11. DERIVATIVES AND HEDGE ACCOUNTING
We use derivatives and other financial instruments as part of our financial risk management programs and as part of our investment operations. Interest rate, currency, equity and commodity swaps, credit contracts (including the super senior credit default swap portfolio), swaptions, options and forward transactions are accounted for as derivatives, recorded on a trade-date basis and carried at fair value. Unrealized gains and losses are reflected in income, when appropriate. In certain instances, a contract's transaction price is the best indication of initial fair value. Aggregate asset or liability positions are netted on the Consolidated Balance Sheets only to the extent permitted by qualifying master netting arrangements in place with each respective counterparty. Cash collateral posted with counterparties in conjunction with transactions supported by qualifying master netting arrangements is reported as a reduction of the corresponding net derivative liability, while cash collateral received in conjunction with transactions supported by qualifying master netting arrangements is reported as a reduction of the corresponding net derivative asset.
Derivatives, with the exception of bifurcated embedded derivatives, are reflected in the Consolidated Balance Sheets in Derivative assets, at fair value and Derivative liabilities, at fair value. A bifurcated embedded derivative is measured at fair value and accounted for in the same manner as a free standing derivative contract. The corresponding host contract is accounted for according to the accounting guidance applicable for that instrument. A bifurcated embedded derivative is generally presented with the host contract in the Consolidated Balance Sheets. See Note 5 herein for additional information on embedded policy derivatives.
The following table presents the notional amounts and fair values of our derivative instruments:
| |
|
|
|
|
|
||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
| |
Gross Derivative Assets | Gross Derivative Liabilities | Gross Derivative Assets | Gross Derivative Liabilities | |||||||||||||||||||||
| (in millions) |
Notional |
Fair |
Notional |
Fair |
Notional Amount |
Fair Value(a) |
Notional Amount |
Fair Value(a) |
|||||||||||||||||
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Interest rate contracts(b) |
$ |
– |
|
$ |
– |
|
$ |
112 |
|
$ |
15 |
$ | – | $ | – | $ | – | $ | – | ||||||
|
Foreign exchange contracts |
|
– |
|
|
– |
|
|
1,857 |
|
|
190 |
– | – | – | – | ||||||||||
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Interest rate contracts(b) |
|
50,897 |
|
|
3,771 |
|
|
59,585 |
|
|
3,849 |
63,463 | 6,479 | 63,482 | 5,806 | ||||||||||
|
Foreign exchange contracts |
|
1,774 |
|
|
52 |
|
|
3,789 |
|
|
129 |
8,325 | 104 | 10,168 | 174 | ||||||||||
|
Equity contracts(c) |
|
29,296 |
|
|
413 |
|
|
9,840 |
|
|
524 |
4,990 | 221 | 25,626 | 1,377 | ||||||||||
|
Commodity contracts |
|
17 |
|
|
1 |
|
|
13 |
|
|
5 |
625 | 145 | 622 | 146 | ||||||||||
|
Credit contracts |
|
70 |
|
|
55 |
|
|
15,459 |
|
|
1,335 |
70 | 60 | 16,244 | 2,051 | ||||||||||
|
Other contracts(d) |
|
32,440 |
|
|
34 |
|
|
1,408 |
|
|
167 |
20,449 | 38 | 1,488 | 206 | ||||||||||
|
Total derivatives not designated as hedging instruments |
|
114,494 |
|
|
4,326 |
|
|
90,094 |
|
|
6,009 |
97,922 | 7,047 | 117,630 | 9,760 | ||||||||||
|
Total derivatives, gross |
$ |
114,494 |
|
$ |
4,326 |
|
$ |
92,063 |
|
$ |
6,214 |
$ | 97,922 | $ | 7,047 | $ | 117,630 | $ | 9,760 | ||||||
(a) Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.
(b) Includes cross currency swaps.
(c) Notional amount of derivative assets and fair value of derivative assets include $23.2 billion and $107 million, respectively, at December 31, 2013 related to bifurcated embedded derivatives. There were no bifurcated embedded derivative assets at December 31, 2012. Notional amount of derivative liabilities and fair values of derivative liabilities include $6.7 billion and $424 million, respectively, at December 31, 2013 and $23 billion and $1.3 billion, respectively at December 31, 2012 related to bifurcated embedded derivatives. A bifurcated embedded derivative is generally presented with the host contract in the Consolidated Balance Sheets.
(d) Consist primarily of contracts with multiple underlying exposures.
