AIG 2009 Annual Report Download - page 282

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair values of derivative assets and liabilities on the Consolidated Balance Sheet:
At December 31, 2009
(in millions) Derivative Assets(a) Derivative Liabilities(b)
AIGFP derivatives $ 31,951 $ 30,930
Non-AIGFP derivatives 2,554 2,455
Total derivatives, gross 34,505 33,385
Counterparty netting(c) (19,054) (19,054)
Cash collateral(d) (6,317) (8,166)
Total derivatives, net $ 9,134 $ 6,165
(a) Included in non-AIGFP derivatives are $4 million of bifurcated embedded derivatives of which $3 million and $1 million, respectively, are recorded
in Bonds available for sale, at fair value, and Policyholder contract deposits.
(b) Included in non-AIGFP derivatives are $762 million of bifurcated embedded derivatives, of which $760 million and $2 million are recorded in
Policyholder contract deposits and Common and preferred stock.
(c) Represents netting of derivative exposures covered by a qualifying master netting agreement.
(d) Represents cash collateral posted and received.
Hedge Accounting
AIG designated certain derivatives entered into by AIGFP with third parties as either fair value or cash flow hedges
of certain debt issued by AIG Parent (including the Matched Investment Program (MIP)), International Lease
Finance Corporation (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 in certain cases also 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 method to assess hedge effectiveness. For net investment hedges, the matched terms method is
utilized to assess hedge effectiveness.
During the twelve months ended December 31, 2009 AIG de-designated certain derivatives to which it was applying
hedge accounting and recorded a reduction of other revenue of approximately $10 million related to the amortization
of the basis adjustment. There were no instances of the discontinuation of hedge accounting during 2008.
Beginning in 2009, AIG began using debt instruments in net investment hedge relationships to mitigate the foreign
exchange risk associated with AIG’s non-U.S. dollar functional currency foreign subsidiaries. AIG assesses the hedge
effectiveness and measures the amount of ineffectiveness for these hedge relationships based on changes in spot
exchange rates. AIG records the change in the carrying amount of these investments in the foreign currency
translation adjustment within Accumulated other comprehensive loss. Simultaneously, the effective portion of the
hedge of this exposure is also recorded in foreign currency translation adjustment and the ineffective portion, if any, is
recorded in earnings. If (1) the notional amount of the hedging debt instrument matches the designated portion of the
net investment and (2) the hedging debt instrument is denominated in the same currency as the functional currency of
the hedged net investment, no ineffectiveness is recorded in earnings. For the year ended December 31, 2009, AIG
recognized losses of $81 million included in Foreign currency translation adjustment in Accumulated other
comprehensive loss related to the net investment hedge relationships.
AIG 2009 Form 10-K 274