AIG 2011 Annual Report Download - page 206

The following table presents the amount of collateral postings with respect to the AIGFP super senior credit
default swap portfolio (prior to offsets for other transactions):
(in millions) December 31, 2011 December 31, 2010
Regulatory capital $ 9 $ 236
Arbitrage – multi-sector CDO 2,711 3,013
Arbitrage – corporate 477 537
Total $ 3,197 $ 3,786
The amount of future collateral posting requirements is a function of AIG’s credit ratings, the rating of the
reference obligations and the market value of the relevant reference obligations, with the latter being the most
significant factor. While a high level of correlation exists between the amount of collateral posted and the
valuation of these contracts in respect of the arbitrage portfolio, a similar relationship does not exist with respect
to the regulatory capital portfolio given the nature of how the amount of collateral for these transactions is
determined. AIGFP estimates the amount of potential future collateral postings associated with its super senior
credit default swaps using various methodologies. The contingent liquidity requirements associated with such
potential future collateral postings are incorporated into AIG’s liquidity planning assumptions.
Valuation Sensitivity – Arbitrage Portfolio
Multi-Sector CDOs
AIG utilizes sensitivity analyses that estimate the effects of using alternative pricing and other key inputs on
AIG’s calculation of the unrealized market valuation loss related to the AIGFP super senior credit default swap
portfolio. While AIG believes that the ranges used in these analyses are reasonable, given the current difficult
market conditions, AIG is unable to predict which of the scenarios is most likely to occur. As recent experience
demonstrates, actual results in any period are likely to vary, perhaps materially, from the modeled scenarios, and
there can be no assurance that the unrealized market valuation loss related to the AIGFP super senior credit
default swap portfolio will be consistent with any of the sensitivity analyses. On average, prices for CDOs
decreased during 2011. Further, it is difficult to extrapolate future experience based on current market conditions.
For the purposes of estimating sensitivities for the super senior multi-sector CDO credit default swap portfolio,
the change in valuation derived using the BET model is used to estimate the change in the fair value of the
derivative liability. Out of the total $5.5 billion net notional amount of CDS written on multi-sector CDOs
outstanding at December 31, 2011, a BET value is available for $3.6 billion net notional amount. No BET value is
determined for $1.9 billion of CDS written on European multi-sector CDOs as prices on the underlying securities
held by the CDOs are not provided by collateral managers; instead these CDS are valued using counterparty
prices. Therefore, sensitivities disclosed below apply only to the net notional amount of $3.6 billion.
The most significant assumption used in the BET model is the estimated price of the securities within the CDO
collateral pools. If the actual price of the securities within the collateral pools differs from the price used in
estimating the fair value of the super senior credit default swap portfolio, there is potential for material variation
in the fair value estimate. Any further declines in the value of the underlying collateral securities held by a CDO
will similarly affect the value of the super senior CDO securities. While the models attempt to predict changes in
the prices of underlying collateral securities held within a CDO, the changes are subject to actual market
conditions which have proved to be highly volatile, especially given current market conditions. AIG cannot predict
reasonably likely changes in the prices of the underlying collateral securities held within a CDO at this time.
192 AIG 2011 Form 10-K