The following table presents the fair values of derivative assets and liabilities in the Consolidated Balance Sheets:
| |
|
|
|
|
|
||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
| |
Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||
| (in millions) |
Notional |
Fair |
Notional |
Fair |
Notional Amount |
Fair Value |
Notional Amount |
Fair Value |
|||||||||||||||||
|
Global Capital Markets derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
AIG Financial Products |
$ |
41,942 |
|
$ |
2,567 |
|
$ |
52,679 |
|
$ |
3,506 |
|
$ | 59,854 | $ | 4,725 | $ | 66,717 | $ | 5,506 | |||||
|
AIG Markets |
|
12,531 |
|
|
964 |
|
|
23,716 |
|
|
1,506 |
|
14,028 | 1,308 | 18,774 | 1,818 | |||||||||
|
Total Global Capital Markets derivatives |
|
54,473 |
|
|
3,531 |
|
|
76,395 |
|
|
5,012 |
|
73,882 | 6,033 | 85,491 | 7,324 | |||||||||
|
Non-Global Capital Markets derivatives(a) |
|
60,021 |
|
|
795 |
|
|
15,668 |
|
|
1,202 |
|
24,040 | 1,014 | 32,139 | 2,436 | |||||||||
|
Total derivatives, gross |
$ |
114,494 |
|
|
4,326 |
|
$ |
92,063 |
|
|
6,214 |
|
$ | 97,922 | 7,047 | $ | 117,630 | 9,760 | |||||||
|
Counterparty netting(b) |
|
|
|
|
(1,734 |
) |
|
|
|
|
(1,734 |
) |
(2,467 | ) | (2,467 | ) | |||||||||
|
Cash collateral(c) |
|
|
|
|
(820 |
) |
|
|
|
|
(1,484 |
) |
(909 | ) | (1,976 | ) | |||||||||
|
Total derivatives, net |
|
|
|
|
1,772 |
|
|
|
|
|
2,996 |
|
3,671 | 5,317 | |||||||||||
|
Less: Bifurcated embedded derivatives |
|
|
|
|
107 |
|
|
|
|
|
485 |
|
– | 1,256 | |||||||||||
|
Total derivatives on consolidated balance sheet |
|
|
|
$ |
1,665 |
|
|
|
|
$ |
2,511 |
|
$ | 3,671 | $ | 4,061 | |||||||||
(a) Represents derivatives used to hedge the foreign currency and interest rate risk associated with insurance as well as embedded derivatives included in insurance contracts. Assets and liabilities include bifurcated embedded derivatives, which are recorded in Policyholder contract deposits.
(b) Represents netting of derivative exposures covered by a qualifying master netting agreement.
(c) Represents cash collateral posted and received that is eligible for netting.
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) agreements. Many of the ISDA agreements also include Credit Support Annex (CSA) provisions, which generally provide for collateral postings 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 to transactions 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 $3.2 billion and $4.5 billion at December 31, 2013 and December 31, 2012, 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 billion and $1.4 billion at December 31, 2013 and December 31, 2012, respectively. We generally can repledge or resell this collateral to the extent it is posted under derivative transactions that are not subject to clearing.
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 Condensed Consolidated Balance Sheets when a legally enforceable ISDA Master Agreement exists between us and our derivative counterparty. An ISDA Master Agreement is an agreement between two counterparties, which may have multiple derivative transactions with each other governed by such agreement, and such ISDA Master Agreement generally provides for the net settlement of all or a specified group of these derivative transactions, as well as cash collateral, through a single payment, in a single currency, 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.
Hedge Accounting
We designated certain derivatives entered into by GCM 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 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 previously designated certain interest rate swaps entered into by GCM with third parties as cash flow hedges of certain floating rate debt issued by ILFC, specifically to hedge the changes in cash flows on floating rate debt attributable to changes in the benchmark interest rate. We de-designated such cash flow hedges in December 2012 in connection with ILFC being classified as held-for-sale.
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. We assess the hedge effectiveness and measure the amount of ineffectiveness for these hedge relationships based on changes in spot exchange rates. For the years ended December 31, 2013, 2012, and 2011 we recognized losses of $38 million, $74 million and $13 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:
| |
|
|
|
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Years ended December 31, (in millions) |
2013 |
2012 |
2011 |
|||||||
|
Interest rate contracts: |
|
|
|
|||||||
|
Gain (loss) recognized in earnings on derivatives(a) |
$ |
(5 |
) |
$ | – | $ | (4 | ) | ||
|
Gain recognized in earnings on hedged items(b) |
|
102 |
|
124 | 153 | |||||
|
Gain (loss) recognized in earnings for ineffective portion(c) |
|
– |
|
– | (1 | ) | ||||
|
Foreign exchange contracts:(c) |
|
|
|
|||||||
|
Loss recognized in earnings on derivatives |
|
(187 |
) |
(2 | ) | (1 | ) | |||
|
Gain recognized in earnings on hedged items |
|
204 |
|
2 | 1 | |||||
|
Gain (loss) recognized in earnings for amounts excluded from effectiveness testing |
|
17 |
|
– | – | |||||
(a) Includes $1 million gain recorded in Interest credited to policyholder account balances and $6 million loss recorded in Net realized capital gains (losses).
