AIG 2008 Annual Report Download - page 271

comprehensive income is expected to be recognized in earnings during the next 12 months. All components of the
derivatives’ gains and losses were included in the assessment of hedge effectiveness. There were no instances of the
discontinuation of hedge accounting in 2008 and 2007.
AIGFP Written Super Senior and Single Name Credit Default Swaps
AIGFP entered into credit derivative transactions in the ordinary course of its business, with the intention of
earning revenue on credit exposure in an unfunded form. In the majority of AIGFP’s credit derivative transactions,
AIGFP sold credit protection on a designated portfolio of loans or debt securities. Generally, AIGFP provides such
credit protection on a “second loss” basis, meaning that AIGFP would incur credit losses only after a shortfall of
principal and/or interest, or other credit events, in respect of the protected loans and debt securities, exceeds a
specified threshold amount or level of “first losses.”
Typically, the credit risk associated with a designated portfolio of loans or debt securities has been tranched
into different layers of risk, which are then analyzed and rated by the credit rating agencies. At origination, there is
usually an equity layer covering the first credit losses in respect of the portfolio up to a specified percentage of the
total portfolio, and then successive layers ranging generally from a BBB-rated layer to one or more AAA-rated
layers. A significant majority of AIGFP transactions were rated by rating agencies have risk layers or tranches rated
AAA at origination and are immediately junior to the threshold level above which AIGFP’s payment obligation
would generally arise. In transactions that were not rated, AIGFP applied equivalent risk criteria for setting the
threshold level for its payment obligations. Therefore, the risk layer assumed by AIGFP with respect to the
designated portfolio of loans or debt securities in these transactions is often called the “super senior” risk layer,
defined as a layer of credit risk senior to one or more risk layers rated AAA by the credit rating agencies, or if the
transaction is not rated, structured to the equivalent thereto. The expected weighted average maturity of AIGFP’s
super senior credit derivative portfolios as of December 31, 2008 was 0.7 years for the Regulatory Capital Corporate
portfolio, 1.2 years for the Regulatory Capital Residential Mortgage portfolio, 7.8 years for the Regulatory Capital
Other portfolio, 3.7 years for the Corporate Arbitrage portfolio and 6.0 years for the Multi-Sector CDO portfolio.
The net notional amount, fair value of derivative liability and unrealized market valuation loss of the
AIGFP super senior credit default swap portfolio, including credit default swaps written on mezzanine
tranches of certain regulatory capital relief transactions, by asset class were as follows:
2008(b) 2007(b) 2008(c) 2007(c) 2008(d) 2007(d)
Net Notional Amount
December 31,
Fair Value
Of Derivative
Liability at
December 31,
Unrealized Market
Valuation Loss
Year Ended
December 31(a),
(In millions)
Regulatory Capital:
Corporate loans.................. $125,628 $229,313 $— $—$—$—
Prime residential mortgages ........ 107,246 149,430 ————
Other(e) ....................... 1,575 —379 —379 —
Total ......................... 234,449 378,743 379 —379 —
Arbitrage:
Multi-sector CDOs(f) ............. 12,556 78,205 5,906 11,246 25,700 11,246
Corporate debt/CLO(g) ............ 50,495 70,425 2,554 226 2,328 226
Total ......................... 63,051 148,630 8,460 11,472 28,028 11,472
Mezzanine tranches(h) .............. 4,701 5,770 195 —195 —
Total ........................... $302,201 $533,143 $9,034 $11,472 $28,602 $11,472
(a) There were no unrealized market valuation losses in 2006.
AIG 2008 Form 10-K 265
American International Group, Inc., and Subsidiaries
Notes to Consolidated Financial Statements — (Continued)