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ITEM 1A / RISK FACTORS.....................................................................................................................................................................................A downgrade in our credit ratings could require us to post additional collateral and result in the terminationof derivative transactions. Credit ratings estimate a company’s ability to meet its obligations and may directly affectthe cost and availability of financing. A downgrade of our long-term debt ratings by the major rating agencies wouldrequire us to post additional collateral payments related to derivative transactions to which we are a party, and couldpermit the termination of these derivative transactions. This could adversely affect our business, our consolidatedresults of operations in a reporting period or our liquidity. In the event of further downgrades of two notches to ourlong-term senior debt ratings, AIG would be required to post additional collateral of $226 million, and certain of ourcounterparties would be permitted to elect early termination of contracts.AIG Parent’s ability to access funds from our subsidiaries is limited. As a holding company, AIG Parentdepends on dividends, distributions and other payments from its subsidiaries to fund payments due on its obligations,including its outstanding debt. The majority of our investments are held by our regulated subsidiaries. Oursubsidiaries may be limited in their ability to make dividend payments or advance funds to AIG Parent in the futurebecause of the need to support their own capital levels or because of regulatory limits.AIG Parent’s ability to support our subsidiaries is limited. AIG Parent has in the past and expects to continue toprovide capital to our subsidiaries as necessary to maintain regulatory capital ratios, comply with rating agencyrequirements and meet unexpected cash flow obligations, in some cases under support or capital maintenanceagreements. AIG Parent has entered into capital maintenance agreements with certain of our insurance subsidiariesthat will require it to contribute capital if specific capital levels are breached. If AIG Parent is unable to satisfy acapital need of a subsidiary, the subsidiary could become insolvent or, in certain cases, could be seized by itsregulator.Our subsidiaries may not be able to generate cash to meet their needs due to the illiquidity of some of theirinvestments. Our subsidiaries have investments in certain securities that may be illiquid, including certain fixedincome securities and certain structured securities, private company securities, private equity funds and hedge funds,mortgage loans, finance receivables and real estate. Collectively, investments in these securities had a fair value of$49 billion at December 31, 2012. The decline in the U.S. real estate markets and tight credit markets have alsomaterially adversely affected the liquidity of our other securities portfolios, including our residential and commercialmortgage-related securities and investment portfolios. In the event additional liquidity is required by one or more ofour subsidiaries and AIG Parent is unable to provide it, it may be difficult for these subsidiaries to generate additionalliquidity 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 fromwriting new business and retaining customers and business. Insurer Financial Strength (IFS) ratings are animportant factor in establishing the competitive position of insurance companies. IFS ratings measure an insurancecompany’s ability to meet its obligations to contract holders and policyholders. High ratings help maintain publicconfidence 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 itmore 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 concerningthe relationship between parent and subsidiary ratings, a downgrade in AIG Parent’s credit ratings could result in adowngrade of the IFS ratings of our insurance subsidiaries.BUSINESS AND OPERATIONS..............................................................................................................................................................................................Interest rate fluctuations, increased surrenders, investment returns and other events may require oursubsidiaries to accelerate the amortization of DAC, and record additional liabilities for future policy benefits.DAC represents deferred costs that are incremental and directly related to the successful acquisition of new businessor renewal of existing business. The amortization of DAC associated with our Life and Retirement Services businessis affected by factors that include current and expected interest rate fluctuations, surrender rates and investmentreturns. Changes in these factors may require our subsidiaries to accelerate the amortization of DAC and recordadditional liabilities for future policy benefits. For example, when interest rates rise, customers may buy acompetitor’s insurance products with higher anticipated returns. This can lead to an increase in policy loans, policysurrenders, withdrawals of life insurance policies, and withdrawals of annuity contracts, causing an acceleration of theamortization of DAC. If DAC amortization exceeds the fees we earn upon surrender or withdrawals, our results ofoperations could be negatively affected...................................................................................................................................................................................................................................AIG 2012 Form 10-K 35