AIG 2010 Annual Report Download - page 174

American International Group, Inc., and Subsidiaries
SunAmerica companies generally limit their maximum underwriting exposure on life insurance of a single life to
$15 million or less of coverage, in certain circumstances by using yearly renewable term reinsurance. For
SunAmerica companies, the reinsurance programs provide risk mitigation per life for individuals and group and
for catastrophic risk events.
Financial Services
AIG’s Financial Services subsidiaries engage in diversified activities including commercial aircraft leasing and
the remaining Capital Markets businesses and portfolios. Together, the Aircraft Leasing and Capital Markets
operations generate the majority of the revenues produced by the Financial Services operations.
Capital Markets
AIGFP has continued to unwind its portfolios, including those associated with credit protection written through
credit default swaps on super senior risk tranches of diversified pools of loans and debt securities. As a
consequence of its wind-down strategy, AIGFP is entering into new derivative transactions only to hedge its
current portfolio, reduce risk and hedge the currency, interest rate and other market risks associated with its
affiliated businesses. See Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity of Parent and Subsidiaries — Financial Services — Capital Markets Wind-down. Prior to
the wind-down, AIGFP engaged as principal in a wide variety of financial transactions, including standard and
customized financial products involving commodities, credit, currencies, energy, equities and interest rates.
Historically, AIGFP derived a significant portion of its revenues from hedged financial positions entered into in
connection with counterparty transactions. Prior to the wind-down, AIGFP also participated as a dealer in a wide
variety of financial derivatives transactions.
The senior management of AIG defines the policies and establishes general operating parameters for Capital
Markets operations. AIG’s senior management has established various oversight committees to monitor on an
ongoing basis the various financial market, operational and credit risk attendant to the Capital Markets
operations. The senior management of AIGFP reports the results of its operations to and reviews future strategies
with AIG’s senior management.
AIGFP actively manages its exposures to limit potential economic losses, and in doing so, AIGFP must
continually manage a variety of exposures including credit, market, liquidity, operational and legal risks.
Derivative Transactions
A counterparty may default on any obligation to AIG, including a derivative contract. Credit risk is a
consequence of extending credit and/or carrying trading and investment positions. Credit risk exists for a derivative
contract when that contract has a positive fair value to AIG. The maximum potential exposure will increase or
decrease during the life of the derivative commitments as a function of maturity and market conditions. To help
manage this risk, AIGFP’s credit department operates within the guidelines set by the CRC. Transactions which
fall outside these pre-established guidelines require the specific approval of the CRC. It is also AIG’s policy to
include credit valuation adjustments for potential counterparty default when necessary.
In addition, AIGFP utilizes various credit enhancements, including letters of credit, guarantees, collateral, credit
triggers, credit derivatives and margin agreements to reduce the credit risk relating to its outstanding financial
derivative transactions. AIGFP requires credit enhancements in connection with specific transactions based on,
among other things, the creditworthiness of the counterparties, and the transaction’s size and maturity.
Furthermore, AIGFP generally seeks to enter into agreements that have the benefit of set-off and close-out
netting provisions. These provisions provide that, in the case of an early termination of a transaction, AIGFP can
set off its receivables from a counterparty against its payables to the same counterparty arising out of all covered
transactions. As a result, where a legally enforceable netting agreement exists, the fair value of the transaction
with the counterparty represents the net sum of estimated fair values. The fair value of AIGFP’s interest rate,
158 AIG 2010 Form 10-K