AIG 2011 Annual Report Download - page 175

• manage the approval process for requests for credit limits, program limits and credit transactions above
delegated authorities or where concentrations of risk may exist or be incurred;
• aggregate globally all credit exposure data by counterparty, country, sector and industry and report risk
concentrations regularly to and review with senior management;
• administer regular portfolio credit reviews of investment, derivative and credit-incurring business units and
recommend corrective actions where required;
• conduct credit research on countries, sectors and asset classes where risk concentrations may exist;
• develop methodologies for quantification and assessment of credit risks, including the establishment and
maintenance of AIG’s internal risk rating process; and
• approve appropriate credit reserves, credit-related other-than-temporary impairments and corresponding
methodologies in all credit portfolios.
AIG monitors and controls its company-wide credit risk concentrations and attempts to avoid unwanted or
excessive risk accumulations, whether funded or unfunded. To minimize the level of credit risk in certain
circumstances, AIG may require third-party guarantees, reinsurance or collateral, such as letters of credit and trust
accounts. These guarantees, reinsurance recoverables, letters of credit and trust accounts are also treated as credit
exposure and are added to AIG’s risk concentration exposure data.
AIG defines its aggregate credit exposures to a counterparty as the sum of its fixed maturity securities, equity
securities, loans, finance leases, reinsurance recoverables, derivatives (mark-to-market and potential future
exposure), deposits, reverse repurchase agreements, repurchase agreements, collateral extended to counterparties,
commercial bank letters of credit received as collateral, guarantees, and the specified credit equivalent exposures
to certain insurance products which embody credit risk. Therefore, AIG’s reported credit exposures to a
counterparty reflect available for sale investments, trading securities, derivative exposures, insurance credit and any
other counterparty credit exposures.
AIG’s single largest credit exposure, the U.S. Government, was 34 percent of Total equity at December 31, 2011
compared to 22 percent at December 31, 2010. The increase reflects the effects of the Recapitalization on Total
equity as well as increased exposure to the U.S. Government, including primarily credit exposure related to the
U.S. Treasury bonds and government agencies and to the direct and guaranteed exposures to U.S. government-
sponsored entities, primarily the Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac). Based on AIG’s internal risk ratings, at December 31, 2011, AIG’s
largest below investment grade-rated credit exposure was 0.6 percent of Total equity, compared to 0.6 percent at
December 31, 2010.
AIG’s single largest industry credit exposure in 2011 was to the global financial institutions sector, which
includes banks and finance companies, securities firms, and insurance and reinsurance companies, many of which
can be highly correlated at times of market stress. As of December 31, 2011, credit exposure to this sector was
$108 billion, or 123 percent of Total equity compared to 119 percent at December 31, 2010.
At December 31, 2011:
• $103 billion or 95 percent of these financial institution credit exposures were considered investment grade
based on AIG’s internal ratings.
• $5 billion or 5 percent were considered non-investment grade. Most of the non-investment grade exposure
was to financial institutions in countries AIG does not consider of investment grade quality. Aggregate credit
exposure to the ten largest below investment grade-rated financial institutions was $2 billion.
• AIG’s aggregate credit exposure to fixed maturity securities of the financial institution sector amounted to
$40 billion.
• Short-term bank deposit placements, reverse repos, repos and commercial paper issued by financial
institutions (primarily commercial banks), operating account balances with banks and bank-issued
AIG 2011 Form 10-K 161