Re: | American International Group, Inc. Form 10-K for the Year Ended December 31, 2007 Form 10-Q for the Quarter Ended June 30, 2008 File No. 1-8787 |
1. | Please refer to your tabular disclosure on page 17. Please explain the basis for the counterparty netting adjustments shown in the table. Please tell us whether any portion of the counterparty netting adjustments are related to your super senior credit default swap portfolio, and explain how the adjustments are consistent with requirements of SFAS 157 or other applicable literature. |
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AIG Response: | |||
The counterparty netting adjustments in the table on page 17 of the June 30, 2008 Form 10-Q were made in accordance with the provisions of paragraph 10 of FIN 39, as interpreted by FSP FIN 39-1. FIN 39 sets forth guidelines for when it is appropriate to present certain financial assets and liabilities on a net basis on the balance sheet. There are special provisions for derivatives that are subject to master netting agreements, whereby derivative balances with the same counterparty are to be reported net on the balance sheet, as long as the following criteria have been met: |
1) | Each of two parties owes the other determinable amounts | ||
2) | The reporting party has the right to set off the amount owed with the amount owed by the other party | ||
3) | The right of setoff is enforceable at law |
Standard ISDA Master Netting Agreements used by AIG and throughout the over-the-counter derivative industry meet these criteria. As described more fully in Note 1 to AIGs June 30, 2008 financial statements, FSP FIN 39-1 provides an interpretation of FIN 39 that requires cash collateral posted/received by AIG with respect to master netting agreements to also be netted against the derivative balances with the same counterparty when applying the netting provisions of paragraph 10. | |||
AIGFPs super senior credit default swaps are subject to such Master Netting Agreements and thus the counterparty netting adjustments in the tabular disclosure on page 17 include adjustments to set off fair value amounts recognized and amounts recognized for the cash collateral posted for super senior credit default swaps. | |||
The cash collateral posted and other derivative positions with a particular counterparty, including the super senior credit default swaps, are incorporated into the determination of the effect of AIGs own credit risk on the fair value of the derivative liability. |
2. | You disclose that the unrealized market valuation losses on your super senior credit default swap portfolio represents the amount you would need to pay a willing, able and knowledgeable third-party to assume the obligations. Please revise your disclosure to discuss how you determined the principal or most |
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advantageous market in accordance with SFAS 157, and disclose who you believe the market participants would be. | |||
AIG Response: | |||
In response to the Staffs comment, AIG intends to include additional disclosure in its Form 10-Q for the quarterly period ended September 30, 2008 as follows (please refer to Form 10-Q for the Quarter Ended June 30, 2008, page 15 and page 42): |
3. | You have provided extensive disclosure regarding the valuation of CDS relating to multi-sector CDOs, but appear to have provided only limited disclosures regarding the valuation of CDS relating to corporate debt/CLOs. Please revise to provide disclosure of the contractual terms, methodology, inputs and assumptions regarding the valuation of your CDS relating to corporate debt/CLOs. |
AIG Response: |
In response to the Staffs comment, AIG intends to include additional disclosure in its Form 10-Q for the quarterly period ended September 30, 2008 as follows (please refer to Form 10-Q for the Quarter Ended June 30, 2008, page 15 and page 49): |
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4. | You disclose that your modified version of the Binomial Expansion Technique (BET) model to value your credit default swap portfolio written on super senior tranches of CDOs of asset-backed securities. Please clarify how the output of the modified BET model translates into the amount that you would need to pay to a willing, able and knowledgeable third-party to assume the obligations. | ||
AIG Response: | |||
The underlying assumption of the valuation methodology is that, in order to be willing to assume the obligations under a credit default swap, a market participant would require payment of the full difference between the cash price of the underlying tranches of the referenced securities portfolio and the notional amount specified in the credit default swap. | |||
The BET model uses assumptions with respect to market prices, weighted average lives and recovery rates for each underlying security of each CDO, the diversity score of each CDO and discount rates. In the absence of observable market data for transfers of such liabilities, AIG believes that the BET model provides a reasonable basis for estimating the fair value of AIGFPs credit default swap portfolio. |
