AIG 2010 Annual Report Download - page 305

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
included these entities in the above table as they are wholly owned and there are no other variable interests in the
entities other than those of ILFC.
Structured Investment Vehicle
The Direct Investment business sponsors Nightingale Finance Ltd, its only structured investment vehicle (SIV),
which invests in variable rate, investment-grade debt securities, the majority of which are ABS. The Direct
Investment business has no equity interest in the SIV; however, it maintains the power to direct the activities of
the SIV that most significantly impact the entity’s economic performance and bears the obligation to absorb
economic losses that could potentially be significant to the SIV. The SIV meets the definition of a VIE and
accordingly, the Direct Investment business, as primary beneficiary, consolidates the SIV.
12. Derivatives and Hedge Accounting
AIG uses derivatives and other financial instruments as part of its financial risk management programs and as
part of its investment operations. AIGFP had also transacted in derivatives as a dealer and had acted as an
intermediary between the relevant AIG subsidiary and the counterparty. In a number of situations, AIG has
replaced AIGFP with AIG Markets for purposes of acting as an intermediary between the AIG subsidiary and the
third-party counterparty as part of the wind-down of AIGFP’s portfolios.
Derivatives are financial arrangements among two or more parties with returns linked to or ‘‘derived’’ from
some underlying equity, debt, commodity, or other asset, liability, or foreign exchange rate or other index or the
occurrence of a specified payment event. Derivative payments may be based on interest rates, exchange rates,
prices of certain securities, commodities, or financial or commodity indices or other variables. Derivatives, with the
exception of bifurcated embedded derivatives, are reflected on the Consolidated Balance Sheet in Unrealized gain
on swaps, options and forward transactions, at fair value and Unrealized loss on swaps, options and forward
contracts, at fair value. A bifurcated embedded derivative is recorded at fair value whereas the corresponding host
contract is recorded on an amortized cost basis. A bifurcated embedded derivative is presented with the host
contract on the Consolidated Balance Sheet.
The following table presents the notional amounts and fair values of AIG’s derivative instruments:
December 31, 2010 December 31, 2009
Gross Derivative Gross Derivative Gross Derivative Gross Derivative
Assets Liabilities Assets Liabilities
Notional Fair Notional Fair Notional Fair Notional Fair
(in millions) Amount(a) Value(b) Amount(a) Value(b) Amount(a) Value(b) Amount(a) Value(b)
Derivatives designated as hedging instruments:
Interest rate contracts(c) $ 1,471 $ 156 $ 626 $ 56 $ 10,612 $ 2,129 $ 3,884 $ 375
Derivatives not designated as hedging instruments:
Interest rate contracts(c) 150,966 14,048 118,783 9,657 345,614 27,451 300,847 23,718
Foreign exchange contracts 2,495 203 4,105 338 16,662 720 9,719 939
Equity contracts 5,002 358 1,559 329 8,175 1,184 7,713 1,064
Commodity contracts 944 92 768 67 759 883 381 373
Credit contracts 2,046 379 62,715 4,180 3,706 1,210 190,275 5,815
Other contracts 27,333 1,075 16,297 753 34,605 928 23,310 1,101
Total derivatives not designated as hedging
instruments 188,786 16,155 204,227 15,324 409,521 32,376 532,245 33,010
Total derivatives $190,257 $16,311 $204,853 $15,380 $420,133 $34,505 $536,129 $33,385
(a) Notional amount represents a standard of measurement of the volume of derivatives business of AIG. Notional amount is generally not a
quantification of market risk or credit risk and is not recorded on the Consolidated Balance Sheet. Notional amounts generally represent those
amounts used to calculate contractual cash flows to be exchanged and are not paid or received, except for certain contracts such as currency
swaps and certain credit contracts. For credit contracts, notional amounts are net of all underlying subordination.
AIG 2010 Form 10-K 289