AIG 2014 Annual Report Download - page 49

ITEM 1A / RISK FACTORS
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for our products at the time they were sold and issued. Changes in interest rates may be correlated with inflation trends, which
would impact our loss trends.
INVESTMENT PORTFOLIO, CONCENTRATION OF INVESTMENTS, INSURANCE AND OTHER
EXPOSURES
The performance and value of our investment portfolio are subject to a number of risks and uncertainties, including
changes in interest rates. Our investment securities are subject to market risks and uncertainties. In particular, interest rates
are highly sensitive to many factors, including monetary policies, domestic and international economic and political issues and
other factors beyond our control. Changes in monetary policy or other factors may cause interest rates to rise, which would
adversely affect the value of the fixed income securities that we hold and could adversely affect our ability to sell these
securities. In addition, the evaluation of available-for-sale securities for other-than-temporary impairments, which may occur if
interest rates rise, is a quantitative and qualitative process that is subject to significant management judgment. For a sensitivity
analysis of our exposure to certain market risk factors, see Item 7. MD&A – Enterprise Risk Management – Market Risk
Management. Furthermore, our alternative investment portfolio includes investments for which changes in fair value are
reported through operating income and are therefore subject to significant volatility. In an economic downturn or declining
market, the reduction in our investment income due to decreases in the fair value of alternative investments could have a
material adverse effect on operating income.
Our investment portfolio is concentrated in certain segments of the economy. Our results of operations and financial
condition have in the past been, and may in the future be, adversely affected by the degree of concentration in our investment
portfolio. We have concentrations in real estate and real estate-related securities, including residential mortgage-backed,
commercial mortgage-backed and other asset-backed securities and commercial mortgage loans. We also have significant
exposures to financial institutions and, in particular, to money center and global banks; certain industries, such as energy and
utilities; U.S. state and local government issuers and authorities; PICC Group, PICC P&C and AerCap, as a result of our
strategic investments; and Euro Zone financial institutions, governments and corporations. Events or developments that have
a negative effect on any particular industry, asset class, group of related industries or geographic region may adversely affect
our investments to the extent they are concentrated in such segments. Our ability to sell assets concentrated in such areas
may be limited.
Concentration of our insurance and other risk exposures may have adverse effects. We may be exposed to risks as a
result of concentrations in our insurance policies, derivatives and other obligations that we undertake for customers and
counterparties. We manage these concentration risks by monitoring the accumulation of our exposures by factors such as
exposure type, industry, geographic region, counterparty and other factors. We also seek to use reinsurance, hedging and
other arrangements to limit or offset exposures that exceed the limits we wish to retain. In certain circumstances, however,
these risk management arrangements may not be available on acceptable terms or may prove to be ineffective for certain
exposures. Also, our exposure may be so large that even a slightly adverse experience compared to our expectations may
have a material adverse effect on our consolidated results of operations or financial condition, or result in additional statutory
capital requirements for our subsidiaries.
Our valuation of investment securities may include methodologies, estimations and assumptions that are subject to
differing interpretations and could result in changes to investment valuations that may materially adversely affect our
results of operations, financial condition and liquidity. During periods of market disruption, it may be difficult to value
certain of our investment securities if trading becomes less frequent and/or market data becomes less observable. There may
be cases where certain assets in normally active markets with significant observable data become inactive with insufficient
observable data due to the financial environment or market conditions in effect at that time. As a result, valuations may include
inputs and assumptions that are less observable or require greater estimation and judgment as well as valuation methods that
are more complex. These values may not be realized in a market transaction, may not reflect the value of the asset and may
change very rapidly as market conditions change and valuation assumptions are modified. Decreases in value and/or an
inability to realize that value in a market transaction or secured lending transaction may have a material adverse effect on our
results of operations, financial condition and liquidity.