AIG 2010 Annual Report Download - page 306

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.
(c) Includes cross currency swaps.
The following table presents the fair values of derivative assets and liabilities on the Consolidated Balance Sheet:
December 31, 2010 December 31, 2009
Derivative Derivative
Derivative Assets Liabilities(a) Derivative Assets(b) Liabilities(c)
Notional Fair Notional Fair Notional Fair Notional Fair
(in millions) Amount Value Amount Value Amount Value Amount Value
Capital Markets derivatives $168,033 $12,268 $173,226 $12,379 $400,223 $ 31,951 $499,821 $ 30,930
All other derivatives 22,224 4,043 31,627 3,001 19,910 2,554 36,308 2,455
Total derivatives, gross $190,257 16,311 $204,853 15,380 $420,133 34,505 $536,129 33,385
Counterparty netting(d) (6,298) (6,298) (19,054) (19,054)
Cash collateral(e) (4,096) (2,902) (6,317) (8,166)
Total derivatives, net 5,917 6,180 9,134 6,165
Less: Bifurcated embedded derivatives(f) - 445 4 762
Total derivatives on balance sheet $ 5,917 $ 5,735 $ 9,130 $ 5,403
(a) Included in all other derivatives are bifurcated embedded derivatives, which are recorded in Policyholder contract deposits Bonds available for
sale, at fair value, and Common and preferred stock.
(b) Included in all other derivatives are bifurcated embedded derivatives, which are recorded in Bonds available for sale, at fair value, and
Policyholder contract deposits.
(c) Included in all other derivatives are bifurcated embedded derivatives, which are recorded in Policyholder contract deposits and Common and
preferred stock.
(d) Represents netting of derivative exposures covered by a qualifying master netting agreement.
(e) Represents cash collateral posted and received.
(f) Current period includes a change in valuation assumption relating to embedded policy derivatives.
Hedge Accounting
AIG designated certain derivatives entered into by AIGFP and AIG Markets with third parties as either fair
value or cash flow hedges of certain debt issued by AIG Parent and ILFC. 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, a qualitative
methodology is utilized to assess hedge effectiveness.
AIG uses 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
290 AIG 2010 Form 10-K