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ITEM 7 / CRITICAL ACCOUNTING ESTIMATES.....................................................................................................................................................................................The following sensitivity analysis table summarizes the effect on the loss reserve position of using certainalternative loss cost trend (for accident years where we use expected loss ratio methods) or lossdevelopment factor assumptions rather than the assumptions actually used in determining our estimates inthe year-end loss reserve analyses in 2012.December 31, 2012Effect on LossEffect on Loss(in millions) Reserves ReservesLoss cost trends:Loss development factors:Excess casualty:Excess casualty:5 percent increase $ 1,500 4.6 percent increase $ 1,1005 percent decrease (1,100) 3.3 percent decrease (700)D&O:D&O:26.5 percent increase 1,000 11 percent increase 65025.5 percent decrease (700) 6.8 percent decrease (400)Excess workers’ compensation:Excess workers’ compensation:5 percent increase 400 Increase (b) 1,3005 percent decrease (250) Decrease (b) (850)Primary workers’ compensation (a) :Primary workers’ compensation:6.9 percent increase 2,2003.1 percent decrease (1,000)(a) Loss cost trend assumption does not have a material impact for this line of business.(b)Percentages not applicable due to extremely long-tailed nature of workers’ compensation.Future Policy Benefits for Life and Accident and Health Insurance Contracts (AIG Life andRetirement)..............................................................................................................................................................................................Periodically, we evaluate estimates used in establishing liabilities for future policy benefits for life andaccident and health insurance contracts, which include liabilities for certain payout annuities. We also evaluateestimates used in amortizing Deferred Policy Acquisition Costs (DAC), Value of Business Acquired (VOBA) andSales Inducement Assets (SIA) for these products. We evaluate these estimates against actual experience andadjust them based on management judgment regarding mortality, morbidity, persistency, maintenance expenses, andinvestment returns.For long duration traditional business, a ‘‘lock-in’’ principle applies. The assumptions used to calculate thebenefit liabilities and DAC are set when a policy is issued and do not change with changes in actual experience,unless a loss recognition event occurs. These assumptions include margins for adverse deviation in the event thatactual experience might deviate from these assumptions.As we experience changes over time, we update the assumptions to reflect theseobserved changes. Because of the long term nature of many of our liabilities subjectto the ‘‘lock-in’’ principle, small changes in certain assumptions may cause largechanges in the degree of reserve adequacy. In particular, changes in estimates offuture invested asset returns have a large effect on the degree of reserve deficiency.If observed changes in actual experience or estimates result in projected futurelosses under loss recognition testing, we adjust DAC through amortization expense,and may record additional liabilities through a charge to policyholder benefit expense.Loss recognition testing is performed at an aggregate AIG Life and Retirementreporting segment level. Once loss recognition has been recorded for a block ofbusiness, the old assumption set is replaced (i.e., a DAC unlocking), and theassumption set used for the loss recognition would then be subject to the lock-inprinciple. See Note 10 to the Consolidated Financial Statements for additionalinformation.The key assumptions used inestimating future policy benefitreserves are:• Investment returns: whichvary by year of issuance andproducts.• Mortality, morbidity andsurrender rates: based uponactual experience modified toallow for variation in policyform, risk classification anddistribution channel.• Premium rate increases(Long-term care)..................................................................................................................................................................................................................................AIG 2012 Form 10-K 189
ITEM 7 / CRITICAL ACCOUNTING ESTIMATES.....................................................................................................................................................................................We also use these estimates to determine whether to adjust DAC and record additional liabilities when unrealizedgains or losses on fixed maturity and equity securities available for sale are recognized through accumulated othercomprehensive income. The determination is made at each balance sheet date, as if the securities had been sold attheir stated aggregate fair value and the proceeds reinvested at current yields. Significant unrealized appreciation oninvestments in a prolonged low interest rate environment may cause DAC to be adjusted and additional future policybenefit liabilities to be recorded through a charge directly to accumulated other comprehensive income (ie. ShadowDAC). This is included, net of tax, with the change in net unrealized appreciation (depreciation) of investments.Our future policy benefits include guaranteed minimum death benefits (GMDB). We determine the GMDBliability each period end by estimating the expected value of death benefits in excess of the