AIG 2009 Annual Report Download - page 166

American International Group, Inc., and Subsidiaries
A number of guaranteed benefits, such as living benefits or guaranteed minimum death benefits, are offered on
certain variable life and variable annuity products. AIG manages its exposure resulting from these long-term
guarantees through reinsurance or capital market hedging instruments.
AIG invests in equities for various reasons, including diversifying its overall exposure to interest rate risk. Available
for sale bonds and equity securities are subject to declines in fair value. Such declines in fair value are presented in
unrealized appreciation or depreciation of investments, net of taxes, as a component of Accumulated other
comprehensive income. AIG recognizes the credit component of an other-than-temporary impairment of a fixed
maturity security in earnings and the non-credit component in accumulated other comprehensive income when AIG
does not intend to sell the security or it is more likely than not that AIG will not be required to sell the security prior
to recovery. See Investments — Other-Than-Temporary Impairments herein. Generally, insurance regulations restrict
the types of assets in which an insurance company may invest. When permitted by regulatory authorities and when
deemed necessary to protect insurance assets, including invested assets, from adverse movements in foreign currency
exchange rates, interest rates and equity prices, AIG and its insurance subsidiaries may enter into derivative
transactions as end users to hedge their exposures. For a further discussion of AIG’s use of derivatives, see Risk
Management — Segment Risk Management — Financial Services herein.
Financial Services
Capital Markets
For a discussion of the unwinding of AIG’s businesses and portfolios, see Capital Resources and Liquidity — AIG’s
Strategy for Stabilization and Repayment of its Obligations as They Come Due — AIGFP Wind-down. The following
information relates to AIGFP’s operations during this wind down.
AIGFP’s management objective is to minimize interest rate, currency, commodity and equity risks associated with
its investment securities. AIGFP hedges the market risk associated with the investment securities on a portfolio basis
effectively converting the returns. While not qualifying for hedge accounting treatment, these transactions achieve the
economic result of limiting interest rate volatility arising from such securities. The market risk associated with such
hedges is managed on a portfolio basis.
Securities purchased under agreements to resell are treated as collateralized financing transactions. AIGFP takes
possession of or obtains a security interest in securities purchased under agreements to resell.
AIGFP uses the proceeds from the issuance of notes and bonds and GIAs to invest in a diversified portfolio of
securities, including trading securities, securities available for sale, and derivative transactions. The funds may also be
invested in securities purchased under agreements to resell. The proceeds from the disposal of the aforementioned
trading securities, securities available for sale and securities purchased under agreements to resell are used to fund the
maturing GIAs or other AIGFP financings, or to invest in new assets. For a further discussion of AIGFP’s borrowings,
see Capital Resources and Liquidity — Debt herein.
Capital Markets derivative transactions are carried at fair value. AIGFP reduces its market risk exposure through
similarly valued offsetting transactions including swaps, trading securities, options, forwards and futures. For a further
discussion on the use of derivatives by Capital Markets, see Results of Operations — Segment Results — Financial
Services Operations — Capital Markets and Segment Risk Management — Financial Services — Derivative
Transactions herein and Note 11 to the Consolidated Financial Statements.
AIGFP owns inventories in certain commodities in which it trades, and may reduce the exposure to market risk
through the use of swaps, forwards, futures, and option contracts. Physical commodities are recorded at the lower of
cost or fair value.
Trading securities, at fair value, and securities and spot commodities sold but not yet purchased, at fair value, are
marked to fair value daily with the unrealized gain or loss recognized in income. These trading securities are
purchased and sold as necessary to meet the risk management and business objectives of Capital Markets operations.
AIG 2009 Form 10-K 158