AIG 2014 Annual Report Download - page 52

ITEM 1A / RISK FACTORS
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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 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, investments in private equity funds and hedge funds,
mortgage loans, finance receivables and real estate. Collectively, investments in these assets had a fair value of $60 billion at
December 31, 2014. 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.
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 $153 million, and certain of our counterparties would be permitted to elect early
termination of contracts.
BUSINESS AND OPERATIONS
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 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