AIG 2010 Annual Report Download - page 308

American International Group, Inc., and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivatives Not Designated as Hedging Instruments
The following table presents the effect of AIG’s derivative instruments not designated as hedging instruments on
the Consolidated Statement of Income (Loss):
Gains (Losses)
Recognized in Earnings
Years Ended December 31,
(in millions) 2010 2009
By Derivative Type:
Interest rate contracts(a) $ 254 $ 726
Foreign exchange contracts (123) (578)
Equity contracts 4(876)
Commodity contracts 1(703)
Credit contracts 1,227 2,088
Other contracts(b) 968 1,739
Total $ 2,331 $ 2,396
By Classification:
Premiums and other considerations $75 $74
Net investment income 18 21
Net realized capital gains 726 1,201
Unrealized market valuation gains on Capital Markets super senior credit default swap portfolio 598 1,418
Other income 914 (318)
Total $ 2,331 $ 2,396
(a) Includes cross currency swaps.
(b) Includes embedded derivative gains of $423 million and $1.7 billion, for the years ended December 31, 2010 and December 31, 2009,
respectively.
Capital Markets Derivatives
AIGFP enters into derivative transactions to mitigate market risk in its exposures (interest rates, currencies,
commodities, credit and equities) arising from its transactions. In most cases, AIGFP did not hedge its exposures
related to the credit default swaps it had written. As a dealer, AIGFP structured and entered into derivative
transactions to meet the needs of counterparties who may be seeking to hedge certain aspects of such
counterparties’ operations or obtain a desired financial exposure.
Capital Markets’ derivative transactions involving interest rate swap transactions generally involve the exchange
of fixed and floating rate interest payment obligations without the exchange of the underlying notional amounts.
AIGFP typically became a principal in the exchange of interest payments between the parties and, therefore, is
exposed to counterparty credit risk and may be exposed to loss, if counterparties default. Currency, commodity
and equity swaps are similar to interest rate swaps but involve the exchange of specific currencies or cash flows
based on the underlying commodity, equity securities or indices. Also, they may involve the exchange of notional
amounts at the beginning and end of the transaction. Swaptions are options where the holder has the right but not
the obligation to enter into a swap transaction or cancel an existing swap transaction.
AIGFP follows a policy of minimizing interest rate, currency, commodity, and equity risks associated with
investment securities by entering into offsetting positions, on a security-by-security basis within its derivatives
portfolio, thereby offsetting a significant portion of the unrealized appreciation and depreciation. In addition, to
reduce its credit risk, AIGFP has entered into credit derivative transactions with respect to $369 million of
securities to economically hedge its credit risk.
292 AIG 2010 Form 10-K