AIG 2014 Annual Report Download - page 53

ITEM 1A / RISK FACTORS
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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 2013 and 2012 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 13 to the Consolidated Financial
Statements.
Certain of our products have guarantees that may increase the volatility of our results.We have annuity and life
insurance products that guarantee a certain level of benefits, including guaranteed minimum death benefits (GMDB),
guaranteed minimum income benefits (GMIB), guaranteed minimum withdrawal benefits (GMWB), guaranteed minimum
account value benefits (GMAV), and products with guaranteed interest crediting rates tied to an index. For GMDB, our most
widely offered guaranteed benefit feature, the liabilities included in Future policyholder benefits were $401 million and $355
million at December 31, 2014 and 2013, respectively. Our economic hedging program utilizes derivative instruments, including
equity options, futures contracts and interest rate swap contracts, as well as other hedging instruments, and is designed so
that changes in value of those instruments move in the opposite direction of changes in the GMWB and GMAV embedded
derivative liabilities. The fair value of GMWB and GMAV embedded derivatives included in Policyholder contract deposits was
a net liability of $957 million at December 31, 2014 and a net asset of $37 million at December 31, 2013. Differences between
the change in fair value of GMWB and GMAV embedded derivatives 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 and guaranteed interest crediting, our exposure may not be fully
hedged, and we may be liable if counterparties are unable or unwilling to pay. We remain exposed to the risk that policyholder
behavior and mortality may differ from our assumptions. Finally, while we believe the impact of downturns in equity markets,
increased equity volatility or reduced interest rates is offset by our economic hedging program, the occurrence of one or more
of these events could result in an increase in the liabilities associated with the guaranteed benefits, reducing our net income
and shareholders’ equity. See Notes 5 and 14 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, as described in greater detail in Note 16 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 16 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 100 countries and jurisdictions. A substantial
portion of our business is conducted outside the United States, and we intend to continue to grow this business. Operations
outside the United States 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 meet certain conditions.
Licenses issued by foreign authorities to our subsidiaries are subject to modification and revocation. Consequently, our
insurance subsidiaries could be prevented from conducting future business in some of the jurisdictions where they currently
operate. Adverse actions from any single country could adversely affect our results of operations, depending on the magnitude
of the event and our financial exposure at that time in that country.