AIG 2011 Annual Report Download - page 74

Foreclosure moratoriums as a result of state attorneys general investigations into lenders’ foreclosure practices
and new financial regulations initiated in 2010 have slowed the reporting of claims from foreclosures, which has
increased the uncertainty surrounding the determination of the liability. UGC’s assumptions regarding future
foreclosures on current delinquencies take into consideration this trend, although significant uncertainty remains
surrounding the determination of the liability for unpaid claims and claims adjustment expenses. UGC expects that
this trend may continue and may negatively affect UGC’s future financial results. Final resolution of these issues
is uncertain and UGC cannot reasonably estimate the ultimate financial impact that any resolution, individually or
collectively, may have on its future results of operations or financial condition. In addition, UGC has segmented
its reserving approach to consider slower development patterns and higher severity in certain states separately
from other states. UGC expects to continue this practice as long as significant variances persist among states.
In March 2011, federal regulators, as required by Dodd-Frank, issued a proposed risk retention rule that
included a definition of a Qualified Residential Mortgage (QRM) in respect of which issuers of asset-backed
securities would not be subject to certain risk retention requirements. The QRM definition included, among other
standards, a maximum loan-to-value ratio (LTV) of 80 percent for a home purchase transaction. The LTV is
calculated without imputing any benefit from private mortgage insurance coverage that may be purchased for that
loan. The final regulations could adversely impact UGC’s volume of domestic first-lien new insurance written,
depending on the final definition of a QRM, the maximum LTV allowed and the benefit, if any, ascribed to
private mortgage insurance.
Global Capital Markets
The active wind-down of the AIGFP derivatives portfolio was completed by the end of the second quarter of
2011. Although the remaining AIGFP derivatives portfolio may experience periodic fair value volatility, the
portfolio consists predominantly of transactions AIG believes are of low complexity, low risk, supportive of AIG’s
risk management objectives or not economically appropriate to unwind based on a cost versus benefit analysis.
Direct Investment Book
MIP assets and liabilities and certain non-derivative assets and liabilities of AIGFP (collectively the Direct
Investment book or DIB) are currently managed collectively on a single program basis to limit the need for
additional liquidity from AIG Parent. Liquidity requirements for the DIB are managed by transferring cash
between AIG Parent and AIGFP as needed.
Program management is focused on winding down this portfolio over time, and reducing and managing its
liquidity needs, including contingent liquidity arising from collateral posting, for both derivative and debt positions
of the DIB. As part of this program management, AIG may from time to time access the capital markets, subject
to market conditions. In addition, AIG may seek to buy back debt or sell assets on an opportunistic basis, subject
to market conditions.
Certain non-derivative assets and liabilities of the DIB are accounted for under the fair value option and thus
operating results are subject to periodic market volatility.
Retained Interests
Retained Interests may continue to experience volatility due to fair value gains or losses on the AIA ordinary
shares and the retained interest in ML III. At December 31, 2011, AIG owned approximately 33 percent of the
outstanding shares of AIA. A one Hong Kong dollar change in AIA’s share price would result in an approximate
$500 million change in AIG’s pre-tax income.
Corporate & Other
In 2011, AIG completed the Recapitalization, executed transactions in the debt and equity capital markets and
substantially completed its asset disposition plan. It is expected that declines in interest expense and disposition
activity costs will be at least partially offset in the short term by increases in other corporate expenses, primarily
60 AIG 2011 Form 10-K