AIG 2015 Annual Report Download - page 291

ITEM 8 / NOTE 10. DERIVATIVES AND HEDGE ACCOUNTING
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Counterparty netting(d) (1,268) (1,268) (2,102) (2,102)
Cash collateral(e) (1,554) (760) (1,119) (1,429)
Total derivatives on
consolidated balance sheets(f) $ 1,309 $2,020 $ 1,604 $ 2,273
(a) Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.
(b) As of December 31, 2015 and 2014, included super senior multi-sector CDOs with a net notional amount of $1.1 billion and $2.6 billion (fair value liability of
$483 million and $947 million), respectively. The expected weighted average maturity as of December 31, 2015 is six years. Because of long-term maturities of
the CDSs in the 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 portfolio. As of December 31, 2015, there were no super senior corporate debt/CLOs remaining. As of
December 31, 2014, included super senior corporate debt/CLOs with a net notional amount of $2.5 billion (fair value liability of $7 million).
(c) Consists primarily of stable value wraps and contracts with multiple underlying exposures.
(d) Represents netting of derivative exposures covered by a qualifying master netting agreement.
(e) Represents cash collateral posted and received that is eligible for netting.
(f) Freestanding derivatives only, excludes Embedded derivatives. Derivative instrument assets and liabilities are recorded in Other Assets and Liabilities,
respectively. Fair value of assets related to bifurcated Embedded derivatives was zero at both December 31, 2015 and December 31, 2014. Fair value of
liabilities related to bifurcated Embedded derivatives was $2.3 billion and $1.6 billion, respectively, at December 31, 2015 and December 31, 2014. A bifurcated
Embedded derivative is generally presented with the host contract in the Consolidated Balance Sheets. Embedded derivatives are primarily related to guarantee
features in variable annuity products, which include equity and interest rate components.
Collateral
We engage in derivative transactions that are not subject to a clearing requirement directly with unaffiliated third parties, in
most cases, under International Swaps and Derivatives Association, Inc. (ISDA) Master Agreements. Many of the ISDA Master
Agreements also include Credit Support Annex (CSA) provisions, which provide for collateral postings that may vary at various
ratings and threshold levels. We attempt to reduce our risk with certain counterparties by entering into agreements that enable
collateral to be obtained from a counterparty on an upfront or contingent basis. We minimize the risk that counterparties might
be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value and generally
requiring additional collateral to be posted upon the occurrence of certain events or circumstances. In addition, certain
derivative transactions have provisions that require collateral to be posted upon a downgrade of our long-term debt ratings or
give the counterparty the right to terminate the transaction. In the case of some of the derivative transactions, upon a
downgrade of our long-term debt ratings, as an alternative to posting collateral and subject to certain conditions, we may
assign the transaction to an obligor with higher debt ratings or arrange for a substitute guarantee of our obligations by an
obligor with higher debt ratings or take other similar action. The actual amount of collateral required to be posted to
counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make,
depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the
time of the downgrade.
Collateral posted by us to third parties for derivative transactions was $3.0 billion and $3.3 billion at December 31, 2015 and
2014, respectively. In the case of collateral posted under derivative transactions that are not subject to clearing, this collateral
can generally be repledged or resold by the counterparties. Collateral provided to us from third parties for derivative
transactions was $1.6 billion and $1.3 billion at December 31, 2015 and 2014, respectively. We generally can repledge or
resell collateral.
Offsetting
We have elected to present all derivative receivables and derivative payables, and the related cash collateral received and
paid, on a net basis on our Consolidated Balance Sheets when a legally enforceable ISDA Master Agreement exists between
us and our derivative counterparty. An ISDA Master Agreement is an agreement governing multiple derivative transactions
between two counterparties. The ISDA Master Agreement generally provides for the net settlement of all, or a specified group,
of these derivative transactions, as well as transferred collateral, through a single payment, and in a single currency, as
applicable. The net settlement provisions apply in the event of a default on, or affecting any, one derivative transaction or a
termination event affecting all, or a specified group of, derivative transactions governed by the ISDA Master Agreement.