AIG 2015 Annual Report Download - page 292

ITEM 8 / NOTE 10. DERIVATIVES AND HEDGE ACCOUNTING
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Hedge Accounting
We designated certain derivatives entered into with third parties as fair value hedges of available for sale investment securities
held by our insurance subsidiaries. The fair value hedges include foreign currency forwards and cross currency swaps
designated as hedges of the change in fair value of foreign currency denominated available for sale securities attributable to
changes in foreign exchange rates. We also designated certain interest rate swaps entered into with third parties as fair value
hedges of fixed rate GICs attributable to changes in benchmark interest rates.
We use foreign currency denominated debt and cross-currency swaps as hedging instruments in net investment hedge
relationships to mitigate the foreign exchange risk associated with our non-U.S. dollar functional currency foreign subsidiaries.
For net investment hedge relationships where issued debt is used as a hedging instrument, we assess the hedge
effectiveness and measure the amount of ineffectiveness based on changes in spot rates. For net investment hedge
relationships that use derivatives as hedging instruments, we assess hedge effectiveness and measure hedge ineffectiveness
using changes in forward rates. For the years ended December 31, 2015, 2014, and 2013 we recognized gains of $90 million
and $156 million and a loss of $38 million, respectively, included in Change in foreign currency translation adjustment in Other
comprehensive income related to the net investment hedge relationships.
A qualitative methodology is utilized to assess hedge effectiveness for net investment hedges, while regression analysis is
employed for all other hedges.
The following table presents the gain (loss) recognized in earnings on our derivative instruments in fair value hedging
relationships in the Consolidated Statements of Income:
Gains/(Losses) Recognized in
Earnings for: Including Gains/(Losses) Attributable to:
Hedging Hedged Hedge Excluded
(in millions) Derivatives(a) Items Ineffectiveness Components Other(b)
Year ended December 31, 2015
Interest rate contracts:
Realized capital gains/(losses) $ - $ 1 $ 1 $ - $ -
Interest credited to policyholder
account balances - - - - -
Other income - 9 - - 9
Gain/(Loss) on extinguishment of debt - 14 - - 14
Foreign exchange contracts:
Realized capital gains/(losses) 202 (167) - 32 3
Interest credited to policyholder
account balances - (1) - - (1)
Other income - 17 - - 17
Gain/(Loss) on extinguishment of debt - 17 - - 17
Equity contracts:
Realized capital gains/(losses) (45) 45 - - -
Year ended December 31, 2014
Interest rate contracts:
Realized capital gains/(losses) $ 1 $ (2) $ - $ - $ (1)
Interest credited to policyholder
account balances - (1) - - (1)
Other income - 43 - - 43
Gain/(Loss) on extinguishment of debt - 164 - - 164
Foreign exchange contracts:
Realized capital gains/(losses) (129) 147 - 8 10
Interest credited to policyholder
account balances - (3) - - (3)