AIG 2010 Annual Report Download - page 209

American International Group, Inc., and Subsidiaries
experience demonstrates, actual results in any period are likely to vary, perhaps materially, from the modeled
scenarios, and there can be no assurance that the unrealized market valuation loss related to the Capital Markets
super senior credit default swap portfolio will be consistent with any of the sensitivity analyses. On average, prices
for CDOs increased during 2010. Further, it is difficult to extrapolate future experience based on current market
conditions.
For the purposes of estimating sensitivities for the super senior multi-sector CDO credit default swap portfolio,
the change in valuation derived using the BET model is used to estimate the change in the fair value of the
derivative liability. Out of the total $6.7 billion net notional amount of CDS written on multi-sector CDOs
outstanding at December 31, 2010, a BET value is available for $4.1 billion net notional amount. No BET value is
determined for $2.6 billion of CDS written on European multi-sector CDOs as prices on the underlying securities
held by the CDOs are not provided by collateral managers; instead these CDS are valued using counterparty
prices. Therefore, sensitivities disclosed below apply only to the net notional amount of $4.1 billion.
The most significant assumption used in the BET model is the estimated price of the securities within the CDO
collateral pools. If the actual price of the securities within the collateral pools differs from the price used in
estimating the fair value of the super senior credit default swap portfolio, there is potential for material variation
in the fair value estimate. Any further declines in the value of the underlying collateral securities held by a CDO
will similarly affect the value of the super senior CDO securities. While the models attempt to predict changes in
the prices of underlying collateral securities held within a CDO, the changes are subject to actual market
conditions which have proved to be highly volatile, especially given current market conditions. AIG cannot predict
reasonably likely changes in the prices of the underlying collateral securities held within a CDO at this time.
The following table presents key inputs used in the BET model, and the potential increase (decrease) to the fair
value of the derivative liability by ABS category at December 31, 2010 corresponding to changes in these key
inputs:
Average Increase (Decrease) to Fair Value of Derivative Liability
Inputs Used
(dollars at December 31, Entire RMBS RMBS RMBS
in millions) 2010 Change Portfolio Prime Alt-A Subprime CMBS CDOs Other
Bond prices 42 points Increase of 5 points $ (278) $ (7) $ (25) $ (116) $ (87) $ (30) $ (13)
Decrease of 5 points 263 8 24 108 85 19 19
Weighted Increase of 1 year 26 - 2 19 4 1 -
average life 6.21 years Decrease of 1 year (54) (1) (2) (42) (5) (3) (1)
Recovery rates 19% Increase of 10% (41) - (3) (16) (19) (1) (2)
Decrease of 10% 27 - 4 13 9 1 -
Diversity score(a) 12 Increase of 5 (10)
Decrease of 5 37
Discount curve(b) N/A Increase of 100bps 20
(a) The diversity score is an input at the CDO level. A calculation of sensitivity to this input by type of security is not possible.
(b) The discount curve is an input at the CDO level. A calculation of sensitivity to this input by type of security is not possible. Furthermore, for
this input it is not possible to disclose a weighted average input as a discount curve consists of a series of data points.
These results are calculated by stressing a particular assumption independently of changes in any other
assumption. No assurance can be given that the actual levels of the key inputs will not exceed, perhaps
significantly, the ranges assumed by AIG for purposes of the above analysis. No assumption should be made that
results calculated from the use of other changes in these key inputs can be interpolated or extrapolated from the
results set forth above.
AIG 2010 Form 10-K 193