AIG 2015 Annual Report Download - page 294

ITEM 8 / NOTE 10. DERIVATIVES AND HEDGE ACCOUNTING
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We estimate that at December 31, 2015, based on our outstanding financial derivative transactions, a one-notch downgrade of
our long-term senior debt ratings to BBB+ by Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill
Companies, Inc. (S&P), would permit counterparties to make additional collateral calls and permit certain counterparties to
elect early termination of contracts, resulting in a negligible amount of corresponding collateral postings and termination
payments; a one-notch downgrade to Baa2 by Moody’s Investors’ Service, Inc. (Moody’s) and an additional one-notch
downgrade to BBB by S&P would result in approximately $44 million in additional collateral postings and termination
payments, and a further one-notch downgrade to Baa3 by Moody’s and BBB– by S&P would result in approximately
$95 million in additional collateral postings and termination payments.
Additional collateral postings upon downgrade are estimated based on the factors in the individual collateral posting provisions
of the CSA with each counterparty and current exposure as of December 31, 2015. Factors considered in estimating the
termination payments upon downgrade include current market conditions, the complexity of the derivative transactions,
historical termination experience and other observable market events such as bankruptcy and downgrade events that have
occurred at other companies. Our estimates are also based on the assumption that counterparties will terminate based on their
net exposure to us. The actual termination payments could significantly differ from our estimates given market conditions at the
time of downgrade and the level of uncertainty in estimating both the number of counterparties who may elect to exercise their
right to terminate and the payment that may be triggered in connection with any such exercise.
Hybrid Securities with Embedded Credit Derivatives
We invest in hybrid securities (such as credit-linked notes) with the intent of generating income, and not specifically to acquire
exposure to embedded derivative risk. As is the case with our other investments in RMBS, CMBS, CDOs and ABS, our
investments in these hybrid securities are exposed to losses only up to the amount of our initial investment in the hybrid
security. Other than our initial investment in the hybrid securities, we have no further obligation to make payments on the
embedded credit derivatives in the related hybrid securities.
We elect to account for our investments in these hybrid securities with embedded written credit derivatives at fair value, with
changes in fair value recognized in Net investment income and Other income. Our investments in these hybrid securities are
reported as Other bond securities in the Consolidated Balance Sheets. The fair values of these hybrid securities were
$5.7 billion and $6.1 billion at December 31, 2015 and 2014, respectively. These securities have par amounts of $11.2 billion
and $12.3 billion at December 31, 2015 and 2014, respectively, and have remaining stated maturity dates that extend to 2055.
11. GOODWILL
Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not
individually identified and separately recognized. Goodwill is tested for impairment annually or more frequently if circumstances
indicate an impairment may have occurred. We assess goodwill for impairment at one level below our reportable segments.
At December 31, 2015, our principal reporting units with goodwill are Commercial Insurance - Property Casualty, Consumer
Insurance - Personal Insurance, and Consumer Insurance - Life. When a business is transferred from one reporting unit to
another, as occurred with the transfer of a portion of the Consumer Insurance - Personal Insurance to Consumer Insurance –
Life, as part of the 2014 segment changes, goodwill at the original reporting unit is allocated among reporting units based on
the fair value of business transferred, relative to business retained by a reporting unit.
The impairment assessment involves an option to first assess qualitative factors to determine whether events or circumstances
exist that lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. If the qualitative assessment is not performed, or after assessing the totality of the events or circumstances, we
determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the impairment
assessment involves a two-step process in which a quantitative assessment for potential impairment is performed.
If the qualitative test is not performed or if the test indicates a potential impairment is present, we estimate the fair value of
each reporting unit and compare the estimated fair value with the carrying amount of the reporting unit, including allocated