AIG 2010 Annual Report Download - page 54

American International Group, Inc., and Subsidiaries
Electronic Data Systems and Handling of Confidential Information
If we are unable to maintain the availability of our electronic data systems and safeguard the security of our data,
our ability to conduct business may be compromised, which could adversely affect our consolidated financial condition
or results of operations. We use computer systems to store, retrieve, evaluate and utilize customer and company
data and information. These systems in turn, rely upon third-party systems. Our business is highly dependent on
our ability to access these systems to perform necessary business functions, including providing insurance quotes,
processing premium payments, making changes to existing policies, filing and paying claims, administering variable
annuity products and mutual funds, providing customer support and managing our investment portfolios. Systems
failures or outages could compromise our ability to perform these functions in a timely manner, which could harm
our ability to conduct business and hurt our relationships with our business partners and customers. In the event
of a natural disaster, a computer virus, a terrorist attack or other disruption inside or outside the U.S., our
systems may be inaccessible to our employees, customers or business partners for an extended period of time, and
our employees may be unable to perform their duties for an extended period of time if our data or systems are
disabled or destroyed. Our systems could also be subject to physical or electronic break-ins or unauthorized
tampering. This may impede or interrupt our business operations and could adversely affect our consolidated
financial condition or results of operations.
In addition, we routinely transmit, receive and store personal, confidential and proprietary information by email
and other electronic means. Although we attempt to keep such information confidential, we may be unable to
utilize such capabilities in all events, especially with clients, vendors, service providers, counterparties and other
third parties who may not have or use appropriate controls to protect confidential information. Furthermore,
certain of our businesses are subject to compliance with regulations enacted by U.S. federal and state
governments, the European Union or other jurisdictions or enacted by various regulatory organizations or
exchanges relating to the privacy of the information of clients, employees or others. A misuse or mishandling of
confidential or proprietary information being sent to or received from an employee or third party could result in
legal liability, regulatory action and reputational harm.
Regulatory Capital Credit Default Swap Portfolio
A deterioration in the credit markets may cause us to recognize unrealized market valuation losses which could have
an adverse effect on our consolidated financial condition, consolidated results of operations or liquidity. Moreover,
depending on how and when the Basel I capital standards are phased out, the period of time that AIGFP remains at
risk for such deterioration could be longer than anticipated by AIGFP. A total of $38.1 billion in net notional
amount of the super senior credit default swap (CDS) portfolio of AIGFP as of December 31, 2010, represented
derivatives written for financial institutions, principally in Europe, primarily for the purpose of providing
regulatory capital relief rather than for arbitrage purposes. The net fair value of the net derivative asset for these
CDS transactions was $173 million at December 31, 2010.
The regulatory benefit of these transactions for AIGFP’s financial institution counterparties was generally
derived from the capital regulations promulgated by the Basel Committee on Banking Supervision known as
Basel I. In December 2010, the Basel Committee on Banking Supervision finalized a new framework for
international capital and liquidity standards known as Basel III, which, when fully implemented, may reduce or
eliminate the regulatory benefits to certain counterparties from these transactions, and may thus impact the period
of time that such counterparties are expected to hold the positions. AIGFP continues to reassess the expected
maturity of this portfolio. As of December 31, 2010, AIGFP estimated that the weighted average expected
maturity of the portfolio was 3.16 years.
Given the current performance of the underlying portfolios, the level of subordination of credit protection
written by AIGFP and AIGFP’s own assessment of the credit quality of the underlying portfolio, as well as the
risk mitigants inherent in the transaction structures, AIGFP does not expect that it will be required to make
payments pursuant to the contractual terms of those transactions providing regulatory capital relief. AIGFP will
continue to assess the valuation of this portfolio and monitor developments in the marketplace. Given the
potential deterioration in the credit markets and the risk that AIGFP’s expectations with respect to the
38 AIG 2010 Form 10-K