(b) Includes gains of $99 million, $124 million and $149 million for the years ended December 31, 2013, 2012 and 2011, respectively, representing the amortization of debt basis adjustment recorded in Other income and Net realized capital gains (losses) following the discontinuation of hedge accounting. Includes a $2 million loss, for the year ended December 31, 2013, recorded in Interest credited to policyholder account balances, representing the accretion on GIC contracts that had a fair value different than par at inception of the hedge relationship.
(c) Gains and losses recognized in earnings for the ineffective portion and amounts excluded from effectiveness testing, if any, are recorded in Net realized capital gains (losses).
The following table presents the effect of our derivative instruments in cash flow hedging relationships in the Consolidated Statements of Income:
| |
|
|
|
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Years Ended December 31, (in millions) |
2013 |
2012 |
2011 |
|||||||
|
Interest rate contracts(a): |
|
|
||||||||
|
Loss recognized in Other comprehensive income on derivatives |
$ |
– |
$ | (2 | ) | $ | (5 | ) | ||
|
Gain (loss) reclassified from Accumulated other comprehensive income into earnings(b) |
|
– |
(35 | ) | 55 | |||||
(a) Hedge accounting was discontinued in December 2012 in connection with ILFC being classified as held-for-sale. Gains and losses recognized in earnings are recorded in Income from continuing operations. Previously the effective portion of the change in fair value of a derivative qualifying as a cash flow hedge was recorded in Accumulated other comprehensive income until earnings were affected by the variability of cash flows in the hedged item. Gains and losses reclassified from Accumulated other comprehensive income were previously recorded in Other income. Gains or losses recognized in earnings on derivatives for the ineffective portion were previously recorded in Net realized capital gains (losses).
(b) Includes $19 million for the year ended December 2012, representing the reclassification from Accumulated other comprehensive income into earnings following the discontinuation of cash flow hedges of ILFC debt.
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) Recognized in Earnings |
|||||||||
| Years Ended December 31, (in millions) |
||||||||||
|
2013 |
2012 |
2011 |
||||||||
|
By Derivative Type: |
|
|
|
|||||||
|
Interest rate contracts(a) |
$ |
(331 |
) |
$ | (241 | ) | $ | 601 | ||
|
Foreign exchange contracts |
|
41 |
|
96 | 137 | |||||
|
Equity contracts(b) |
|
676 |
|
(641 | ) | (263 | ) | |||
|
Commodity contracts |
|
(4 |
) |
(1 | ) | 4 | ||||
|
Credit contracts |
|
567 |
|
641 | 337 | |||||
|
Other contracts |
|
85 |
|
6 | 47 | |||||
|
Total |
$ |
1,034 |
|
$ | (140 | ) | $ | 863 | ||
|
By Classification: |
|
|
|
|||||||
|
Policy fees |
$ |
207 |
|
$ | 160 | $ | 113 | |||
|
Net investment income |
|
28 |
|
5 | 8 | |||||
|
Net realized capital gains (losses) |
|
62 |
|
(672 | ) | 246 | ||||
|
Other income |
|
750 |
|
367 | 496 | |||||
|
Policyholder benefits and claims incurred |
|
(13 |
) |
– | – | |||||
|
Total |
$ |
1,034 |
|
$ | (140 | ) | $ | 863 | ||
(a) Includes cross currency swaps.
(b) Includes embedded derivative gains (losses) of $1.2 billion, $(166) million and $(397) million for the years ended December 31, 2013, 2012 and 2011, respectively.
Global Capital Markets Derivatives
Derivative transactions between AIG and its subsidiaries and third parties are generally centralized through GCM, specifically AIG Markets. The portfolio of this entity consists primarily of interest rate and currency derivatives and also includes legacy credit derivatives that have been novated to this entity. Another of GCM's entities, AIGFP, also enters into derivatives to mitigate market risk in its exposures (interest rates, currencies, credit, commodities and equities) arising from its 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 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."
