AIG 2014 Annual Report Download - page 292

ITEM 8 / NOTE 11. DERIVATIVES AND HEDGE ACCOUNTING
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The following table presents the net notional amount (net of all structural subordination below the covered tranches),
fair value of derivative liability before the effects of counterparty netting adjustments and offsetting cash collateral
and unrealized market valuation gain of the super senior credit default swap portfolio by asset class:
Fair Value of Unrealized Market Valuation
Net Notional Amount at Derivative Liability at Gain for the Years Ended
December 31, December 31, December 31, December 31, December 31, December 31,
(in millions) 2014 2013 2014 2013 2014 2013
Arbitrage:
Multi-sector CDOs(a) $ 2,619 $ 3,257 $947 $ 1,249 $ 235 $ 518
Corporate debt/CLOs(b)(c) 2,480 11,832 728 21 32
Tota l $ 5,099 $ 15,089 $954 $ 1,277 $ 256 $ 550
(a) During 2014, we paid $67 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. Collateral postings with regards to multi-sector CDOs were $852 million and $1.1 billion at December 31, 2014 and 2013,
respectively.
(b) Corporate debt/Collateralized Loan Obligations (CLOs) include $555 million and $1.0 billion in net notional amount of credit default swaps written on the
super senior tranches of CLOs at December 31, 2014 and 2013, respectively. Collateral postings with regards to corporate debt/CLOs were $147 million and
$353 million at December 31, 2014 and 2013, respectively.
(c) On July 17, 2014, AIGFP terminated Corporate Debt Super Senior CDSs with a notional amount of $8.8 billion.
The expected weighted average maturity of the super senior credit derivative portfolios as of December 31, 2014 was
five years for the multi-sector CDO arbitrage portfolio and three 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.
Written Single Name Credit Default Swaps
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, 2014 and
2013, the net notional amounts of these written CDS contracts were $190 million and $373 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 $5 million and $50 million in net notional amounts at December 31, 2014
and 2013, respectively. The net unhedged positions of $185 million and $323 million at December 31, 2014 and 2013,
respectively, represent the maximum exposure to loss on these CDS contracts. The average maturity of the written CDS
contracts was two years and three years at December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, the
fair values of derivative liabilities (which represents the carrying amount) of the portfolio of CDS was $25 million and $32
million, respectively.
Upon a triggering event (e.g., a default) with respect to the underlying reference obligations, settlement is generally effected
through the payment of the notional amount of the contract to the counterparty in exchange for the related principal amount of
securities issued by the underlying credit obligor (physical settlement) or, in some cases, payment of an amount associated
with the value of the notional amount of the reference obligations through a market quotation process (cash settlement).
These CDS contracts were written under ISDA Master Agreements. The majority of these ISDA Master Agreements include
credit support annexes (CSAs) that provide for collateral postings that may vary at various ratings and threshold levels. At
December 31, 2014 and 2013, net collateral posted by us under these contracts was $30 million and $38 million, respectively,
prior to offsets for other transactions.
All Other Derivatives
Our businesses, other than GCM, also use derivatives and other instruments as part of their financial risk management.
Interest rate derivatives (such as interest rate swaps) are used to manage interest rate risk associated with embedded