AIG 2014 Annual Report Download - page 291

ITEM 8 / NOTE 11. DERIVATIVES AND HEDGE ACCOUNTING

274
Derivatives Not Designated as Hedging Instruments
The following table presents the effect of our derivative instruments not designated as hedging instruments in the
Consolidated Statements of Income:
Gains (Losses)
Years Ended December 31, Recognized in Earnings
(in millions) 2014 2013 2012
By Derivative Type:
Interest rate contracts(a) $847 $ (331) $ (241)
Foreign exchange contracts 309 41 96
Equity contracts(b) (1,111) 664 (644)
Commodity contracts (1) (4) (1)
Credit contracts 263 567 641
Other contracts 192 85 6
Total $499 $ 1,022 $ (143)
By Classification:
Net investment income 102 28 5
Net realized capital gains (losses) (219) 257 (516)
Other income 599 750 368
Policyholder benefits and losses incurred 17 (13) -
Total $499 $ 1,022 $ (143)
(a) Includes cross currency swaps.
(b) Includes embedded derivative gains (losses) of $(837) million, $1.2 billion and $(170) million for the years ended December 31, 2014, 2013 and 2012,
respectively.
Global Capital Markets Derivatives
Derivative transactions between AIG and its subsidiaries and third parties are generally centralized through GCM, specifically
AIG Markets. The derivatives portfolio of AIG Markets consists primarily of interest rate and currency derivatives and also
includes legacy credit derivatives that have been novated from AIGFP. AIGFP also enters into derivatives to mitigate market
risk in its exposures (interest rates, currencies, credit, commodities and equities) arising from its portfolio of remaining
transactions.
GCM follows a policy of minimizing interest rate, currency, commodity, and equity risks associated with investment securities
by entering into offsetting positions, thereby offsetting a significant portion of the unrealized appreciation and depreciation.
Super Senior Credit Default Swaps
Credit default swap transactions were entered into by AIGFP 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.”