AIG 2011 Annual Report Download - page 310

American International Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AIG invests in hybrid securities (such as credit-linked notes). Upon the issuance of credit-linked notes, the cash
received by the issuer is generally used to invest in highly rated securities in addition to entering into a derivative
contract that exchanges the return on its highly-rated securities for the return on a separate portfolio of assets.
The investments owned by the issuer serve as collateral for the derivative instrument written by the issuer. The
return on the separate portfolio received by the issuer is used to pay the return owed on the credit-linked notes.
These hybrid securities expose AIG to risks similar to the risks in RMBS, CMBS, CDOs and ABS, but such risk is
derived from the separate portfolio rather than from direct mortgage or loan investments owned by the issuer. As
with other investments in RMBS, CMBS, CDOs and other ABS, AIG invested in these hybrid securities with the
intent of generating income, and not specifically to acquire exposure to embedded derivative risk. Similar to AIG’s
other investments in RMBS, CMBS, CDOs and ABS, AIG’s investments in these hybrid securities are exposed to
losses only up to the amount of AIG’s initial investment in the hybrid security, as losses on the derivative contract
will be paid via the collateral held by the entity that issues the hybrid security. Losses on the embedded derivative
contracts may be triggered by events such as bankruptcy, failure to pay or restructuring associated with the
obligations referenced by the derivative, and these losses in turn result in the reduction of the principal amount to
be repaid to AIG and other investors in the hybrid securities. Other than AIG’s initial investment in the hybrid
securities, AIG has no further obligation to make payments on the embedded credit derivatives in the related
hybrid securities.
Effective July 1, 2010, AIG elected to account for its investments in these hybrid securities with embedded
written credit derivatives at fair value, with changes in fair value recognized in Net investment income and Other
income. Through June 30, 2010, these hybrid securities had been accounted for as available for sale securities, and
had been subject to other-than-temporary impairment accounting as applicable.
AIG’s investments in these hybrid securities are reported as Bond trading securities in the Consolidated Balance
Sheet. The fair value of these hybrid securities was $111 million at December 31, 2011. These securities have a
current par amount of $454 million and have remaining stated maturity dates that extend to 2052.
296 AIG 2011 Form 10-K
HYBRID SECURITIES WITH EMBEDDED CREDIT DERIVATIVES