AIG 2009 Annual Report Download - page 144

American International Group, Inc., and Subsidiaries
disclosure purposes because of the confidentiality restrictions and the inconsistency of the information, it does provide
a sufficient basis for AIGFP to evaluate the risks of the portfolio and to determine a reasonable estimate of fair value.
For regulatory capital CDS transactions written on underlying pools of corporate loans, AIGFP receives monthly or
quarterly updates from one or more Report Providers for each such referenced pool detailing, with respect to the
corporate loans comprising such pool, the principal amount outstanding and defaults. In virtually all of these reports,
AIGFP also receives information on recoveries and realized losses. AIGFP also receives quarterly stratification tables
for each pool incorporating geography, industry and, when not publicly rated, the counterparty’s assessment of the
credit quality of the underlying corporate loans. Additionally, for a significant majority of these regulatory capital
CDS transactions, upon the occurrence of a credit event with respect to any corporate loan included in any such pool,
AIG receives a notice detailing the identity or identification number of the borrower, notional amount of such loan
and the effective date of such credit event.
Ratings from independent ratings agencies for the underlying assets of the corporate loan portfolio are not
universally available, but AIGFP estimates the ratings for the assets not rated by independent agencies by mapping
the information obtained from the Report Providers to rating agency criteria. The ‘‘Percent Non-Investment Grade’’
information in the table above is provided as an indication of the nature of loans underlying the transactions, not
necessarily as an indicator of relative risk of the CDS transactions, which is determined by the individual transaction
structures. For example, Small and Medium Enterprise (SME) loan balances tend to be rated lower than loans to
large, well-established enterprises. However, the greater number of loans and the smaller average size of the SME
loans mitigate the risk profile of the pools. In addition, the transaction structures reflect AIGFP’s assessment of the
loan collateral arrangements, expected recovery values, and reserve accounts in determining the level of subordination
required to minimize the risk of loss. The percentage of non-investment grade obligations in the underlying pools of
corporate loans varies considerably. The three pools containing the highest percentages of non-investment grade
obligations, which include all transactions with pools having non-investment grade percentages greater than
40.00 percent, are all granular SME loan pools which benefit from collateral arrangements made by the originating
financial institutions and from work out of recoveries by the originating financial institutions. The average number of
loans in each pool is over 6,500. This large number of SME loans increases the predictability of the expected loss and
lessens the probability that discrete events will have a meaningful impact on the results of the overall pool. These
transactions benefit from a tranche junior to it which was still rated AAA by at least two rating agencies at
December 31, 2009. Three other pools, with a total net notional amount of $3.1 billion, have non-investment grade
percentages greater than 35.00 percent, each with a remaining life to maturity of 16.2 years. These pools have realized
losses of 0.16 percent from inception through December 31, 2009 and have current weighted average attachment
points of 28.26 percent. Approximately 0.41 percent of the assets underlying the corporate loan transactions are in
default. The percentage of assets in default by transaction was available for all transactions and ranged from
0.00 percent to 2.67 percent.
For regulatory capital CDS transactions written on underlying pools of residential mortgages, AIGFP receives
quarterly reports for each such referenced pool detailing, with respect to the residential mortgages comprising such
pool, the aggregate principal amount outstanding, defaults and realized losses. These reports include additional
information on delinquencies for the large majority of the transactions and recoveries for substantially all transactions.
AIGFP also receives quarterly stratification tables for each pool incorporating geography for the underlying
residential mortgages. The stratification tables also include information on remaining term, property use and interest
rates for a large majority of the transactions.
Delinquency information for the mortgages underlying the residential mortgage transactions was available on
approximately 76 percent of the total gross transaction notional amount and mortgages delinquent more than 30 days
ranged from 0.06 percent to 3.40 percent, averaging 1.35 percent. For all but three transactions, which comprised less
than 1.00 percent of the total gross transaction notional amount, the average default rate (expressed as a percentage
of gross transaction notional amount) was 0.31 percent and ranged from 0.00 percent to 2.41 percent. The default rate
on the remaining three transactions ranged from 4.42 percent to 15.67 percent. The subordination on these three
transactions ranged from 33.11 percent to 44.25 percent.
AIG 2009 Form 10-K 136