AIG 2013 Annual Report Download - page 55

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.
A downgrade in our credit ratings could require us to post additional collateral and result in the termination
of derivative transactions. Credit ratings estimate a company’s ability to meet its obligations and may directly affect
the cost and availability of financing. A downgrade of our long-term debt ratings by the major rating agencies would
require us to post additional collateral payments related to derivative transactions to which we are a party, and could
permit the termination of these derivative transactions. This could adversely affect our business, our consolidated
results of operations in a reporting period or our liquidity. In the event of further downgrades of two notches to our
long-term senior debt ratings, AIG would be required to post additional collateral of $111 million, and certain of our
counterparties would be permitted to elect early termination of contracts.
AIG Parent’s ability to access funds from our subsidiaries is limited. As a holding company, AIG Parent
depends on dividends, distributions and other payments from its subsidiaries to fund dividends on AIG Common
Stock and to make payments due on its obligations, including its outstanding debt. The majority of our investments
are held by our regulated subsidiaries. Our subsidiaries may be limited in their ability to make dividend payments or
advance funds to AIG Parent in the future because of the need to support their own capital levels or because of
regulatory limits. The inability of our subsidiaries to make payments, dividends or distributions in an amount sufficient
to enable AIG Parent to meet its cash requirements could have an adverse effect on our operations, our ability to
pay dividends or our ability to meet our debt service obligations.
AIG Parent’s ability to support our subsidiaries is limited. AIG Parent has in the past and expects to continue to
provide capital to our subsidiaries as necessary to maintain regulatory capital ratios, comply with rating agency
requirements and meet unexpected cash flow obligations. If AIG Parent is unable to satisfy a capital need of a
subsidiary, the subsidiary could become insolvent or, in certain cases, could be seized by its regulator.
Our subsidiaries may not be able to generate cash to meet their needs due to the illiquidity of some of their
investments. Our subsidiaries have investments in certain securities that may be illiquid, including certain fixed
income securities and certain structured securities, private company securities, private equity funds and hedge funds,
mortgage loans, finance receivables and real estate. Collectively, investments in these assets had a fair value of
$49 billion at December 31, 2013. Adverse real estate and capital markets, and tighter credit spreads, have in the
past, and may in the future, materially adversely affect the liquidity of our other securities portfolios, including our
residential and commercial mortgage-related securities portfolios. In the event additional liquidity is required by one or
more of our subsidiaries and AIG Parent is unable to provide it, it may be difficult for these subsidiaries to generate
additional liquidity by selling, pledging or otherwise monetizing these less liquid investments.
A downgrade in the Insurer Financial Strength ratings of our insurance companies could prevent them from
writing new business and retaining customers and business. Insurer Financial Strength (IFS) ratings are an
important factor in establishing the competitive position of insurance companies. IFS ratings measure an insurance
company’s ability to meet its obligations to contract holders and policyholders. High ratings help maintain public
confidence in a company’s products, facilitate marketing of products and enhance its competitive position.
Downgrades of the IFS ratings of our insurance companies could prevent these companies from selling, or make it
more difficult for them to succeed in selling, products and services, or result in increased policy cancellations,
termination of assumed reinsurance contracts, or return of premiums. Under credit rating agency policies concerning
the relationship between parent and subsidiary ratings, a downgrade in AIG Parent’s credit ratings could result in a
downgrade of the IFS ratings of our insurance subsidiaries.
Interest rate fluctuations, increased surrenders, declining investment returns and other events may require
our subsidiaries to accelerate the amortization of DAC and record additional liabilities for future policy
benefits. We incur significant costs in connection with acquiring new and renewal insurance business. DAC
represents deferred costs that are incremental and directly related to the successful acquisition of new business or
renewal of existing business. The recovery of DAC is generally dependent upon the future profitability of the related
business, but DAC amortization varies based on the type of contract. For long-duration traditional business, DAC is
BUSINESS AND OPERATIONS
..................................................................................................................................................................................................................................
AIG 2013 Form 10-K 37
ITEM 1A / RISK FACTORS
..................................................................................................................................................................................
............................................................................................................................................................................................