AIG 2015 Annual Report Download - page 37

ITEM 1A / RISK FACTORS
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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 $95 million, and certain of our counterparties would be permitted to elect early
termination of contracts. Certain rating agencies recently revised the outlook for our credit ratings, primarily as a result of our
reserve strengthening in the fourth quarter of 2015 and related concerns regarding our profitability outlook. We cannot predict
what actions rating agencies may take, or what actions we may take in response to the actions of rating agencies, which could
adversely affect our business.
BUSINESS AND OPERATIONS
Interest rate fluctuations, increased lapses and 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
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 further discussion of DAC and future policy benefits, see Item 7. MD&A — Critical Accounting
Estimates and Notes 8 and 12 to the Consolidated Financial Statements.
Our restructuring initiatives may not yield our expected reductions in expenses and improvements in operational and
organizational efficiency. We may not be able to fully realize the anticipated expense reductions and operational and
organizational efficiency improvements we expect to result from our restructuring initiatives. Actual costs to implement these
initiatives may exceed our estimates or we may be unable to fully implement these initiatives, and the implementation of these
initiatives may harm our relationships with customers or employees or our competitive position. The successful implementation
of these initiatives has required us and will continue to require us to effect workforce reductions, business rationalizations,
systems enhancements, business process outsourcing, business and asset dispositions and other actions, which depend on a
number of factors, some of which are beyond our control. If we are unable to realize these anticipated expense reductions and
efficiency improvements or if implementing these initiatives harms our relationships with customers or employees or our
competitive position, our businesses and results of operations may be adversely affected.