AIG 2008 Annual Report Download - page 270

offset method for its foreign currency hedges. AIGFP used the periodic dollar offset method to assess whether its
hedging relationships were highly effective on a retrospective basis. The prospective and retrospective assessments
were updated on a daily basis. The passage of time component of the hedging instruments and the forward points on
foreign currency hedges were excluded from the assessment of hedge effectiveness and measurement of hedge
ineffectiveness. AIGFP did not utilize the shortcut, matched terms or equivalent methods to assess hedge
effectiveness.
The change in fair value of the derivatives that qualified under the requirements of FAS 133 as fair value
hedges was recorded in current period earnings along with the gain or loss on the hedged item for the hedged risks.
For interest rate hedges, the adjustments to the carrying value of the hedged items were amortized into income using
the effective yield method over the remaining life of the hedged item. Amounts excluded from the assessment of
hedge effectiveness were recognized in current period earnings. For the year ended December 31, 2007, AIGFP
recognized net losses of $0.7 million in earnings, representing hedge ineffectiveness, and also recognized net losses
of $456 million related to the portion of the hedging instruments excluded from the assessment of hedge
effectiveness.
Since its election of the Fair Value Option under SFAS 159 on January 1, 2008, AIGFP no longer designates
any derivatives as hedging relationships qualifying for hedge accounting under FAS 133 under this hedging
program.
For the year ended December 31, 2006. AIGFP did not designate any derivatives as hedging relationships
under FAS 133.
AIG Hedging Intermediated by AIGFP
In 2008 and 2007, AIG designated certain AIGFP derivatives as either fair value or cash flow hedges of certain
debt issued by AIG, Inc. (including MIP), ILFC and AGF. The fair value hedges included (i) interest rate swaps that
were designated as hedges of the change in the fair value of fixed rate debt attributable to changes in the benchmark
interest rate and (ii) foreign currency swaps designated as hedges of the change in fair value of foreign currency
denominated debt attributable to changes in foreign exchange rates and/or the benchmark interest rate. With respect
to the cash flow hedges, (i) 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, and (ii) foreign currency swaps were designated as
hedges of changes in cash flows on foreign currency denominated debt attributable to changes in the benchmark
interest rate and foreign exchange rates.
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, matched terms or equivalent methods to assess hedge effectiveness.
The change in fair value of derivatives designated and effective as fair value hedges along with the gain or loss
on the hedged item are recorded in current period earnings. Upon discontinuation of hedge accounting, the
cumulative adjustment to the carrying value of the hedged item resulting from changes in the benchmark interest
rate or exchange rate is amortized into income using the effective yield method over the remaining life of the hedged
item. Amounts excluded from the assessment of hedge effectiveness are recognized in current period earnings.
During the year ended December 31, 2008 and 2007, AIG recognized a loss of $61 million and $1 million,
respectively, in earnings related to the ineffective portion of the hedging instruments. During the year ended
December 31, 2008 and 2007, AIG also recognized gains of $17 million and $3 million, respectively, related to the
change in the hedging instruments forward points excluded from the assessment of hedge effectiveness.
The effective portion of the change in fair value of a derivative qualifying as a cash flow hedge is recorded in
Accumulated other comprehensive income (loss), until earnings are affected by the variability of cash flows in the
hedged item. The ineffective portion of these hedges is recorded in net realized capital gains (losses). AIG
recognized losses of $13 million and gains of $1 million in earnings representing hedge ineffectiveness in 2008 and
2007, respectively. At December 31, 2008, $115 million of the deferred net loss in Accumulated other
264 AIG 2008 Form 10-K
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)