AIG 2014 Annual Report Download - page 51

ITEM 1A / RISK FACTORS

34
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 to optimize the
allocation of our reinsurance between traditional reinsurance markets and the capital markets, such as through the utilization
of catastrophe bonds, to manage risks more efficiently. 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 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 in line with our risk limits. 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 recoverable 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 or arbitration panel 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 contracts, could have a material
adverse effect on our results of operations and liquidity. Additionally, the use of catastrophe bonds may not provide the same
levels of protection as traditional reinsurance transactions and any disruption, volatility and uncertainty in the catastrophe bond
market, such as following a major catastrophe event, may limit our ability to access such market on terms favorable to us or at
all. Also, to the extent that we intend to utilize catastrophe bond transactions based on an industry loss index rather than on
actual losses incurred by us, this would result in residual risk. Our inability to obtain adequate reinsurance or other protection
could have a material adverse effect on our business, results of operations and financial condition.
We currently have limited reinsurance coverage for terrorist attacks. Further, the availability of private sector reinsurance for
terrorism is limited. As a result, we rely heavily on the Terrorism Risk Insurance Act (TRIA), which provides U.S. government
risk assistance to the insurance industry to manage the exposure to terrorism incidents in the United States. TRIA was
reauthorized in January 2015 and is scheduled to expire on December 31, 2020. Under TRIA, once our losses for certain acts
of terrorism exceed a deductible equal to 20 percent of our commercial property and casualty insurance premiums for covered
lines for the prior calendar year, the federal government will reimburse us for losses in excess of our deductible, starting at 85
percent of losses in 2015, and reducing by one percentage point each year, ending at 80 percent in 2020, up to a total industry
program limit of $100 billion. TRIA does not cover losses in certain lines of business such as consumer property and consumer
casualty.
For additional information on our reinsurance recoverable, see Item 7. MD&A — Enterprise Risk Management — Insurance
Operations Risks — Reinsurance Recoverable.
LIQUIDITY, CAPITAL AND CREDIT
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.
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