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ITEM 8 / NOTE 12. DERIVATIVES AND HEDGE ACCOUNTING.....................................................................................................................................................................................The following table presents the net notional amount, fair value of derivative liability and unrealized marketvaluation gain of the super senior credit default swap portfolio, including credit default swaps written onmezzanine tranches of certain regulatory capital relief transactions, by asset class:Fair Value ofUnrealized MarketValuation GainNet Notional Amount (a) Derivative Liability at (b)(c) (c)December 31, December 31, December 31, December 31,Years Ended December 31,(in millions) 2012 2011 2012 2011 2012 2011Regulatory Capital:Corporate loans $ – $ 1,830 $ – $ – $ – $ –Prime residential mortgages 97 3,653 – – –6Other – 887 – 9 98Total 97 6,370 – 9 914Arbitrage:Multi-sector CDOs (d) 3,944 5,476 1,910 3,077 538 249Corporate debt/CLOs (e) 11,832 11,784 60 127 6744Total 15,776 17,260 1,970 3,204 605 293Mezzanine tranches – 989 – 10 332Total $ 15,873 $ 24,619 $ 1,970 $ 3,223 $ 617 $ 339(a) Net notional amounts presented are net of all structural subordination below the covered tranches. The decrease in the total net notionalamount from December 31, 2011 to December 31, 2012 was due primarily to terminations of $5.4 billion and amortization of $3.2 billion.(b) Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.(c) Includes credit valuation adjustment gains (losses) of $(39) million and $26 million for the years ended December 31, 2012 and 2011,respectively, representing the effect of changes in our credit spreads on the valuation of the derivatives liabilities.(d) During 2012, a super senior CDS transaction with a net notional amount of $470 million was terminated at approximately its fair value at thetime of termination. As a result, a $416 million loss, which was previously included in the fair value derivative liability as an unrealized marketvaluation loss, was realized. During 2012, $213 million was paid to counterparties with respect to multi-sector CDOs. Upon payment, a $213 millionloss, which was previously included in the fair value of the derivative liability as an unrealized market valuation loss, was realized. Multi-sector CDOsalso include $3.4 billion and $4.6 billion in net notional amount of credit default swaps written with cash settlement provisions at December 31, 2012and December 31, 2011, respectively. Collateral postings with regards to multi-sector CDOs were $1.6 billion and $2.7 billion at December 31, 2012and December 31, 2011, respectively.(e) Corporate debt/CLOs include $1.2 billion in net notional amount of credit default swaps written on the super senior tranches of CLOs at bothDecember 31, 2012 and December 31, 2011. Collateral postings with regards to corporate debt/CLOs were $420 million and $477 million atDecember 31, 2012 and December 31, 2011, respectively.The expected weighted average maturity of the super senior credit derivative portfolios as of December 31, 2012 wasless than one year for the regulatory capital prime residential mortgage portfolio, 6 years for the multi-sector CDOarbitrage portfolio and 3 years for the corporate debt/CLO portfolio.Given the current performance of the underlying portfolios, the level of subordination of the credit protection writtenand the assessment of the credit quality of the underlying portfolio, as well as the risk mitigants inherent in thetransaction structures, we do not expect that we will be required to make payments pursuant to the contractual termsof those transactions providing regulatory relief.Because of long-term maturities of the CDS in the arbitrage portfolio, we are unable to make reasonable estimates ofthe periods during which any payments would be made. However, the net notional amount represents the maximumexposure to loss on the super senior credit default swap portfolio.Written Single Name Credit Default Swaps..............................................................................................................................................................................................We have also entered into credit default swap contracts referencing single-name exposures written on corporate,index and asset-backed credits with the intention of earning spread income on credit exposure. Some of thesetransactions were entered into as part of a long-short strategy to earn the net spread between CDS written andpurchased. At December 31, 2012, the net notional amount of these written CDS contracts was $410 million,including ABS CDS transactions purchased from a liquidated multi-sector super senior CDS transaction. Theseexposures have been partially hedged by purchasing offsetting CDS contracts of $51 million in net notional amount.The net unhedged position of $359 million represents the maximum exposure to loss on these CDS contracts. Theaverage maturity of the written CDS contracts is 4 years. At December 31, 2012, the fair value of derivative liability(which represents the carrying value) of the portfolio of CDS was $48 million...................................................................................................................................................................................................................................AIG 2012 Form 10-K 281
ITEM 8 / NOTE 12. DERIVATIVES AND HEDGE ACCOUNTING.....................................................................................................................................................................................Upon a triggering event (e.g., a default) with respect to the underlying credit, we would have the option to eithersettle the position through an auction process (cash settlement) or pay the notional amount of the contract to thecounterparty in exchange for a bond issued by the underlying credit obligor (physical settlement).These CDS contracts were written under ISDA Master Agreements. The majority of these ISDA Master Agreementsinclude credit support annexes (CSAs) that provide for collateral postings at various ratings and threshold levels. AtDecember 31, 2012, collateral posted by us under these contracts was $64 million prior to offsets for othertransactions.All Other Derivatives..............................................................................................................................................................................................Our