AIG 2012 Annual Report Download - page 84

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•Delinquent inventory review – During 2011 and 2012, UGC requested that lenders file claims, in accordance with
the terms of the respective master policies, on approximately 21,000 accounts that had been delinquent
approximately 24 months or more and were not expected to cure. Many of these delinquencies were the result of
the foreclosure moratorium discussed below. Through December 31, 2012, UGC received responses to
approximately 96 percent of these requests. While accelerating the payment of claims, these requests also
impacted the cure rate of the delinquent inventory which in turn impacted UGC’s estimate of reserve for loss and
loss adjustment expenses. During 2013, reserve development may continue to have an impact on the business.
UGC expects that newly reported delinquent loans will continue to decline during 2013 and that the delinquent
inventory will decline further albeit at a slower rate than in 2012. However, the extent of the decline in
delinquencies and the number of newly reported delinquencies is dependent on the prevailing macroeconomic
conditions and the extent that the domestic economy does or does not improve. UGC will closely monitor these
trends and the impact on its incurred loss and loss expenses in 2013.
•Foreclosure delays – Since 2010, a variety of servicing practices have come to light that have delayed the
foreclosure process in many states. Some of these practices, such as the ‘‘robo-signing’’ of affidavits in judicial
foreclosures, have resulted in government investigations into lenders’ foreclosure practices. These developments
have slowed the reporting of foreclosures, which has in turn slowed the filing of mortgage insurance claims and
increased the uncertainty surrounding the determination of the liability for losses and loss adjustment expenses.
UGC’s assumptions regarding future foreclosures on current delinquencies take into consideration this trend,
although significant uncertainty remains surrounding the determination of the liability for unpaid claims and claims
adjustment expenses. UGC expects that this trend may continue for 2013 and may negatively affect UGC’s future
financial results. Final resolution of these issues is uncertain and UGC cannot reasonably estimate the ultimate
financial impact that any resolution, individually or collectively, may have on its future results of operations or
financial condition.
Global Capital Markets (GCM)
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AIG Markets acts as the derivatives intermediary between AIG and its subsidiaries and third parties to provide
hedging services. The derivative portfolio of AIG Markets consists primarily of interest rate and currency derivatives.
The remaining derivatives portfolio of AIGFP consists primarily of hedges of the assets and liabilities of the DIB and
a portion of the legacy hedges for AIG and its subsidiaries. Future hedging needs for AIG and its subsidiaries will be
executed through AIG Markets. AIGFP’s derivative portfolio consists primarily of interest rate, currency, credit,
commodity and equity derivatives. Additionally, AIGFP has a credit default swap portfolio being managed for
economic benefit and with limited risk. The AIGFP portfolio continues to be wound down and is managed consistent
with our risk management objectives. Although the portfolio may experience periodic fair value volatility, it consists
predominantly of transactions that we believe are of low complexity, low risk or currently not economically appropriate
to unwind based on a cost versus benefit analysis.
Direct Investment Book (DIB)
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The DIB portfolio is being wound down and is managed with the objective of ensuring that at all times it maintains
the liquidity we believe is necessary to meet all its liabilities, as they come due, even under stress scenarios and to
maximize return consistent with our risk management objectives. We are focused on meeting the DIB’s liquidity
needs, including the need for contingent liquidity arising from collateral posting for debt positions of the DIB without
relying on resources beyond the DIB. As part of this program management, we may from time to time access the
capital markets, subject to market conditions. In addition, we may seek to buy back debt or sell assets on an
opportunistic basis, subject to market conditions.
From time to time, we may utilize cash allocated to the DIB that is not required to meet the risk target for general
corporate purposes unrelated to the DIB.
Certain non-derivative assets and liabilities of the DIB are accounted for under the fair value option and thus
operating results are subject to periodic market volatility. The overall hedging activity for the assets and liabilities of
the DIB is executed by GCM. The value of hedges related to the non-derivative assets and liabilities of AIGFP in the
DIB are included within the assets and liabilities and operating results of GCM and are not included within the DIB
operating results, assets or liabilities.
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AIG 2012 Form 10-K 67
ITEM 7 / EXECUTIVE SUMMARY