AIG 2015 Annual Report Download - page 189

ITEM 7 / ENTERPRISE RISK MANAGEMENT
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array of combined severe market stresses in equity prices, interest rates, volatility and credit spreads. Finally, hedge
strategies are reviewed regularly to gauge their effectiveness in managing our market exposures in the context of our overall
risk appetite.
Other Operations Risks
Derivative Transactions
We utilize derivatives principally to enable us to hedge exposure to interest rates, currencies, credit, commodities, equities and
other risks. Credit risk associated with derivative counterparties exists for a derivative contract when that contract has a
positive fair value to us. The maximum potential exposure will increase or decrease during the life of the derivative
commitments as a function of maturity and market conditions. All derivative transactions must be transacted within
counterparty limits that have been approved by ERM.
We evaluate counterparty credit quality by internal analysis consistent with the AIG Credit Policy. We utilize various credit
enhancements, including letters of credit, guarantees, collateral, credit triggers, credit derivatives, margin agreements and
subordination to reduce the credit risk relating to outstanding financial derivative transactions. We require credit enhancements
in connection with specific transactions based on, among other things, the creditworthiness of the counterparties, and
transaction size and maturity. Furthermore, we enter into certain agreements that have the benefit of set-off and close-out
netting provisions, such as ISDA Master Agreements. These provisions provide that, in the case of an early termination of a
transaction, we can set off receivables from a counterparty against payables to the same counterparty arising out of all
covered transactions. As a result, where a legally enforceable netting agreement exists, the fair value of the transaction with
the counterparty represents the net sum of estimated fair values.
The fair value of our interest rate, currency, credit, commodity and equity swaps, options, swaptions, and forward
commitments, futures, and forward contracts reported as a component of Other Assets, was approximately $1.3 billion at
December 31, 2015 and $1.6 billion at December 31, 2014. Where applicable, these amounts have been determined in
accordance with the respective master netting agreements.
The following table presents the fair value of our derivatives portfolios in asset positions by internal counterparty
credit rating:
At December 31,
(in millions) 2015 2014
Rating:
AAA $ 56 $11
AA 103 129
A 256 441
BBB 767 838
Below investment grade 127 184
Tot al $ 1,309 $ 1,603
See Note 10 to the Consolidated Financial Statements for additional discussion related to derivative transactions.
AIG Parent and Other
The major risk for investments in life settlements is longevity risk, which represents the risk of a change in the carrying value of
the contracts arising from actual mortality rates being lower than the expected mortality rates. This risk could arise from longer
term societal health changes as well as other factors.