American Airlines’ Asset / Liability Management

Wyatt CrumplerVice President, Asset ManagementAmerican Beacon Advisors, Inc.

Asset / Liability Management

Phase I – 1981 / 1982

• Cash matched dedicated bonds for retirees

– Using Treasury Bonds yielding 16.1%

• Cash matched “near retirees over age 55”

– Using Treasury Bonds yielding 15.3%

• Asset allocation of 60% bonds and 40% stocks

Asset / Liability Management

Phase II – 1987

• Converted to dollar duration bond portfolio

• 50% of assets invested in 26-year duration strips

– Hedged 100% of liabilities with 13-year duration

• Yield on bonds exceeded 9%

Asset / Liability Management

Phase III – Early 2000s

• Converted 40% of strips to corporate bonds with 12-13 year duration to introduce credit spread exposure (approx 150 bps)

• Better hedged corporate bond rate used by FASB

• Entered interest rate swaps to maintain duration and hedge ratio

Asset / Liability Management

Phase VI –2002

• Eliminated swaps due to concerns on leverage in “Enron” environment

• Reduced duration to 18 years

• Reduced bond allocation to 40%

• Resulted in hedge ratio of 40%

Asset / Liability Management

Phase V – 2007 & 2008

• Reintroduced swaps in 2007 to increase hedge to 50%

• Developed hedge ratio matrix based on corporate bond rates and funded status of the defined benefit plan

Asset / Liability Management

Phase VI – 2009 to current

• Eliminated swaps in early 2009 as the spread between AA rates and swap rates widened

• Reintroduced swaps in mid-2010 to maintain a 40% hedge

• Reduced hedge to 35% in April 2011 and to 30% in August 2011 by removing swaps

Asset / Liability Management

Corporate Bond Rate

FundedStatus(PBO)

Below 5% 5% to 7% 7% to 8% Above 8%

Below 65% 30% 40% 50% 60%

Below 75% 30% 40% 60% 70%

Below 85% 40% 50% 60% 70%

Below 95% 50% 60% 60% 70%

Above 95% 60% 70% 70% 70%

Current Liability Hedge Matrix