AIG 2010 Annual Report Download - page 67

American International Group, Inc., and Subsidiaries
AIG has incorporated into this discussion a number of cross-references to additional information included
throughout this Annual Report on Form 10-K to assist readers seeking additional information related to a
particular subject.
Capital Resources and Liquidity
Overview
As a result of the recent closing of the Recapitalization, AIG’s liquidity management practices have changed
considerably. Since September 2008, the FRBNY Credit Facility had been utilized as a primary source of liquidity.
In addition, since 2009, the commitment provided by the Department of the Treasury (the Department of the
Treasury Commitment (Series F)), relating to AIG’s Series F Fixed Rate Non-Cumulative Perpetual Preferred
Stock, par value $5.00 per share (the Series F Preferred Stock), had been used as a source of funding, primarily to
support the capital needs of AIG’s insurance company subsidiaries. However, at the closing of the
Recapitalization, as described more fully above and in Note 1 to the Consolidated Financial Statements, AIG fully
repaid and terminated the FRBNY Credit Facility, and the Department of the Treasury Commitment (Series F)
was exchanged for, among other consideration, a commitment (the Series G Drawdown Right) by the Department
of the Treasury to fund up to $2 billion in liquidation preference of AIG’s Series G Cumulative Mandatory
Convertible Preferred Stock, par value $5.00 per share (the Series G Preferred Stock). AIG also completed the
following transactions to enhance its liquidity and capital position:
• In the fourth quarter of 2010, AIG issued an aggregate of $2 billion in senior unsecured notes, comprised of
$500 million in three-year notes and $1.5 billion in ten-year notes. In addition, AIG established a
$500 million contingent liquidity facility.
• In December 2010, AIG entered into an aggregate of $3 billion in unsecured and committed bank credit
facilities, split evenly between a 364-day and a three-year credit facility. These facilities became available
upon the closing of the Recapitalization and are intended to support general corporate purposes.
• In December 2010, Chartis Inc. entered into a one-year $1.3 billion letter of credit facility, which provides
for the issuance of letters of credit in favor of certain of Chartis’ insurance companies.
• In January 2011, ILFC entered into an unsecured three-year $2 billion revolving credit facility. ILFC may
borrow under this facility for general corporate purposes.
For further discussion of the terms and conditions relating to these above-referenced credit facilities, see Credit
Facilities below.
As a result of various actions taken in the fourth quarter of 2010 and in 2011 to date, AIG Parent has
generated substantial cash and short-term investment balances, and has established significant sources of
contingent liquidity.
Liquidity Adequacy Management
In 2010, AIG implemented a stress testing and liquidity framework to systematically assess AIG’s aggregate
exposure to its most significant risks. This framework is built on AIG’s existing Enterprise Risk Management
(ERM) stress testing methodology for both insurance and non-insurance operations. The scenarios are performed
with a two-year time horizon and capital adequacy requirements consider both financial and insurance risks.
AIG’s insurance operations must comply with numerous constraints on their minimum capital positions. These
constraints are guiding requirements for capital adequacy for individual businesses, based on capital assessments
under rating agency, regulatory and business requirements. Using ERM’s stress testing methodology, the capital
impact of potential stresses is evaluated relative to the binding capital constraint of each business operation in
order to determine AIG Parent’s liquidity needs to support the insurance operations and maintain their target
capitalization levels. Added to this amount is the contingent liquidity required under stressed scenarios for
non-insurance operations, including the AIGFP derivatives portfolio, the Direct Investment business and ILFC.
AIG 2010 Form 10-K 51