projected accountbalance and recognizing the excess ratably over the accumulation period based on total expected fees. Theestimates include assumptions about interest rates, mortality rates, lapse rates and a randomly generated model ofinvestment returns. In addition to GMDB, our future policy benefits include, to a lesser extent, guaranteed minimumincome benefits (GMIB). We determine GMIB liability each period end by estimating the expected value of theperiodic income payments from annuities in excess of the projected account balance. We derive this estimate at thedate the annuity converts to regular payments, and we recognize the excess ratably over the accumulation periodbased on total expected assessments. We periodically evaluate estimates used and adjust the additional liabilitybalance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests thatearlier assumptions should be revised.We also issue certain variable annuity products that offer optional guaranteed minimum withdrawal benefits(GMWB) and guaranteed minimum account value benefits (GMAV). These living benefits are embeddedderivatives that are required to be bifurcated from the host contract and carried at fair value. The fair value estimatesof the living benefit guarantees include assumptions such as equity market returns, interest rates, market volatilityand policyholder behavior. We also incorporate our own risk of non-performance in the valuation of the embeddedpolicy derivatives. See Note 6 to the Consolidated Financial Statements for information on how AIG incorporates itsown non-performance risk.We have a dynamic hedging program designed to manage economic risk exposure associated with changes in thefair value of GMWB and GMAV liabilities caused by changes in the equity markets, interest rates and market impliedvolatilities. The program utilizes hedging instruments, including derivatives such as equity options, futures contractsand interest rate swap contracts, and is designed so that changes in value of the hedging instruments move in theopposite direction of changes in the GMWB and GMAV embedded derivative liabilities. We monitor the hedgingpositions on a daily basis in relation to the change in valuation of GMWB and GMAV embedded derivative liabilities,and rebalance those positions as needed. Differences between the change in fair value of GMWB and GMAVembedded derivative liabilities and the hedging instruments can be caused by extreme and unanticipated movementsin the equity markets, interest rates and market volatility, policyholder behavior, statutory capital considerations andconstraints and the ability to purchase hedging instruments at prices consistent with the desired risk and returntrade-off. None of the derivative instruments described above are designated for hedge accounting.Approximately 56 percent of our individual variable annuity account values contain either a GMWB rider or a GMAVrider as of December 31, 2012. Declines in the equity markets, increased volatility and a sustained low interest rateenvironment increase our exposure to potential benefits under the GMWB and GMAV contracts, leading to anincrease in the existing liability for those benefits. Our exposure to the guaranteed amounts is equal to the amountby which the contract holder’s account balance is below the guaranteed withdrawal or account value amount. As ofDecember 31, 2012, our exposure to the guaranteed withdrawal and account value amount under GMWB and GMAVwas $0.9 billion and $10 million, respectively.The only way the GMWB contract holder can monetize the excess of the guaranteed amount over the account valueof the contract is through a series of withdrawals that do not exceed a specific percentage per year of theguaranteed amount. If, after the series of withdrawals, the account value is exhausted, the contract holder willreceive a series of annuity payments equal to the remaining guaranteed amount, and, for lifetime GWWB products,the annuity payments can continue beyond the guaranteed amount. The account value can also fluctuate with equitymarket returns on a daily basis resulting in increases or decreases in the excess of the guaranteed amount overaccount value.The net impact of the change in the fair value of the embedded derivative liabilities, as well as the change in the fairvalue of the derivative instruments is included in Net Realized Capital Gains (Losses)...................................................................................................................................................................................................................................190 AIG 2012 Form 10-K
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American International Group, Inc.2
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KEY FACTS & FIGURES52,000+ $65.7 bi
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■We said we would return to profi
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Financial HighlightsYears Ended Dec
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~63,000AIG EMPLOYEES AROUND THE WOR
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$115.1 millionAVERAGE CLAIMS PAID E
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$10,000MAXIMUM DONATION MADE BY AIG
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American International Group, Inc.F
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AMERICAN INTERNATIONAL GROUP, INC.A
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ITEM 1 / BUSINESS / AIG............