5. | Please revise to disclose how the BET model calculates the probabilistic measure of expected loss for your credit default swaps. Explain each significant step in the valuation process. | ||
AIG Response: | |||
In response to the Staffs comment, AIG intends to include additional disclosure in its Form 10-Q for the quarterly period ended September 30, 2008 as follows (please refer to Form 10-Q for the Quarter Ended June 30, 2008, page 49): |
1) | Calculation of the cash flow pattern that matches the weighted average life for each underlying security of the CDO; | ||
2) | Calculation of an implied credit spread for each security from the price and conversion of the spread into the probability of default; |
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3) | Generation of expected losses for the security using the probability of default and recovery rate; | ||
4) | Aggregation of the cash flows for all securities to create a cash flow profile of the entire collateral pool within the CDO; | ||
5) | Division of the collateral pool into a number of independent identical securities (idealized securities) based on the CDOs diversity score; | ||
6) | Simulation of the default behavior of the idealized securities using a Monte Carlo simulation and aggregation of the results to derive the effect of the expected losses on the cash flow pattern of the super senior tranche taking into account the cash flow diversion mechanism of the CDO; | ||
7) | Discounting of the expected cash flows to estimate the value of the super senior tranche of the CDO; and | ||
8) | Adjusting of the model value for the super senior multi-sector CDO credit default swap for the effect of the risk of non-performance by AIG using the credit spreads of AIG available in the marketplace. |
6. | Please refer to prior comment two of our letter dated June 25, 2008. Please revise your disclosure to provide a summary that quantifies the CDO pool pricing assumptions for each period presented, and explains any significant changes between periods. | ||
AIG Response: | |||
In response to the Staffs comment, AIG intends to include additional disclosure in its Form 10-Q for the quarterly period ended September 30, 2008 as follows (please refer to Form 10-Q for the Quarter Ended June 30, 2008, page 49): | |||
The most significant assumption used in the BET model is the pricing of the individual securities within the CDO collateral pools. The following table summarizes the weighted average price at June 30, 2008 and September 30, 2008, and the percentage of the total CDO collateral pools at September 30, 2008, by ABS category. |
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Percentage of | ||||||||||||
Weighted | Total CDO | |||||||||||
Average Price | Collateral Pools | |||||||||||
Weighted Average | September 30, | September 30, | ||||||||||
ABS Category | Price June 30, 2008 | 2008 | 2008 | |||||||||
Inner CDOs |
XX% | XX% | XX | % | ||||||||
CMBS |
XX% | XX% | XX | % | ||||||||
Prime |
XX% | XX% | XX | % | ||||||||
Alt-A |
XX% | XX% | XX | % | ||||||||
Subprime |
XX% | XX% | XX | % | ||||||||
Other |
XX% | XX% | XX | % | ||||||||
Total |
XX% | XX% | 100.00 | % |
In addition to the table, AIG will include disclosure in its Form 10-Q for the quarterly period ended September 30, 2008 for any significant changes between periods. |
7. | You disclose that the most significant assumption in your CDS valuation is the pricing of securities within the CDO collateral pools, which you state are obtained in most cases from the CDO collateral managers, to the extent available. Please expand your disclosure to include the following information: |
| Describe the relative significance and effect on the valuation of each pricing methodology used. (A) | ||
| Describe more specifically the third party pricing services and in-house valuation models used by collateral managers. (B) | ||
| Describe more specifically your analysis and testing that verifies the accuracy and completeness of pricing information provided by collateral managers. (C) | ||
| Quantify the impact of the time lag in prices provided by the collateral managers. Describe how and to what extent this time lag affects your fair value estimate. (D) | ||
| Describe more specifically the methods and assumptions used to determine pricing for individual securities when the collateral manager has been unable to provide this information. (E) | ||
| Explain the relative significance of the Monte Carlo simulation process to the overall valuation process. If the Monte Carlo simulation process has a material effect on the valuation, describe the process in more detail. (F) |
AIG Response: | |||
For the convenience of the Staff, we have labeled the subparts of comment 7 and respond as follows. |
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A. | Relative significance and effect on the valuation of each pricing methodology used |
