AIG 2013 Annual Report Download - page 296

Credit default swap transactions were entered into with the intention of earning revenue on credit exposure. In the
majority of these transactions, we sold credit protection on a designated portfolio of loans or debt securities.
Generally, such credit protection was provided on a ‘‘second loss’’ basis, meaning we would incur credit losses only
after a shortfall of principal and/or interest, or other credit events, in respect of the protected loans and debt
securities, exceeded a specified threshold amount or level of ‘‘first losses.’’
The following table presents the net notional amount, fair value of derivative (asset) liability and unrealized
market valuation gain (loss) of the super senior credit default swap portfolio, including credit default swaps
written on mezzanine tranches of certain regulatory capital relief transactions, by asset class:
Regulatory Capital:
Prime residential mortgages $ 97 $ – $ –
Other – – 9
Total 97 – 9
Arbitrage:
Multi-sector CDOs(d) 3,944 1,910 538
Corporate debt/CLOs(e) 11,832 60 67
Total 15,776 1,970 605
Mezzanine tranches – – 3
Total $ 15,873 $ 1,970 $ 617
(a) Net notional amounts presented are net of all structural subordination below the covered tranches. The decrease in the total net notional amount
from December 31, 2012 to December 31, 2013 was due to amortization of $1.0 billion and terminations and maturities of $69 million, partially offset
by increases due to foreign exchange rate movement of $313 million.
(b) Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.
(c) Includes credit valuation adjustment losses of $5 million and $39 million for the years ended December 31, 2013 and 2012, respectively,
representing the effect of changes in our credit spreads on the valuation of the derivatives liabilities.
(d) During 2013, we paid $143 million to counterparties with respect to multi-sector CDOs, which was previously included in the fair value of the
derivative liability as an unrealized market valuation loss. Multi-sector CDOs also include $2.8 billion and $3.4 billion in net notional amount of credit
default swaps written with cash settlement provisions at December 31, 2013 and December 31, 2012, respectively. Collateral postings with regards
to multi-sector CDOs were $1.1 billion and $1.6 billion at December 31, 2013 and December 31, 2012, respectively.
(e) Corporate debt/Collateralized Loan Obligations (CLOs) include $1.0 billion and $1.2 billion in net notional amount of credit default swaps written
on the super senior tranches of CLOs at December 31, 2013 and 2012, respectively. Collateral postings with regards to corporate debt/CLOs were
$353 million and $420 million at December 31, 2013 and December 31, 2012, respectively.
The expected weighted average maturity of the super senior credit derivative portfolios as of December 31, 2013 was
six years for the multi-sector CDO arbitrage portfolio and two years for the corporate debt/CLO portfolio.
Because of long-term maturities of the CDSs in the arbitrage portfolio, we are unable to make reasonable estimates
of the periods during which any payments would be made. However, the net notional amount represents the
maximum exposure to loss on the super senior credit default swap portfolio.
We have legacy credit default swap contracts referencing single-name exposures written on corporate, index and
asset-backed credits with the intention of earning spread income on credit exposure. Some of these transactions
were entered into as part of a long-short strategy to earn the net spread between CDSs written and purchased. At
December 31, 2013 and 2012, the net notional amounts of these written CDS contracts were $373 million and
$410 million, respectively, including ABS CDS transactions purchased from a liquidated multi-sector super senior
CDS transaction. These exposures were partially hedged by purchasing offsetting CDS contracts of $50 million and
Super Senior Credit Default Swaps
Written Single Name Credit Default Swaps
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AIG 2013 Form 10-K278
ITEM 8 / NOTE 11. DERIVATIVES AND HEDGE ACCOUNTING
Fair Value of Derivative Unrealized Market Valuation
Net Notional Amount at(a) Liability at(b) Gain for the years ended(c)
December 31, December 31, December 31, December 31, December 31, December 31,
(in millions) 2013 2012 2013 2012 2013 2012
$– $– $–
–––
–––
3,257 1,249 518
11,832 28 32
15,089 1,277 550
–––
$ 15,089 $ 1,277 $ 550
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