businesses, other than GCM, also use derivatives and other instruments as part of their financial riskmanagement. Interest rate derivatives (such as interest rate swaps) are used to manage interest rate risk associatedwith embedded derivatives contained in insurance contract liabilities, fixed maturity securities, outstanding mediumandlong-term notes as well as other interest rate sensitive assets and liabilities. Foreign exchange derivatives(principally foreign exchange forwards and options) are used to economically mitigate risk associated with non-U.S.dollar denominated debt, net capital exposures, and foreign currency transactions. Equity derivatives are used tomitigate financial risk embedded in certain insurance liabilities. The derivatives are effective economic hedges of theexposures that they are meant to offset.In addition to hedging activities, we also enter into derivative instruments with respect to investment operations,which include, among other things, credit default swaps and purchasing investments with embedded derivatives, suchas equity-linked notes and convertible bonds.Credit Risk-Related Contingent Features..............................................................................................................................................................................................The aggregate fair value of our derivative instruments that contain credit risk-related contingent features that were ina net liability position at December 31, 2012, was approximately $3.9 billion. The aggregate fair value of assetsposted as collateral under these contracts at December 31, 2012, was 4.3 billion.We estimate that at December 31, 2012, based on our outstanding financial derivative transactions a one-notchdowngrade of our long-term senior debt ratings to BBB+ by Standard & Poor’s Financial Services LLC, a subsidiaryof The McGraw-Hill Companies, Inc. (S&P), would permit counterparties to make additional collateral calls and permitcertain counterparties to elect early termination of contracts, resulting in a negligible amount of correspondingcollateral postings and termination payments; a one-notch downgrade to Baa2 by Moody’s Investors’ Service, Inc.(Moody’s) and an additional one-notch downgrade to BBB by S&P would result in approximately $102 million inadditional collateral postings and termination payments and a further one-notch downgrade to Baa3 by Moody’s andBBB- by S&P would result in approximately $112 million in additional collateral postings and termination payments.Additional collateral postings upon downgrade are estimated based on the factors in the individual collateral postingprovisions of the CSA with each counterparty and current exposure as of December 31, 2012. Factors considered inestimating the termination payments upon downgrade include current market conditions, the complexity of thederivative transactions, historical termination experience and other observable market events such as bankruptcy anddowngrade events that have occurred at other companies. Our estimates are also based on the assumption thatcounterparties will terminate based on their net exposure to us. The actual termination payments could significantlydiffer from our estimates given market conditions at the time of downgrade and the level of uncertainty in estimatingboth the number of counterparties who may elect to exercise their right to terminate and the payment that may betriggered in connection with any such exercise.Hybrid Securities with Embedded Credit Derivatives..............................................................................................................................................................................................We invest in hybrid securities (such as credit-linked notes) with the intent of generating income, and not specificallyto acquire exposure to embedded derivative risk. As is the case with our other investments in RMBS, CMBS, CDOsand ABS, our investments in these hybrid securities are exposed to losses only up to the amount of our initialinvestment in the hybrid security. Other than our initial investment in the hybrid securities, we have no furtherobligation to make payments on the embedded credit derivatives in the related hybrid securities.We elect to account for our investments in these hybrid securities with embedded written credit derivatives at fairvalue, with changes in fair value recognized in Net investment income and Other income. Our investments in thesehybrid securities are reported as Bond trading securities in the Consolidated Balance Sheet. The fair value of thesehybrid securities was $6.7 billion at December 31, 2012. These securities have a current par amount of $15.0 billionand have remaining stated maturity dates that extend to 2052...................................................................................................................................................................................................................................282 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 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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ITEM 7 / INVESTMENTS...............
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ITEM 7 / ENTERPRISE RISK MANAGEMENT
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ITEM 7 / CRITICAL ACCOUNTING ESTIMA
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ITEM 7 / GLOSSARY..................
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ITEM 7 / GLOSSARY..................
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ITEM 7A / QUANTITATIVE AND QUALITAT
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ITEM 8 / INDEX TO FINANCIAL STATEME
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AMERICAN INTERNATIONAL GROUP, INC.C
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ITEM 8 / NOTE 1. BASIS OF PRESENTAT
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ITEM 8 / NOTE 2. SUMMARY OF SIGNIFI
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ITEM 8 / NOTE 3. SEGMENT INFORMATIO
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ITEM 8 / NOTE 4. DIVESTED BUSINESSE
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ITEM 8 / NOTE 24. INCOME TAXES.....
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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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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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