AIG 2011 Annual Report Download - page 202

curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs, some of which may
be unobservable. The following paragraphs describe the methods AIG uses to measure on a recurring basis the
fair value of the certain classes of assets and liabilities classified in Level 3. See Note 6 to the Consolidated
Financial Statements for discussion of the valuation methodologies for other assets classified in Level 3, including
certain fixed maturity securities and certain other invested assets, as well as discussion of transfers of Level 3
assets and liabilities.
Maiden Lane II and Maiden Lane III
At their inception, AIG’s interests in ML II and ML III were valued and recorded at the transaction prices of
$1 billion and $5 billion, respectively. See Note 6 to the Consolidated Financial Statements for a discussion of the
valuation methodologies applied to ML II and ML III since inception and sensitivity analysis disclosures with
respect to the Maiden Lane Interests.
AIGFP Super Senior Credit Default Swap Portfolio
AIGFP wrote credit protection on the super senior risk layer of collateralized loan obligations (CLOs), multi-
sector CDOs and diversified portfolios of corporate debt, and prime residential mortgages. In these transactions,
AIGFP is at risk of credit performance on the super senior risk layer related to such assets. To a lesser extent,
AIGFP also wrote protection on tranches below the super senior risk layer, primarily in respect of regulatory
capital relief transactions.
The following table presents the net notional amount, fair value of derivative (asset) liability and unrealized
market valuation gain (loss) of the AIGFP super senior credit default swap portfolio, including credit default
swaps written on mezzanine tranches of certain regulatory capital relief transactions, by asset class:
Fair Value of Unrealized Market
Net Notional Amount Derivative (Asset) Liability at Valuation Gain (Loss)
December 31, December 31, Years Ended December 31,
(in millions) 2011(a) 2010(a) 2011(b)(c) 2010(b)(c) 2011(c) 2010(c)
Regulatory Capital:
Corporate loans $ 1,830 $ 5,193 $- $-$-$-
Prime residential mortgages(d) 3,653 31,613 -(190) 653
Other 887 1,263 917 84
Total 6,370 38,069 9(173) 14 57
Arbitrage:
Multi-sector CDOs(e) 5,476 6,689 3,077 3,484 249 663
Corporate debt/CLOs(f) 11,784 12,269 127 171 44 (67)
Total 17,260 18,958 3,204 3,655 293 596
Mezzanine tranches(d)(g) 989 2,823 10 198 32 (55)
Total $ 24,619 $ 59,850 $ 3,223 $ 3,680 $ 339 $ 598
(a) Net notional amounts presented are net of all structural subordination below the covered tranches.
(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 $26 million and ($133) million in the years ended December 31, 2011 and 2010,
respectively, representing the effect of changes in AIG’s credit spreads on the valuation of the derivatives liabilities.
(d) During 2011, AIGFP terminated two super senior prime residential mortgage transactions, with a combined net notional amount of
$24.1 billion, that had previously been the subject of a collateral dispute. In addition, AIGFP terminated all of the related mezzanine tranches
and hedge transactions related to those mezzanine tranches, with a combined net notional amount of $2.2 billion. The transactions were
terminated at values that approximated their collective fair values at the time of termination.
(e) During 2011, AIGFP liquidated one multi-sector super senior CDS transaction with a net notional amount of $188 million. The primary
underlying collateral components, which consisted of individual ABS CDS transactions, were sold in an auction to counterparties, including
AIGFP, at their approximate fair value at the time of the liquidation. AIGFP was the winning bidder on approximately $107 million of
individual ABS CDS transactions, which are reported in written single name credit default swaps as of December 31, 2011. During 2011,
AIGFP also paid $37 million to its counterparties with respect to multi-sector CDOs. Multi-sector CDOs also include $4.6 billion and
$5.5 billion in net notional amount of credit default swaps written with cash settlement provisions at December 31, 2011 and December 31,
2010, respectively.
188 AIG 2011 Form 10-K