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ITEM 1 / BUSINESS / AIG............
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ITEM 1 / BUSINESS / AIG PROPERTY CA
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ITEM 1 / BUSINESS / AIG PROPERTY CA
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ITEM 1 / BUSINESS / AIG LIFE AND RE
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ITEM 1 / BUSINESS / OTHER OPERATION
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ITEM 1 / BUSINESS / OTHER OPERATION
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1 / BUSINESS..................
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ITEM 1A / RISK FACTORS.............
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ITEM 1B / UNRESOLVED STAFF COMMENTS
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ITEM 5 / MARKET FOR REGISTRANT’S
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ITEM 6 / SELECTED FINANCIAL DATA...
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ITEM 6 / SELECTED FINANCIAL DATA...
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ITEM 7 / MANAGEMENT’S DISCUSSION
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ITEM 7 / USE OF NON-GAAP MEASURES..
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ITEM 7 / EXECUTIVE SUMMARY.........
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ITEM 7 / RESULTS OF OPERATIONS.....
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ITEM 7 / LIQUIDITY AND CAPITAL RESO
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Page 155 and 156: ITEM 7 / INVESTMENTS...............
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Page 213 and 214: ITEM 7 / GLOSSARY..................
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Page 217 and 218: ITEM 7A / QUANTITATIVE AND QUALITAT
Page 219 and 220: ITEM 8 / INDEX TO FINANCIAL STATEME
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Page 227 and 228: ITEM 8 / NOTE 1. BASIS OF PRESENTAT
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ITEM 8 / NOTE 6. FAIR VALUE MEASURE
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ITEM 8 / NOTE 7. INVESTMENTS.......
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ITEM 8 / NOTE 8. LENDING ACTIVITIES
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ITEM 8 / NOTE 9. REINSURANCE.......
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ITEM 8 / NOTE 10. DEFERRED POLICY A
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ITEM 8 / NOTE 10. DEFERRED POLICY A
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ITEM 8 / NOTE 11. VARIABLE INTEREST
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ITEM 8 / NOTE 11. VARIABLE INTEREST
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ITEM 8 / NOTE 12. DERIVATIVES AND H
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ITEM 8 / NOTE 13. LIABILITY FOR UNP
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ITEM 8 / NOTE 14. VARIABLE LIFE AND
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ITEM 8 / NOTE 15. DEBT OUTSTANDING.
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ITEM 8 / NOTE 15. DEBT OUTSTANDING.
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ITEM 8 / NOTE 16. CONTINGENCIES, CO
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ITEM 8 / NOTE 17. TOTAL EQUITY.....
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ITEM 8 / NOTE 18. NONCONTROLLING IN
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ITEM 8 / NOTE 19. EARNINGS (LOSS) P
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ITEM 8 / NOTE 20. STATUTORY FINANCI
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ITEM 8 / NOTE 21. SHARE-BASED COMPE
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ITEM 8 / NOTE 21. SHARE-BASED COMPE
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ITEM 8 / NOTE 22. EMPLOYEE BENEFITS
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ITEM 8 / NOTE 24. INCOME TAXES.....
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ITEM 8 / NOTE 26. QUARTERLY FINANCI
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ITEM 8 / NOTE 27. INFORMATION PROVI
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PART II............................
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PART IV............................
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SignatureTitle/s/ ARTHUR C. MARTINE
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ExhibitNumber Description Location(
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Condensed Financial Information of
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Condensed Financial Information of
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Notes to Condensed Financial Inform
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Supplementary Insurance Information
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Valuation and Qualifying AccountsFo
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Subsidiaries of RegistrantExhibit 2
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Percentageof VotingSecuritiesJurisd
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Percentageof VotingSecuritiesJurisd
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CONSENT OF INDEPENDENT REGISTERED P
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CERTIFICATIONSI, Robert H. Benmosch
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CERTIFICATIONExhibit 32In connectio
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SECURITIES REGISTERED PURSUANT TO S
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American International Group, Inc.1
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