AIG 2013 Annual Report Download - page 56

generally amortized in proportion to premium revenue and varies with lapse experience. Actual lapses in excess of
expectations can result in an acceleration of DAC amortization.
DAC for investment-oriented products is generally amortized in proportion to estimated gross profits. Estimated gross
profits are affected by a number of assumptions, including current and expected interest rates, net investment
income and spreads, net realized gains and losses, fees, surrender rates, mortality experience and equity market
returns and volatility. If actual and/or future estimated gross profits are less than originally expected, then the
amortization of DAC would be accelerated in the period the actual experience is known and would result in a charge
to income. For example, if interest rates rise rapidly and significantly, customers with policies that have interest
crediting rates below the current market may seek competing products with higher returns and we may experience
an increase in surrenders and withdrawals of life and annuity contracts, resulting in a decrease in future profitability
and an acceleration of the amortization of DAC.
We also periodically review products for potential loss recognition events, principally insurance-oriented products.
This review involves estimating the future profitability of in-force business and requires significant management
judgment about assumptions including mortality, morbidity, persistency, maintenance expenses, and investment
returns, including net realized capital gains (losses). If actual experience or estimates result in projected future
losses, we may be required to amortize any remaining DAC and record additional liabilities through a charge to
policyholder benefit expense, which could negatively affect our results of operations. For example, realized gains on
investment sales in 2012 and 2013 have reduced future investment margins and required the recognition of
additional liabilities for certain payout annuities. For further discussion of DAC and future policy benefits, see Item 7.
MD&A — Critical Accounting Estimates and Notes 9 and 12 to the Consolidated Financial Statements.
Certain of our products offer guarantees that may increase the volatility of our results. We offer variable
annuity products that guarantee a certain level of benefits, such as guaranteed minimum death benefits (GMDB),
guaranteed minimum income benefits (GMIB), guaranteed minimum withdrawal benefits (GMWB) and guaranteed
minimum account value benefits (GMAV). For GMDB, our most widely offered guaranteed benefit feature, the
liabilities included in Future policyholder benefits at December 31, 2013 were $355 million. Our economic hedging
program utilizes derivative instruments, including equity options, futures contracts and interest rate swap contracts,
and is designed so that changes in value of the derivative instruments move in the opposite direction of changes in
the GMWB and GMAV embedded derivative liabilities. Differences between the change in fair value of GMWB and
GMAV embedded derivative liabilities and the hedging instruments can be caused by extreme and unanticipated
movements in the equity markets, interest rates and market volatility, policyholder behavior and our inability to
purchase hedging instruments at prices consistent with the desired risk and return trade-off. While we believe that
our actions have reduced the risks related to guaranteed benefits, our exposure is not fully hedged, and we remain
liable if counterparties are unable or unwilling to pay. In addition, we remain exposed to the risk that policyholder
behavior and mortality may differ from our assumptions. Finally, downturns in equity markets, increased equity
volatility or reduced interest rates could result in an increase in the liabilities associated with the guaranteed benefits,
reducing our net income and shareholders’ equity. See Note 13 to the Consolidated Financial Statements and Item 7.
MD&A — Critical Accounting Estimates for more information regarding these products.
Indemnity claims could be made against us in connection with divested businesses. We have provided
financial guarantees and indemnities in connection with the businesses we have sold, including ALICO, as described
in greater detail in Note 15 to the Consolidated Financial Statements. While we do not currently believe the claims
under these indemnities will be material, it is possible that significant indemnity claims could be made against us. If
such a claim or claims were successful, it could have a material adverse effect on our results of operations, cash
flows and liquidity. See Note 15 to the Consolidated Financial Statements for more information on these financial
guarantees and indemnities.
Our foreign operations expose us to risks that may affect our operations. We provide insurance, investment
and other financial products and services to both businesses and individuals in more than 130 countries. A
substantial portion of our AIG Property Casualty business is conducted outside the United States, and we intend to
continue to grow this business. Operations outside the United States, particularly in developing nations, may be
affected by regional economic downturns, changes in foreign currency exchange rates, political upheaval,
nationalization and other restrictive government actions, which could also affect our other operations.
The degree of regulation and supervision in foreign jurisdictions varies. AIG subsidiaries operating in foreign
jurisdictions must satisfy local regulatory requirements and it is possible that local licenses may require AIG Parent to
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AIG 2013 Form 10-K38
ITEM 1A / RISK FACTORS
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