catastrophes. Market conditions beyond our control determine the availability and cost of
reinsurance. For example, reinsurance may be more difficult or costly to obtain after a year with a large number of
major catastrophes. As a result, we may, at certain times, be forced to incur additional expenses for reinsurance or
may be unable to obtain sufficient reinsurance on acceptable terms. In that case, we would have to accept an
increase in exposure risk, reduce the amount of business written by our subsidiaries or seek alternatives.
Additionally, we are exposed to credit risk with respect to our subsidiaries’ reinsurers to the extent the reinsurance
receivable is not secured by collateral or does not benefit from other credit enhancements. We also bear the risk that
a reinsurer may be unwilling to pay amounts we have recorded as reinsurance recoverables for any reason, including
that (i) the terms of the reinsurance contract do not reflect the intent of the parties of the contract, (ii) the terms of
the contract cannot be legally enforced, (iii) the terms of the contract are interpreted by a court differently than
intended, (iv) the reinsurance transaction performs differently than we anticipated due to a flawed design of the
reinsurance structure, terms or conditions, or (v) a change in laws and regulations, or in the interpretation of the laws
and regulations, materially impacts a reinsurance transaction. The insolvency of one or more of our reinsurers, or
inability or unwillingness to make timely payments under the terms of our agreements, could have a material adverse
effect on our results of operations and liquidity. For additional information on our reinsurance, see Item 7. MD&A –
Enterprise Risk Management – Insurance Operations Risks – AIG Property Casualty Key Insurance Risks –
Reinsurance Recoverables.
LIQUIDITY, CAPITAL AND CREDIT
..............................................................................................................................................................................................
Our internal sources of liquidity may be insufficient to meet our needs. We need liquidity to pay our operating
expenses, interest on our debt, maturing debt obligations and to meet any statutory capital requirements of our
subsidiaries. If our liquidity is insufficient to meet our needs, we may at the time need to have recourse to third-party
financing, external capital markets or other sources of liquidity, which may not be available or could be prohibitively
expensive. The availability and cost of any additional financing at any given time depends on a variety of factors,
including general market conditions, the volume of trading activities, the overall availability of credit, regulatory
actions and our credit ratings and credit capacity. It is also possible that, as a result of such recourse to external
financing, customers, lenders or investors could develop a negative perception of our long- or short-term financial
prospects. Disruptions, volatility and uncertainty in the financial markets, and downgrades in our credit ratings, may
limit our ability to access external capital markets at times and on terms favorable to us to meet our capital and
liquidity needs or prevent our accessing the external capital markets or other financing sources. For a further
discussion of our liquidity, see Item 7. MD&A – Liquidity and Capital Resources.
..................................................................................................................................................................................................................................
AIG 2012 Form 10-K34
ITEM 1A / RISK FACTORS