AIG 2005 Annual Report Download - page 181

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
At December 31, 2005 and 2004, the counterparty breakdown
20. Derivatives
by industry with respect to the fair value of Capital Markets
Continued
derivatives portfolio was as follows:
agreements. After consideration of these credit enhancements,
the fair value of AIGFP’s interest rate, currency, commodity Fair Value
and equity swaps, options, swaptions, and forward commit- Total Total
ments, futures, and forward contracts approximated $18.70 bil- (in millions) 2005 2004
lion at December 31, 2005 and $22.67 billion at December 31, Non-U.S. banks $ 6,182 $ 7,163
2004. These amounts have been determined in accordance Insured municipalities 387 543
with the respective close-out netting provisions under the U.S. industrials 1,434 2,139
applicable ISDA Master Agreements. The fair value represents Governmental 2,158 1,387
the maximum potential loss to AIGFP. Non-U.S. financial service companies 873 1,511
AIGFP independently evaluates the creditworthiness of its Non-U.S. industrials 2,287 2,377
counterparties, taking into account credit ratings assigned by Special purpose 2,529 4,937
recognized statistical rating organizations. In addition, AIGFP’s U.S. banks 1,147 773
credit approval process involves pre-set counterparty and U.S. financial service companies 1,618 1,726
country credit exposure limits and, for particularly credit Supranationals 51 114
intensive transactions, obtaining approval from AIG’s Credit Utility 29 –
Risk Committee. AIGFP estimates that the average credit Total $18,695 $22,670
rating of Capital Markets derivatives counterparties, measured
by reference to the fair value of its derivative portfolio as a FAS 133 requires that third-party derivatives used for
whole, is equivalent to the AA rating category. The maximum hedging must be specifically matched with the underlying
potential loss will increase or decrease during the life of the exposures to an outside third party and documented contempo-
derivative commitments as a function of maturity and market raneously to qualify for hedge accounting treatment. In many
conditions. cases, AIG did not meet these hedging requirements with
respect to certain hedging transactions. Not meeting the
Capital Markets determines counterparty credit quality by requirements of FAS 133 does not result in any changes in
reference to ratings from independent rating agencies or, AIG’s liquidity or its overall financial condition even though
where such ratings are not available, by internal analysis. At inter-period volatility of earnings is increased.
December 31, 2005 and 2004, the counterparty credit quality AIG and its subsidiaries also use derivatives and other
with respect to the fair value of Capital Markets derivatives instruments as part of its financial risk management programs.
portfolios were as follows: Interest rate derivatives (such as interest rate swaps) are used
to manage interest rate risk associated with its investments in
Fair Value fixed income securities, commercial paper issuances, medium
Total Total and long-term note offerings, and other interest rate sensitive
(in millions) 2005 2004 assets and liabilities. In addition, foreign exchange derivatives
Counterparty credit quality: (principally cross currency swaps, forwards and options) are
AAA $ 4,568 $ 9,185 used to economically hedge non-U.S. dollar denominated debt,
AA 8,057 7,244 net capital exposures and foreign exchange transactions. The
A3,838 4,448 derivatives are effective economic hedges of the exposures they
BBB 1,709 1,193 are meant to offset. For accounting purposes, a limited number
Below investment grade 523 600 of these derivatives have been designated as hedging instru-
Total $18,695 $22,670 ments under FAS 133. The effect on earnings from those
derivatives that have been designated as hedges is insignificant
for 2005 and 2004.
21. Variable Life and Annuity Contracts
In July 2003, the American Institute of Certified Public
Accountants issued Statement of Position 03-1, ‘‘Accounting
and Reporting by Insurance Enterprises for Certain Nontradi-
tional Long-Duration Contracts and for Separate Accounts’’
(SOP 03-1). This Statement was effective January 1, 2004, and
requires AIG to recognize a liability for guaranteed minimum
death benefits and other living benefits related to its variable
annuity and variable life contracts and modifies certain
disclosures and financial statement presentations for these
products. AIG reported for the first quarter of 2004 a one-time
AIG m Form 10-K 129