B. | Third party pricing services and in-house valuation models used by collateral managers |
C. | Analysis and testing that verifies the accuracy and completeness of pricing information provided by collateral managers |
D. | Time lag |
E. | Methods and assumptions used to determine pricing for individual securities when the collateral manager has been unable to provide this information |
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F. | Monte Carlo simulation |
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8. | You state that AIG considers all available information in addition to the results of the BET model and that for each individual super senior bond, you compare the BET-driven valuation to the highest third party prices and use the lower value if they do not approximate each other. Please expand your disclosure to describe more specifically the nature and sources of these third party prices and provide a breakdown of your fair valuation that quantifies the third party and BET-driven components for each period presented. | ||
AIG Response: | |||
In response to the Staffs comment, AIG intends to include additional disclosure in its Form 10-Q for the quarterly period ended September 30, 2008 as follows (please refer to Form 10-Q for the Quarter Ended June 30, 2008, page 49): |
Fair Value | ||||||||
Loss at | ||||||||
Notional | September 30, | |||||||
(in millions) | Amount | 2008 | ||||||
BET model |
$XX | $XX | ||||||
Third party price |
XX | XX | ||||||
Average of BET model and third party price |
XX | XX | ||||||
Other |
XX | XX | ||||||
Total |
$XX | $XX | ||||||
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9. | You disclose that other inputs to the BET model include diversity scores, weighted average lives, recovery rates and discount rates. Please disclose how each of these inputs are obtained, along with any key underlying assumptions. | ||
AIG Response: | |||
In response to the Staffs comment, AIG intends to include additional disclosure in its Form 10-Q for the quarterly period ended September 30, 2008 as follows (please refer to Form 10-Q for the Quarter Ended June 30, 2008, page 49): |
10. | We acknowledge the new disclosure in your second quarter Form 10-Q. However, we believe that investors would benefit from an expanded description and quantification of the key assumptions underlying your roll rate analysis. Please provide this information, much of which appears on pages 10-14 of your August 8, 2008 response letter. | ||
AIG Response: | |||
In response to the Staffs comment, AIG intends to include additional disclosure in its Form 10-Q for the quarterly period ended September 30, 2008 as follows (please refer to Form 10-Q for the Quarter Ended June 30, 2008, page 122): |
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Pre- | ||||||||||||||||
Segment | 2005 | 2005 | 2006 | 2007 | ||||||||||||
30+ days delinquent |
60 | % | 70 | % | 80 | % | 80 | % | ||||||||
60+ days delinquent |
70 | % | 80 | % | 80 | % | 80 | % | ||||||||
90+ days delinquent + borrower
bankruptcies |
70 | % | 80 | % | 90 | % | 90 | % | ||||||||
Foreclosed/REO mortgages |
100 | % | 100 | % | 100 | % | 100 | % |
Pre 2H 2004 | 2H 2004 | 1H 2005 | 2H 2005 | 2006/2007 | ||||||||||||
50% |
50 | % | 50 | % | 55 | % | 60 | % |
11. | You state that the roll rate and loss severity assumptions were based on several sources, including the research of a well known investment bank and rating agency roll rate models and assumptions. Please include in your revised disclosure a more detailed explanation of the specific factors and sources that you considered in selecting each key assumption. For each of your key assumptions, quantify the impact of changes in key assumptions underlying the estimates at March 31, 2008 and June 30, 2008 (i.e. both scenarios). | ||
AIG Response: | |||
In response to the Staffs comment, AIG intends to include additional disclosure in its Form 10-Q for the quarterly period ended September 30, 2008 as follows (please refer to Form 10-Q for the Quarter Ended June 30, 2008, page 122): |
In addition, AIG intends to include the following additional disclosure: |
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12. | You provide sensitivity disclosure for your SFAS 157 compliant fair valuation but not for your estimate of the potential realized credit losses for AIGFPs super senior multi-sector credit default swap portfolio. Please discuss and quantify the sensitivity of this estimate to reasonably likely changes in key assumptions. | ||
AIG Response: | |||
In response to the Staffs comment, AIG intends to include additional disclosure in its Form 10-Q for the quarterly period ended September 30, 2008 as follows (please refer to Form 10-Q for the Quarter Ended June 30, 2008, page 122): |
cc: | Frank Wyman, Staff Accountant Carl Tartar, Accounting Branch Chief (Securities and Exchange Commission) David Herzog |
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