The following table presents the net notional amount, fair value of derivative (asset) liability and unrealized market valuation gain (loss) of the super senior credit default swap portfolio, including credit default swaps written on mezzanine tranches of certain regulatory capital relief transactions, by asset class:
| |
|
|
|
|
|
|
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Net Notional Amount at(a) | Fair Value of Derivative Liability at(b) |
Unrealized Market Valuation Gain for the years ended(c) |
||||||||||||||||
| |
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | |||||||||||||
| (in millions) |
2013 |
2012 |
2013 |
2012 |
2013 |
2012 |
|||||||||||||
|
Regulatory Capital: |
|
|
|
|
|
|
|||||||||||||
|
Prime residential mortgages |
$ |
– |
$ | 97 |
$ |
– |
$ | – |
$ |
– |
$ | – | |||||||
|
Other |
|
– |
– |
|
– |
– |
|
– |
9 | ||||||||||
|
Total |
|
– |
97 |
|
– |
– |
|
– |
9 | ||||||||||
|
Arbitrage: |
|
|
|
|
|
|
|||||||||||||
|
Multi-sector CDOs(d) |
|
3,257 |
3,944 |
|
1,249 |
1,910 |
|
518 |
538 | ||||||||||
|
Corporate debt/CLOs(e) |
|
11,832 |
11,832 |
|
28 |
60 |
|
32 |
67 | ||||||||||
|
Total |
|
15,089 |
15,776 |
|
1,277 |
1,970 |
|
550 |
605 | ||||||||||
|
Mezzanine tranches |
|
– |
– |
|
– |
– |
|
– |
3 | ||||||||||
|
Total |
$ |
15,089 |
$ | 15,873 |
$ |
1,277 |
$ | 1,970 |
$ |
550 |
$ | 617 | |||||||
(a) Net notional amounts presented are net of all structural subordination below the covered tranches. The decrease in the total net notional amount from December 31, 2012 to December 31, 2013 was due to amortization of $1.0 billion and terminations and maturities of $69 million, partially offset by increases due to foreign exchange rate movement of $313 million.
(b) Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.
(c) Includes credit valuation adjustment losses of $5 million and $39 million for the years ended December 31, 2013 and 2012, respectively, representing the effect of changes in our credit spreads on the valuation of the derivatives liabilities.
(d) During 2013, we paid $143 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. Multi-sector CDOs also include $2.8 billion and $3.4 billion in net notional amount of credit default swaps written with cash settlement provisions at December 31, 2013 and December 31, 2012, respectively. Collateral postings with regards to multi-sector CDOs were $1.1 billion and $1.6 billion at December 31, 2013 and December 31, 2012, respectively.
(e) Corporate debt/Collateralized Loan Obligations (CLOs) include $1.0 billion and $1.2 billion in net notional amount of credit default swaps written on the super senior tranches of CLOs at December 31, 2013 and 2012, respectively. Collateral postings with regards to corporate debt/CLOs were $353 million and $420 million at December 31, 2013 and December 31, 2012, respectively.
The expected weighted average maturity of the super senior credit derivative portfolios as of December 31, 2013 was six years for the multi-sector CDO arbitrage portfolio and two 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, 2013 and 2012, the net notional amounts of these written CDS contracts were $373 million and $410 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 $50 million and $51 million in net notional amounts at December 31, 2013 and 2012, respectively. The net unhedged positions of $323 million and $359 million at December 31, 2013 and 2012, respectively, represent the maximum exposure to loss on these CDS contracts. The average maturity of the written CDS contracts was three years and four years at December 31, 2013 and 2012, respectively. At December 31, 2013 and 2012, the fair values of derivative liabilities (which represents the carrying value) of the portfolio of CDS was $32 million and $48 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 at various ratings and threshold levels. At December 31, 2013 and 2012, net collateral posted by us under these contracts was $38 million and $64 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 derivatives contained in insurance contract liabilities, fixed maturity securities, outstanding medium- and long-term notes as well as other interest rate sensitive assets and liabilities. Foreign exchange derivatives (principally foreign exchange forwards and options) are used to economically mitigate risk associated with non-U.S. dollar denominated debt, net capital exposures, and foreign currency transactions. Equity derivatives are used to mitigate financial risk embedded in certain insurance liabilities. The derivatives are effective economic hedges of the exposures that they are meant to offset.
In addition to hedging activities, we also enter into derivative instruments with respect to investment operations, which include, among other things, credit default swaps and purchasing investments with embedded derivatives, such as equity-linked notes and convertible bonds.
Credit Risk-Related Contingent Features
The aggregate fair value of our derivative instruments that contain credit risk-related contingent features that were in a net liability position at December 31, 2013 and 2012, was approximately $2.6 billion and $3.9 billion, respectively. The aggregate fair value of assets posted as collateral under these contracts at December 31, 2013 and 2012, was 3.1 billion and $4.3 billion, respectively.
We estimate that at December 31, 2013, 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 $65 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 $111 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, 2013. 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 $6.4 billion and $6.7 billion at December 31, 2013 and 2012, respectively. These securities have par amounts of $13.4 billion and $15 billion at December 31, 2013 and 2012, respectively, and both have remaining stated maturity dates that extend to 2052.