AIG 2011 Annual Report Download - page 304

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AIG designated certain derivatives entered into by AIG Markets with third parties as cash flow hedges of
certain debt issued by ILFC and designated certain derivatives entered into by AIG’s insurance subsidiaries with
third parties as fair value hedges of available-for-sale investment securities held by such subsidiaries. The fair
value hedges include foreign currency forwards designated as hedges of the change in fair value of foreign
currency denominated available-for-sale securities attributable to changes in foreign exchange rates. With respect
to the cash flow hedges, interest rate swaps were designated as hedges of the changes in cash flows on floating
rate debt attributable to changes in the benchmark interest rate.
AIG assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging
transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Regression
analysis is employed to assess the effectiveness of these hedges both on a prospective and retrospective basis. AIG
does not utilize the shortcut method to assess hedge effectiveness. For net investment hedges, a qualitative
methodology is utilized to assess hedge effectiveness.
AIG uses foreign currency denominated debt as hedging instruments in net investment hedge relationships to
mitigate the foreign exchange risk associated with AIG’s non-U.S. dollar functional currency foreign subsidiaries.
AIG assesses the hedge effectiveness and measures the amount of ineffectiveness for these hedge relationships
based on changes in spot exchange rates. AIG records the change in the carrying amount of these investments
related to the effective portion of the hedge in the foreign currency translation adjustment within Accumulated
other comprehensive income (loss). Simultaneously, the ineffective portion, if any, is recorded in earnings. If
(i) the notional amount of the hedging debt matches the designated portion of the net investment and (ii) the
hedging debt is denominated in the same currency as the functional currency of the hedged net investment, no
ineffectiveness is recorded in earnings. For the years ended December 31, 2011 and 2010, AIG recognized gains
(losses) of $(13) million and $28 million, respectively, included in Foreign currency translation adjustment in
Accumulated other comprehensive loss related to the net investment hedge relationships.
The following table presents the effect of AIG’s derivative instruments in fair value hedging relationships in the
Consolidated Statement of Operations:
Years Ended December 31,
(in millions) 2011 2010
Interest rate contracts(a)(b):
Gain (loss) recognized in earnings on derivatives $(4)$ 196
Gain (loss) recognized in earnings on hedged items(c) 153 (25)
Gain recognized in earnings for ineffective portion and amount excluded from effectiveness testing -27
(a) Gains and losses recognized in earnings for the ineffective portion and amounts excluded from effectiveness testing are recorded in Net realized
capital gains (losses). Includes $27 million for 2010 related to the ineffective portion.
(b) Includes immaterial amounts related to Foreign exchange contracts.
(c) Includes $149 million for 2011 and $144 million for 2010, representing the amortization of debt basis adjustment following the discontinuation
of hedge accounting recorded in Other income and Net realized capital gains (losses).
290 AIG 2011 Form 10-K
HEDGE ACCOUNTING