AIG 2008 Annual Report Download - page 192

$16.0 billion at December 31, 2008 and $17.1 billion at December 31, 2007. Where applicable, these amounts have
been determined in accordance with the respective master netting agreements.
AIGFP evaluates the counterparty credit quality by reference to ratings from rating agencies or, where such
ratings are not available, by internal analysis consistent with the risk rating policies of the CRC. In addition,
AIGFP’s credit approval process involves pre-set counterparty and country credit exposure limits subject to
approval by the CRC and, for particularly credit-intensive transactions, requires approval from the CRC. AIG
estimates that the average credit rating of Capital Markets derivatives counterparties, measured by reference to the
fair value of its derivative portfolio as a whole, is equivalent to the AA rating category.
The fair value of Capital Markets derivatives portfolios by counterparty credit rating was as follows:
2008 2007
At December 31,
(In millions)
Rating:
AAA ..................................................... $ 3,278 $ 5,069
AA....................................................... 4,963 5,166
A........................................................ 5,815 4,796
BBB...................................................... 1,694 1,801
Below investment grade........................................ 251 302
Total ....................................................... $16,001 $17,134
See Critical Accounting Estimates and Note 10 for additional discussion related to derivative transactions.
Capital Markets Trading VaR
AIGFP attempts to minimize risk in benchmark interest rates, equities, commodities and foreign exchange.
Market exposures in option-implied volatilities, correlations and basis risks are also minimized over time.
AIGFP’s minimal reliance on market risk-driven revenue is reflected in its VaR. AIGFP’s VaR calculation is
based on the interest rate, equity, commodity and foreign exchange risk arising from its portfolio. Credit-related
factors, such as credit spreads or credit default, are not included in AIGFP’s VaR calculation. Because the market
risk with respect to securities available for sale, at market, is substantially hedged, segregation of the financial
instruments into trading and other than trading was not considered necessary. AIGFP operates under established
market risk limits based upon this VaR calculation. In addition, AIGFP back-tests its VaR.
In the calculation of VaR for AIGFP, AIG uses the historical simulation methodology based on estimated
changes to the value of all transactions under explicit changes in market rates and prices within a specific historical
time period. AIGFP attempts to secure reliable and independent current market prices, such as published exchange
prices, external subscription services, such as Bloomberg or Reuters, or third-party or broker quotes. When such
prices are not available, AIGFP uses an internal methodology that includes extrapolation from observable and
verifiable prices nearest to the dates of the transactions. Historically, actual results have not deviated from these
models in any material respect.
AIGFP reports its VaR level using a 95 percent confidence level and a one-day holding period, facilitating risk
comparison with AIGFP’s trading peers and reflecting the fact that market risks can be actively assumed and offset
in AIGFP’s trading portfolio.
186 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries