AIG 2010 Annual Report Download - page 145

American International Group, Inc., and Subsidiaries
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
For a discussion of the unwinding of AIG’s Capital Markets’ businesses and portfolios, see Capital Resources
and Liquidity — Liquidity of Parent and Subsidiaries — Capital Markets Wind-down. The following information
pertains to AIGFP’s operations during this wind-down.
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 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 12 to the Consolidated Financial Statements.
Other Businesses
Invested assets of the Direct Investment business primarily include those supporting the MIP, certain
non-derivative assets and liabilities of Capital Markets and proprietary investments of AIG Global Real Estate.
MIP
The MIP business was originally created to generate spread income from investments yielding returns greater
than AIG’s cost of funds. The invested assets are predominantly fixed maturity securities and include U.S.
residential mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities as well
as commercial mortgage loans. Due to principal losses on the investment portfolio, the strategy of the business has
focused on generating sufficient liquidity in order to fund maturing liabilities.
Non-derivative Assets and Liabilities of Capital Markets
Management’s objective is to minimize interest rate, currency, commodity and equity risks associated with its
investment securities. Market risk associated with the investment securities is hedged on a portfolio basis
effectively converting the returns to floating U.S. dollars. 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 took
possession of or obtained a security interest in securities purchased under agreements to resell.
Historically, AIGFP used 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 were also invested in securities purchased under agreements to resell. The proceeds from the disposal of
these trading securities, securities available for sale and securities purchased under agreements to resell were used
to fund the maturing GIAs or other AIGFP financings. For a further discussion, see Capital Resources and
Liquidity — Debt herein.
AIGFP owns inventories in certain commodities in which it trades, and may reduce its 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 2010 Form 10-K 129